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The budgets of four companies yield the following information:

Company

Beach Lake Mountain Valley

Net Sales Revenue \( 1,615,000 \)(d) \( 1,050,000 \)(j)

Variable Costs (a) 60,000 525,000 100,800

Fixed Costs (b) 232,000 260,000 (k)

Operating Income (Loss) 285,600 (e) (g) 31,500

Units Sold 170,000 10,000 (h) (l)

Contribution Margin per Unit \( 3.80 \) (f) \( 75.00 \) 9.00

Contribution Margin Ratio (c) 80% (i) 30%

Requirements

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)

2. Which company has the lowest breakeven point in sales dollars?

3. What causes the low breakeven point?

Short Answer

Expert verified

(1)(a) $969,000

(b) 360,000

(c) 40%

(d) $300,000

(e) $8,000

(f) $24

(g) $265,000

(h) 7,000

(i) 50%

(j) $144,000

(k) $11,700

(l) 4,800

(2) The lowest breakeven point in sales dollars equals $39,000.

(3) Lower contribution margin ratio and lower fixed costs

Step by step solution

01

Calculation of (a), (b), (c)

Net sales revenue

$1,615,000

Variable costs ($1,615,000 / 170,000)-$3.80 ) x 170,000

(a)$969,000

Fixed costs ($1,615,000-$969,000 -$285,600)

(b)$360,400

Operating income (Loss)

$285,600

Units sold

170,000

Contribution margin per unit

$3.80

Contribution margin ratio (($3.80 x 170,000) / $1,615,000)

(c)40%

02

Calculation of (d), (e), (f)

Net sales revenue ($60,000 / (1-80%)

(d) $300,000

Variable costs

$60,000

Fixed costs

$232,000

Operating income (Loss) ($300,000-$60,000-$232,000)

(e) $8,000

Units sold

10,000

Contribution margin per unit ($300,000-$60,000)/10,000

(f)$24

Contribution margin ratio

80%

03

Calculation of (g), (h), (i)

Net sales revenue

$1,050,000

Variable costs

$525,000

Fixed costs

$260,000

Operating income (Loss) ($1,050,000-$525,000-$260,000)

(g) $265,000

Units sold ($1,050,000-$525,000) / $75

(h) 7,000

Contribution margin per unit

$75

Contribution margin ratio ($1,050,000-$525,000)/$1,050,000)

(i)50%

04

Calculation of (j), (k), (l) 

Net sales revenue ($100,800 / (1-30%))

(j)$144,000

Variable costs

$100,800

Fixed costs ($144,000-$100,800-$31,500)

(k)$11,700

Operating income (Loss)

$31,500

Units sold ($144,000 - $100,800)/$9)

(l)4,800

Contribution margin per unit

$9

Contribution margin ratio ($144,000-$100,800)/$144,000)

30%

Step 4: Calculation of breakeven sales in dollars

Breakevensales(Beach)=FixedcostsContributionmarginratio=$360,40040%=$901,000

Breakevensales(Lake)=FixedcostsContributionmarginratio=$232,00080%=$290,000

Breakevensales(Mountain)=FixedcostsContributionmarginratio=$260,00050%=$520,000

Breakevensales(Valley)=FixedcostsContributionmarginratio=$11,70030%=$39,000

Valley has the lowest breakeven point that is $39,000.

Step 4: Reason for low breakeven point

Low contribution margin causes the low breakeven point. Valley has the lowest contribution margin ratio that is why it has the lowest breakeven point.

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Most popular questions from this chapter

Use the following information to complete Short Exercises S20-10 through S20-15.

Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at \(70 per person as a one-day entrance fee. Variable costs are \)42 per person, and fixed costs are $170,800 per month.

S20-15 Computing degree of operating leverage

Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the degree of operating leverage (round to two decimal places). Estimate the operating income if sales increase by 15%.

Question: Computing contribution margin, units and required sales to break even, and units to achieve target profit

Compute the missing amounts for the following table.

A B C Sales price per unit \( 200 \) 4,000 $ 5,220 Variable costs per unit 80 1,000 2,088 Total fixed costs 73,200 660,000 3,758,400 Target profit 266,760 3,000,000 3,132,000 Calculate: โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ

Contribution margin per unit โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ

Contribution margin ratio โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ

Required units to break even โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒโ€ƒโ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ โ€ƒ

Required sales dollars to break even

Required units to achieve target profit

Determine how each change effects the elements of the cost-volume-profit graph by placing an X in the appropriate column(s).


EFFECT

Sales Line
Fixed Cost Line
Total cost line
Breakeven point

Change

Slope Increases

Slope decreases

Shifts up

Shifts Down

Slope Increases

Slope Decreases

Increases

Decreases

Sales price per unit Increases

Sales price per unit Decreases

Variable cost per unit Increases

Variable cost per unit decreases

Total fixed cost increases

Total fixed cost decreases

On the CVP graph, where is the breakeven point shown? Why?

Before you begin this assignment, review the Tying It All Together feature in the chapter.

Best Buy Co., Inc. is a leading provider of technology products. Customers can shop at more than 1,700 stores or online. The company is also known for its Geek Squad for technology services. Suppose Best Buy is considering a particular HDTV for a major sales item for Black Friday, the day after Thanksgiving, known as one of the busiest shopping days of the year. Assume the HDTV has a regular sales price of \(900, a cost of \)500, and a Black Friday proposed discounted sales price of \(650. Best Buyโ€™s 2015 Annual Report states that failure to manage costs could have a material adverse effect on its profitability and that certain elements in its cost structure are largely fixed in nature. Best Buy, like most companies, wishes to maintain price competitiveness while achieving acceptable levels of profitability. (Item 1A. Risk Factors.)

Requirements

1. Calculate the gross profit of the HDTV at the regular sales price and at the discounted sales price.

2. Assume that during the November/December holiday season last year, Best Buy sold an average of 150 of this particular HDTV per store. If the HDTVs are marked down to \)650, how many would each store have to sell this year to make the same total gross profit as last year?

3. Relative to Sales Revenue, what type of costs would Best Buy have that are fixed? What type of costs would be variable?

4. Because Best Buy stated that its cost structure is largely fixed in nature, what might be the impact on operating income if sales decreased? Does having a cost structure that is largely fixed in nature increase the financial risk to a company? Why or why not?

5. In the Tying It All Together feature in the chapter, we looked at the cost of advertising. Is advertising a fixed or variable cost? If the company has a small margin of safety, how would increasing advertising costs affect Best Buyโ€™s operating income? What would be the effect of decreasing advertising costs?

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