Managerial accounting simple variable costs and cost behavior


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Managerial accounting simple variable costs and cost behavior questions 5 pages Busi294.Assignment#3.2013.pdf 294 − Assignment #3 Question #1 [13 marks] Lattes ‘R Us Co. (“LRUS”) specializes in lattes that sell for $4.00 per latte. The variable costs for each latte total $2.75 and monthly fixed costs are $180,000. During January 2013, 200,000 lattes were sold. Required [Each part- (a) & (b), and (c) are independent.]: a) The sales manager is confident that an intensive advertising campaign will double the sales volume. If the company president’s goal is to increase this month’s profits (net income before tax) by 50% over last month’s, what is the maximum amount that can be spent on advertising in order to double sales volume? b) Assume that the company has decided to increase its selling price by 15% per latte with no change in advertising or ingredients. Compute the sales volume in lattes that would be needed at the new price for the company to earn the same profit as in January 2013. c) The owner of LRUS is considering the following options to increase profitability: • • • Increase advertising, Increase the quality of the ingredients and simultaneously increase the selling price, Increase the selling price with no change in ingredients. What advice would you provide to the president with respect to each of the strategies? Question # 2 [13 marks] Espressos ‘R Us Co. (“ERUS”) is another coffee shop that specializes in two types of espresso drinks, the Americano and the Cappuccino. Both drinks take exactly the same time to make. Selected information about the two products follows: Selling price per unit Variable costs per unit Americano $3.50 $2.25 Cappuccino $5.00 $3.00 ERUS’ fixed costs are $115,000. Last year (2012) the company sold a total of 84,000 espressos, in a sales mix of 3 Cappuccino to 1 Americano. This year (2013), the company expects to increase its sales to a total of 91,000 units by changing the sales mix to 6 Americano to 1 Cappuccino. ERUS’ tax rate is 40%. Required: a) Assuming that the sales mix is 3 Cappuccino:1 Americano, compute the number of Cappuccions and the number of Americanos that must be sold to break-even. b) Assuming the sales mix is 6 Americano:1 Cappuccino, compute the number of Capuccinos and the number of Americanos that must be sold to make an after-tax profit of $80,000. c) The owner would like advice as to how to improve profits. Briefly discuss what advice you give him/her? ONLY SUBMIT THE PAGES THAT START WITH “NAME” (pages 2−5) 1 294 – ASSIGNMENT #3 NAME (Last, First):_____________________________ Student No.:____________________ Q1 Grade _______ Q2 Grade _______ Total = _______ [out of 26] Question #1 [13 marks] Required (Each part- (a) & (b), and (c) are independent.): a) The sales manager is confident that an intensive advertising campaign will double the sales volume. If the company president’s goal is to increase this month’s profits by 50% over last month’s, what is the maximum amount that can be spent on advertising in order to double sales volume? b) Assume that the company has decided to increase its selling price by 15% per latte with no change in advertising or ingredients. Compute the sales volume in lattes that would be needed at the new price for the company to earn the same profit as in January 2013. 2 c) The owner of LRUS is considering the following options to increase profitability: • Increase advertising, • Increase the quality of the ingredients and simultaneously increase the selling price, • Increase the selling price with no change in ingredients. What advice would you provide to the president with respect to each of the strategies? INCREASE ADVERTISING: INCREASE QUALITY OF INGREDIENTS AND SALES PRICE: INCREASE SELLING PRICE: 3 Question # 2 [13 marks] a) Assuming that the sales mix is 3 Cappuccino:1 Americano, compute the number of Cappuccions and the number of Americanos that must be sold to break-even. b) Assuming

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