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Enterprises Manufacturing New Products

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E5-2 (b-d)

Kozy Enterprises is considering manufacturing a new product. It projects the cost of direct materials and rent for a range of output as shown below.
Output
in Units Rent
Expense Direct
Materials
1,000 \$5,000 \$4,000
2,000 5,000 6,000
3,000 5,000 7,800
4,000 7,000 8,000
5,000 7,000 10,000
6,000 7,000 12,000
7,000 7,000 14,000
8,000 7,000 16,000
9,000 7,000 18,000
10,000 10,000 23,000
11,000 10,000 28,000
12,000 10,000 36,000

Determine the relevant range of activity for this product.

Calculate the variable cost per unit within the relevant range.
\$

Indicate the fixed cost within the relevant range.
\$

E5-6

Mozena Corporation manufactures a single product. Monthly production costs incurred in the manufacturing process are shown below for the production of 3,000 units. The utilities and maintenance costs are mixed costs.The fixed portions of these costs are \$300 and \$200, respectively.
Production in Units 3,000
Production Costs
Direct Materials \$7,500
Direct labor 15,000
Utilities 1,800
Property taxes 1,000
Indirect labor 4,500
Supervisory salaries 1,800
Maintenance 1,100
Depreciation 2,400

Identify the above costs as variable, fixed, or mixed. Put an "X" in the column which applies and the letter "O" if it does not. (Please put an answer in each field. Do not leave any fields blank.)
Fixed Variable Mixed
Direct Materials

Direct labor

Utilities

Property taxes

Indirect labor

Supervisory salaries

Maintenance

Depreciation

Calculate the expected costs when production is 5,000 units.
\$

E5-11

Airport Connection provides shuttle service between four hotels near a medical center and an international airport. Airport Connection uses two 10 passenger vans to offer 12 round trips per day. A recent month's activity in the form of a cost-volume-profit income statement is shown below.
Fare revenues (1,440 fares) \$36,000
Variable costs
Fuel \$5,040
Tolls and Parking 3,100
Maintenance 500 8,640
Contribution margin 27,360
Fixed costs
Salaries 13,000
Depreciation 1,300
Insurance 1,128 15,428
Net income \$11,932

Calculate the break-even point in (1) dollars and (2) number of fares.
Break-even point in dollars; \$

Break-even point in fares

Without calculations, determine the contribution margin at the break-even point.
\$

E5-15

Moran Company reports the following operating results for the month of August: Sales \$350,000 (units 5,000); variable costs \$210,000; and fixed costs \$90,000. Management is considering the following independent courses of action to increase net income.
1. Increase selling price by 10% with no change in total variable costs.
2. Reduce variable costs to 55% of sales.
Compute the net income to be earned under each alternative.
1. \$

2. \$

Which course of action will produce the highest net income?

P5-2A

Utech Company bottles and distributes Livit, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2008, management estimates the following revenues and costs.
Net sales \$1,800,000 Selling expenses-variable \$70,000
Direct materials 430,000 Selling expenses-fixed 65,000
Direct labor 352,000 Administrative expenses-variable 20,000

Prepare a CVP income statement for 2008 based on management's estimates. (List amounts from largest to smallest eg 10, 5, 3, 2.)
UTECH COMPANY
CVP Income Statement (Estimated)
For the Year Ending December 31, 2008

\$

Variable expenses

\$

Total variable expenses

Contribution margin

Fixed expenses

Total fixed expenses

Net income \$

Compute the break-even point in (1) units and (2) dollars.
Breakeven point in units units

Breakeven point in dollars \$

Compute the contribution margin ratio and the margin of safety ratio. (Round answers to 0 decimal places, e.g. 125.)
Contribution margin ratio %

Margin of safety ratio %

Determine the sales dollars required to earn net income of \$238,000.
\$

P5-4A

Alice Shoemaker is the advertising manager for Value Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add \$34,000 in fixed costs to the \$270,000 currently spent. In addition, Alice is proposing that a 5% price decrease (\$40 to \$38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at \$22 per pair of shoes. Management is impressed with Alice's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

Compute the current break-even point in units, and compare it to the break-even point in units if Alice's ideas are used.
Current breakeven point pairs of shoes

New breakeven point pairs of shoes

Compute the margin of safety ratio for current operations and after Alice's changes are introduced. (Round answers to 0 decimal places, e.g. 125.)
Current percentage %

New percentage %

Prepare a CVP income statement for current operations and after Alice's changes are introduced.
VALUE SHOE STORE
CVP Income Statement
Current New
Sales \$
\$

Variable expenses

Contribution margin

Fixed expenses

Net income \$
\$

Would you make the changes suggested?

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Solution Preview

E5-2 (b-d)
Kozy Enterprises is considering manufacturing a new product. It projects the cost of direct materials and rent for a range of output as shown below.
Output in units Rent expense Direct material
1,000 \$5,000 \$4,000
2,000 5,000 6,000
3,000 5,000 7,800
4,000 7,000 8,000
5,000 7,000 10,000
6,000 7,000 12,000
7,000 7,000 14,000
8,000 7,000 16,000
9,000 7,000 18,000
10,000 10,000 23,000
11,000 10,000 28,000
12,000 10,000 36,000

Determine the relevant range of activity for this product.
Highest output 12,000
Lowest output 1,000
Relevant range of output 11,000 =difference

Calculate the variable cost per unit within the relevant range.
Total cost Quantity
Highest level \$46,000 12,000
Lowest level \$9,000 1,000
Difference \$37,000 =46,000 - 9,000 11,000
Variable cost \$3.36 =37,000/11.000

Indicate the fixed cost within the relevant range.
Fixed cost \$5,636 =46,000 - (3.36 * 1,000)

E5-6
Mozena Corporation manufactures a single product. Monthly production costs incurred in the manufacturing process are shown below for the production of 3,000 units. The utilities and maintenance costs are mixed costs. The fixed portions of these costs are \$300 and \$200, respectively.

Production in Units 3,000
Production Costs
Direct Materials \$7,500
Direct labor 15,000
Utilities 1,800
Property taxes 1,000
Indirect labor 4,500
Supervisory salaries 1,800
Maintenance 1,100
Depreciation 2,400

Identify the above costs as variable, ...

Solution Summary

The expert examines enterprises manufacturing of a new product. The relevant range of activity for this product is determined.

\$2.19