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Question 1

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Multiple Product Planning with Taxes
In the year 2008, Wiggins Processing Company had the following contribution income statement:

WIGGINS PROCESSING COMPANY Contribution Income Statement For the Year 2008
Sales		$1,000,000
Variable costs
Cost of goods sold	$460,000
Selling and administrative	200,000	(660,000)
Contribution margin		340,000
Fixed Costs
Factory overhead	192,000
Selling and administrative	80,000	(272,000)
Before-tax profit		68,000
Income taxes (38%)		(25,840)
After-tax profit		$42,160

 

HINT: Round the contribution margin ratio to two decimal places for your calculations below.

(a) Determine the annual break-even point in sales dollars.
$Answer

(b) Determine the annual margin of safety in sales dollars.
$Answer

(c) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $34,000?
Answer

(d) With the current cost structure, including fixed costs of $272,000, what dollar sales volume is required to provide an after-tax net income of $160,000?

Do not round until your final answer. Round your answer to the nearest dollar.
$Answer

(e) Prepare an abbreviated contribution income statement to verify that the solution to part (d) will provide the desired after-tax income.

Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers.

WIGGINS PROCESSING COMPANY Income Statement For the Year 2008
Sales	$Answer
Variable costs (66% of sales)	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income before taxes	Answer
Income taxes (38%)	Answer
Net income after taxes	$Answer

Question 2

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Alternative Production Procedures and Operating Leverage
Assume Paper Mate is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method. The predicted manufacturing costs for each method are as follows:

	Capital Intensive	Labor Intensive
Direct materials per unit	$5.00	$6.00
Direct labor per unit	$5.00	$13.00
Variable manufacturing overhead per unit	$5.00	$2.00
Fixed manufacturing overhead per year	$2,580,000.00	$780,000.00

 

Paper Mate’s market research department has recommended an introductory unit sales price of $31. The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold.

(a) Determine the annual break-even point in units if Paper Mate uses the:

1. Capital-intensive manufacturing method.
Answer

units

2. Labor-intensive manufacturing method.
Answer

units

(b) Determine the annual unit volume at which Paper Mate is indifferent between the two manufacturing methods.
Answer

units

(c) Management wants to know more about the effect of each alternative on operating leverage.

1. Explain operating leverage and the relationship between operating leverage and the volatility of earnings.

They are positively correlated, with increases in operating leverage accompanied by increases in the volatility of earnings.

They have little or no correlation because they are unrelated.

They are negatively correlated, with increases in operating leverage accompanied by decreases in the volatility of earnings.

2. Compute operating leverage for each alternative at a volume of 260,000 units. Round your answers two decimal places.

Capital-Intensive operating leverage Answer
Labor-Intensive operating leverage Answer

3. Which alternative has the higher operating leverage? Why?

The capital intensive method has a higher operating leverage because of the greater use of fixed assets.

The labor intensive method has a higher operating leverage because of higher variable conversion costs.

The labor intensive method has a higher operating leverage because of lower variable manufacturing overhead.

The capital intensive method has a higher operating leverage because of the higher variable manufacturing overhead.

 

Question 3

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Contribution Income Statement and Operating Leverage
Florida Berry Basket harvests early-season strawberries for shipment throughout the eastern United States in March. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the strawberries. The strawberries are sold in crates containing 100 individually packaged one-quart containers. Affixed to each one-quart container is the distinctive Florida Berry Basket logo inviting buyers to “Enjoy the berry best strawberries in the world!” The selling price is $100 per crate, variable costs are $85 per crate, and fixed costs are $275,000 per year. In the year 2013, Florida Berry Basket sold 50,000 crates.

(a) Prepare a contribution income statement for the year ended December 31, 2013. HINT: Use a negative sign with both “costs” answers.

FLORIDA BERRY BASKET Income Statement For the Year Ended December 31, 2013
Sales	$Answer
Variable costs	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income	$Answer

(b) Determine the company’s 2013 operating leverage. (Round your answer to two decimal places.)
Answer

(c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer to one decimal place.)
Answer

% decrease

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $375,000 and reduce variable costs to $81.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answers two decimal places.)
Answer

 

The acquisition of the berry-picking machines will decrease variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage.

The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage.

The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also decrease fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage.

The acquisition of the berry-picking machines will reduce variable costs, thereby increasing the contribution margin. It will also reduce fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage.

