Chapter 20: Q2RQ (page 1119)
What is a fixed cost? Give an example.
Fixed costs are the costs that persistent consistency in total amount.
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How can CVP analysis be used by companies with multiple products?
What is cost stickiness? Why do managers need to be aware of cost stickiness?
Crandall Company sells flags with team logos. Crandall has fixed costs of \(583,200 per year plus variable costs of \)4.80 per flag. Each flag sells for \(12.00.
Requirements
1. Use the equation approach to compute the number of flags Crandall must sell each year to break even.
2. Use the contribution margin ratio approach to compute the dollar sales Crandall needs to earn \)33,000 in operating income for 2018. (Round the contribution margin ratio to two decimal places.)
3. Prepare Crandall’s contribution margin income statement for the year ended December 31, 2018, for sales of 70,000 flags. (Round your final answers up to the next whole number.)
4. The company is considering an expansion that will increase fixed costs by 21% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should Crandall undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)
England Productions performs London shows. The average show sells 1,300 tickets at\(60 per ticket. There are 175 shows per year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of65, each earning a net average of \)340 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)728,000.
Requirements
1. Compute revenue and variable costs for each show.
2. Use the equation approach to compute the number of shows England Productionsmust perform each year to break even.
3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $5,687,500. Is this profit goal realistic? Giveyour reasoning.
4. Prepare England Productions’s contribution margin income statement for175 shows performed in 2018. Report only two categories of costs: variableand fixed.
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
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