# Various CVP & Breakeven Questions

E6-3

Ger Company reports the following operating results for the month of August: Sales $300,000 (units 5,000); variable costs $210,000; and fixed costs $70,000. Management is considering three independent courses of action to increase net income.

Compute the net income that would result from each of the independent actions below:

1. Increase selling price by 10% with no change in total variable costs.

$

2. Reduce variable costs to 58% of sales.

$

3. Reduce fixed costs by $20,000.

$

E6-9 (a,b)

Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance. Shown below are unit cost and sales data.

Pairs

of Shoes Pairs

of Gloves Range

Finder

Unit sales price $100 $30 $250

Unit variable costs 60 10 200

Unit contribution margin $40 $20 $50

Sales mix 40% 50% 10%

Fixed costs are $620,000.

Compute the break-even point in units for the company.

Determine the number of units to be sold at the break-even point for each product line.

Shoes

Gloves

Range finders

E6-11

Spencer Company manufactures and sells three products. Relevant per unit data concerning each product are given below.

Product

A B C

Selling price $9 $12 $14

Variable costs and expenses $3 $9.50 $12

Machine hours to produce 2 1 2

Compute the contribution margin per unit of the limited resource (machine hour) for each product. (Round answers to 2 decimal places, e.g. 10.50.)

Product A $

Product B $

Product C $

Assuming 1,500 additional machine hours are available, which product should be manufactured?

Prepare an analysis showing the total contribution margin if the additional hours are (1) divided equally among the products, and (2) allocated entirely to the product identified in (b) above. (Round contribution margin to 2 decimal places, e.g. 10.50.)

Divided equally among the products:

Product

A B C

Machine hours

Contribution margin per unit

of limited resource $

$

$

Total contribution margin $

$

$

The total contribution margin is $ .

Allocated entirely to the product identified in the section above.

Machine hours

Contribution margin per unit of limited resource $

Total contribution margin $

E6-15

Imagen Arquitectonica of Tijuana, Mexico is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfredo Ayala, Imagen's owner, is considering replacing the draftsmen with a computerized drafting system.

However, before making the change Alfredo would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Manual System Computerized System

Sales $1,500,000 $1,500,000

Variable costs 1,200,000 600,000

Contribution margin 300,000 900,000

Fixed costs 60,000 660,000

Net income $240,000 $240,000

Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 10.50.)

Manual System

Computerized System

Which alternative would produce the higher net income if sales increased by $100,000?

Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.

P6-3A

Manning Industries manufactures and sells three different models of wet-dry shop vacuum cleaners. Although the shop vacs vary in terms of quality and features, all are good sellers. Manning is currently operating at full capacity with limited machine time. Sales and production information relevant to each model follows.

Product

Economy Standard Deluxe

Selling price $30 $50 $100

Variable costs and expenses $12 $18 $42

Machine hours required .5 .8 1.6

Ignoring the machine time constraint, which single product should Manning Industries produce?

What is the contribution margin per unit of limited resource for each product? (Round answers to 2 decimal places, e.g. 10.50.)

Economy $

Standard $

Deluxe $

If additional machine time could be obtained, how should the additional time be used?

P6-4A

The Creekside Inn is a restaurant in Tucson, Arizona. It specializes in southwestern style meals in a moderate price range. Terry Wilson, the manager of Creekside, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows.

Percent of Total Sales Contribution Margin Ratio

Appetizers 10% 60%

Main entrees 60% 30%

Desserts 10% 50%

Beverages 20% 80%

Terry is considering a variety of options to try to improve the profitability of the restaurant. Her goal is to generate a target net income of $150,000.The company has fixed costs of $1,200,000 per year.

Calculate the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income.

Appetizers $

Main entrees $

Desserts $

Beverages $

Total restaurant sales $

Terry believes the restaurant could greatly improve its profitability by reducing the complexity and selling price of its entrees to increase the number of clients that it serves. It would then more heavily market its appetizers and beverages. She is proposing to drop the contribution margin ratio on the main entrees to 10% by dropping the average selling price. She envisions an expansion of the restaurant that would increase fixed costs by 50%. At the same time, she is proposing to change the sales mix to the following.

Percent of Total Sales Contribution Margin Ratio

Appetizers 20% 60%

Main entrees 30% 10%

Desserts 10% 50%

Beverages 40% 80%

Compute the total restaurant sales, and the sales of each product line that would be necessary to achieve the desired target net income.

Appetizers $

Main entrees $

Desserts $

Beverages $

Total restaurant sales $

Suppose that Terry drops the selling price on entrees and increases fixed costs as proposed in the second part of the question, but customers are not swayed by the marketing efforts and the sales mix remains what it was in the first part of the question. Compute the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income. (Round weighted-average contribution margin to 2 decimal places, e.g. 10.50 and final answers to 0 decimal places, e.g. 125.)

Appetizers $

Main entrees $

Desserts $

Beverages $

Total restaurant sales $

#### Solution Summary

The solution computes questions..E6-3 Ger Company E6-9 (a,b) Tiger Golf E6-11 Spencer Company E6-15 Imagen Arquitechtonica P6-3A Manning Industries P6-4A Creekside Inn related to CVP analysis.