 

Question 4

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Cost-Volume-Profit Relations: Missing Data
Following are data from 4 separate companies. Supply the missing data in each independent case

	Case A	Case B	Case C	Case D
Unit Sales	1,000	800	Answer	Answer
Sales revenue	$20,000	$Answer	$Answer	$60,000
Variable cost per unit	$10	$2	$10	$Answer
Contribution margin	$Answer	$800	$Answer	$Answer
Fixed Costs	$8,100	$Answer	$60,000	$Answer
Net income	$Answer	$600	$Answer	$Answer
Unit contribution margin	$Answer	$Answer	$Answer	$13
Break-even point (units)	Answer	Answer	4,000	2,000
Margin of safety (units)	Answer	Answer	100	1,000

 

 

Question 5

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High-Low Cost Estimation and Profit Planning
Comparative 2007 and 2008 income statements for Dakota Products Inc. follow:

DAKOTA PRODUCTS INC. Comparative Income Statements For Years Ending December 31, 2007 and 2008
	2007	2008
Unit sales	5,000	8,000
Sales revenue	$60,000	$96,000
Expenses	(64,000)	(76,000)
Profit (loss)	$(4,000)	$20,000

 

(a) Determine the break-even point in units.
Answer

units

(b) Determine the unit sales volume required to earn a profit of $5,000.
Answer

 

Question 6

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CVP Analysis and Special Decisions
Sweet Grove Citrus Company buys a variety of citrus fruit from growers and then processes the fruit into a product line of fresh fruit, juices, and fruit flavorings. The most recent year’s sales revenue was $4,200,000. Variable costs were 60 percent of sales and fixed costs totaled $1,300,000. Sweet Grove is evaluating two alternatives designed to enhance profitability.

• One staff member has proposed that Sweet Grove purchase more automated processing equipment. This strategy would increase fixed costs by $200,000 but decrease variable costs to 54 percent of sales.
• Another staff member has suggested that Sweet Grove rely more on outsourcing for fruit processing. This would reduce fixed costs by $200,000 but increase variable costs to 65 percent of sales.

Round your answers to the nearest whole number.

(a) What is the current break-even point in sales dollars?
$Answer

(b) Assuming an income tax rate of 36 percent, what dollar sales volume is currently required to obtain an after-tax profit of $700,000?
$Answer

(c) In the absence of income taxes, at what sales volume will both alternatives (automation and outsourcing) provide the same profit?
$Answer

(d) Briefly describe one strength and one weakness of both the automation and the outsourcing alternatives.

Automation has less risk and a lower break-even point. Outsourcing has higher profits if sales increase.

Automation has higher profits if sales increase and a lower break-even point. Outsourcing has less risk.

Automation has less risk. Outsourcing has higher profits if sales increase and a lower break-even point.

Automation has higher profits if sales increase. Outsourcing has less risk and a lower break-even point.

 

Question 7

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Multiple Product Break-Even Analysis
Presented is information for Stafford Company’s three products.

	A	B	C
Unit selling price	$ 6	$ 8	$ 7
Unit variable costs	(4)	(5)	(3)
Unit contribution margin	$ 2	$ 3	$ 4

With monthly fixed costs of $112,500, the company sells two units of A for each unit of B and three units of B for each unit of C.

Determine the unit sales of product A at the monthly break-even point.
Answer

units

 

Question 8

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Cost-Volume-Profit Relations: Missing Data

Following are data from 4 separate companies. Supply the missing data in each independent case.

	Case 1	Case 2	Case 3	Case 4
Sales revenue	$120,000	$80,000	$Answer	$Answer
Contribution margin	$60,000	$Answer	$20,000	$Answer
Fixed costs	$30,000	$Answer	$Answer	$Answer
Net income	$Answer	$5,000	$10,000	$Answer
Variable cost ratio	Answer	0.50	Answer	0.20
Contribution margin ratio	Answer	Answer	0.40	Answer
Break-even point (dollars)	$Answer	$Answer	$Answer	$25,000
Margin of safety (dollars)	$Answer	$Answer	$Answer	$20,000

Question 9

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Multiple-Level Break-Even Analysis

Jensen Associates provides marketing services for a number of small manufacturing firms. Jensen receives a commission of 10 percent of sales. Operating costs are as follows:

Unit-level costs	$ 0.04 per sales dollar
Sales-level costs	$ 300 per sales order
Customer-level costs	$ 900 per customer per year
Facility-level costs	$ 60,000 per year

(a) Determine the minimum order size in sales dollars for Jensen to break even on an order.
$Answer

(b) Assuming an average customer places four orders per year, determine the minimum annual sales required to break even on a customer.
$Answer

(c) What is the average order size in (b)?
$Answer

(d) Assuming Jensen currently serves 100 customers, with each placing an average of four orders per year, determine the minimum annual sales required to break even.
$Answer

(e) What is the average order size in (d)?
$Answer

(f) Explain the differences in the answers to (a), (c), and (e).

In the long-run the most important costs are facility level costs.

The most important costs to cover are unit level costs.

In multiple customer firms the break-even point decreases as the number of customers increases.

Even if individual orders have a positive contribution, some customers may be unprofitable.

 

Question 10

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Profitability Analysis
Assume a local Cost Cutters provides cuts, perms, and hairstyling services. Annual fixed costs are $120,000, and variable costs are 40 percent of sales revenue. Last year’s revenues totaled $250,000.

(a) Determine its break-even point in sales dollars.
$Answer

(b) Determine last year’s margin of safety in sales dollars.
$Answer

(c) Determine the sales volume required for an annual profit of $80,000.

Round your answers to the nearest dollar.
$Answer