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White Company sells flags with team logos. White has fixed costs of \(639,600 per year plus variable costs of \)4.20 per flag. Each flag sells for \(12.00.

Requirements

1. Use the equation approach to compute the number of flags White must sell each year to break even.

2. Use the contribution margin ratio approach to compute the dollar sales White needs to earn \)32,500 in operating income for 2018. (Round the contribution margin to two decimal places.)

3. Prepare White’s contribution margin income statement for the year ended December 31, 2018, for sales of 73,000 flags. (Round your final answers up to the next whole number.)

4. The company is considering an expansion that will increase fixed costs by 23% and variable costs by $0.60 per flag. Compute the new breakeven point in units and in dollars. Should White undertake the expansion? Give your reasoning. (Round your final answers up to the next whole number.)

Short Answer

Expert verified
  1. Breakeven units equals 82,000 Units
  2. Desired sales level to earn $32,500 operating income equals $1,034,000
  3. Operating loss equals ($70,200)
  4. New breakeven in units equals 109,265 units and in dollars equals $1,311,180. Expansion can be undertaken if expected sales increases beyond breakeven level.

Step by step solution

01

Computation of number of flags for breakeven 

Netsalesrevenue-Variablecosts-Fixedcosts=Targetprofit$12×Unitssold-$4.20×Unitssold-$639,600=$0$7.8×Unitssold=$639,600Unitssold=82,000

02

Contribution margin approach

Contributionmarginratio=ContributionmarginSalesperunit=$12-$4.20$12=65%

Desired sales level for target profit=Fixedcost+TargetprofitContributionmarginratio=$639,600+$32,50065%=$1,034,000

03

 Step 3: Contribution margin income statement

Net sales revenue (73,000 x $12)

$876,000

Variable costs (73,000 x $4.20)

$306,600

Contribution margin

$569,400

Fixed cost

$639,600

Operating income/(Loss)

($70,200)

04

Calculation of new breakeven in units and sales

Breakevensalesin units=FixedcostContributionmarginperunit=$639,600×1+23%$12-$4.20+$0.60=109,265Units

Contributionmarginratio=ContributionmarginSalesperunit=$12-$4.20+$0.60$12=60%

Breakevensales=FixedcostContributionmarginratio=$639,600×1+23%60%=$1,311,180

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Most popular questions from this chapter

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.)

The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.

What is a company’s cost structure? How can cost structure affect a company’s profits?

Following is the income statement for Marrow Mufflers for the month of June 2018:

MARROW MUFFLERS

Contribution Margin Income Statement

Month Ended June 30, 2018

Net Sales Revenue (140 units _ \(250) \) 35,000

Variable Costs (140 units _ \(50) 7,000

Contribution Margin 28,000

Fixed Costs 11,500

Operating Income \) 16,500

Requirements

1. Calculate the degree of operating leverage. (Round to four decimal places.)

2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.)

3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.

What is cost-volume-profit analysis?

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