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Operating Data, Revenue, Contribution Margin and Costs

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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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https://brainmass.com/business/accounting/accounting-problems-246358

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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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Managerial Accounting: Master Budgeting

Mainline moving company specializes in hauling heave foods over long distances. The company's revenues and expenses depend on revenue miles, a measure that combines both weights and mileage. The summarized budget data for next year are based on predicted total revenue miles of 800,000. At that level of volume, and at any level of volume between 700,000 and 900,0000 revenue miles, the company's fixed costs are $110,000. The selling price and variable costs are:

Per Revenue Mile
Average selling price (revenue) $1.50
Average variable expenses 1.30
1. Compute the budgeted net income. Ignor income taxed
2. Management is trying to decide hor various possible conditions or decisions might affect net income. Compute the new net income for each of the following changes. Consider each case independantly.
a. A 10% increase in sales price
b. a 10% increase in revenue miles
c. a 10% increase in variable expenses
d. a 10 percent increase in fixed expenses
e An average decrease in selling price of $.03 per revenue mile and a 5% increase in revenue miles. Refer to the original data.
f. An Average increase in selling price of $.05 and 100% decrease in revenue miles.
g. A 10% increase in fixed expenses in the form of more advertising and a 5 % increase in revenue miles.

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