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Operating Data, Revenue, Contribution Margin and Costs

1. Helix Services, Inc., has been in business for six months. The following are basic operating data for that period.

Month July Aug. Sept. Oct. Nov. Dec.
Service hours 120 136 260 420 320 330
Revenue $6,000 $6,800 $13,000 $21,000 $16,000 $16,500
Operating costs $4,300 $5,300 $ 7,100 $11,200 $ 9,100 $10,600

Required
a. What is the average service revenue per hour for the six-month time period?
b. Use the high-low method to estimate the total monthly fixed cost and the variable cost per hour.
c. Determine the average contribution margin per hour.
d. Use the scattergraph method to estimate the total monthly fixed cost and the variable cost per hour.
e. Compare the results of the two methods and comment on the difference.

2. Freescale Manufacturing Company makes a product that it sells for $50 per unit. The company incurs variable manufacturing costs of $14 per unit. Variable selling expenses are $6 per unit, annual fixed manufacturing costs are $189,000, and fixed selling and administrative costs are $141,000 per year.

Required
Determine the break-even point in units and dollars using each of the following approaches:
a. Equation method.
b. Contribution margin per unit.
c. Contribution margin ratio.
d. Confirm your results by preparing a contribution margin income statement for the break-even sales volume.

3. Bella Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow.

Relevant Information
Skin Cream Bath Oil Color Gel
Budgeted sales in units (a) 71,000 111,000 39,000
Expected sales price (b) $8 $4 $12
Variable costs per unit (c) $5 $2 $7
Income statements
Sales revenue (a x b) $568,000 $444,000 $468,000
Variable costs (a x c) (355,000) (222,000) (273,000)
Contribution margin 213,000 222,000 195,000
Fixed costs (153,000) (186,000) (155,000)
Net income $ 60,000 $ 36,000 $ 40,000

Required
a. Determine the margin of safety as a percentage for each product.
b. For each product, determine the percentage change in net come that results from the 20% increase in sales. Which product has the highest operating leverage?
c. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? Explain your answer.
d. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? Explain your answer.

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Solution Summary

This solution contains step-by-step calculations to determine a variety of values from revenue, contribution margin, costs per hour, margin of safety, operating leverage and others.

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