Purchase Solution

# Vince Drum Company, Jetson Company, Letter Co. CVP problems

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Problem facts:

Problem 18-1A
The following costs result from the production and sale of 4,000 drum sets manufactured by
Vince Drum Company for the year ended December 31,2011. The drum sets sell for \$250 each. The company has a 25% income tax rate.

Variable production costs
Plastic for casting .......................\$68,000
Wages of assembly workers..............328,000
Drum Stands......................104,000
Variable selling costs
Sales commission....................60,000
Fixed manufactoring costs
Taxes on factory.....................10,000
Factory maintance....................20,000
Factory machinery depreciation.....................80,000
Lease of equipment for sales staff.....................20,000
Accounting staff salaries....................70,000
Required
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution magin per unit and its contribution margin ration.

Analysis component
3. Interpret the contribution margin and contribution margin ration from part 2
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Jetson Co. sold 20,000 units of its only product and incurred a \$50,000 loss?(ignoring taxes)
for the current year as shown here. During a planning session for year 2012
activities, the production manager notes that variable costs can be reduced 50% by installing a machine that
automates several operations. To obtain these savings, the company must increase its annual?
fixed costs by \$150,000. The maximum output capacity of the company is 40,000 units per year.

JETSON COMPANY
Contribution Margin Income Statement
For Year Ended December 31, 2011

Sales \$750,000
Variable costs 600,000
Contribution margin 150,000
Fixed costs 200,000
Net Loss \$(50,000)

Required
1.Compute the break-even point in dollars sales for year 2011.
2.Compute the predicted break-even point in dollar sales for year 2012 assuming the machine is installed and there is no change in the unit sales price.
3.Prepare a forecasted contribution margin income statement for 2012 that shows the expected results with the machine installed. Assume that the unit sales price and the number of units sold will not change, and no income taxes will be due.
4.Compute the sales level required in both dollars and units to earn \$140,000 of after-tax income in 2012 with the machine installed and no change in the unit sales price. Assume that the income tax rate is 30%.
5.Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4. Assume an income tax rate of 30%
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Letter Co. produces and sells two products, T and O.? It manufactures these products in separate factories and markets them through different channels
They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.

Sales
\$800,000
? \$800,000
Variable Costs
?560,000
?100,000
Contribution margin
240,000
700,000
Fixed Costs
100,000
560,000
Income before taxes
140,000
140,000
Income taxes (32% rate)
44,800
44,800
Net Income
\$95,200
\$95,200

Required

1. ? Compute the break-even point in dollar sales for each product.
2. ? Assume that the company expects sales of each product to decline to 33,000 units next year with no change in unit sales price.
Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns.?
for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings.?
3. ? Assume that the company expects sales of each product to increase to 64,000 units next year with no change in unit sales price. Prepare forecasted.?
financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% income tax rate).

Analysis component
4. ? If sales greatly decrease, which product would experience a greater loss? Explain
5. ? Describe some factors that might have created the different cost structures for these two products.
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##### Solution Summary

Your tutorial including coaching notes are attached in Excel. Three ideas about why a product might have high fixed costs are suggested. Each problem is a separate tab. Click in cells to see calculations.

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Problem facts:

Problem 18-1A
The following costs result from the production and sale of 4,000 drum sets manufactured by
Vince Drum Company for the year ended December 31,2011. The drum sets sell for \$250 each. The company has a 25% income tax rate.

Variable production costs
Plastic for casting .......................\$68,000
Wages of assembly workers..............328,000
Drum Stands......................104,000
Variable selling costs
Sales commission....................60,000
Fixed manufactoring costs
Taxes on factory.....................10,000
Factory maintance....................20,000
Factory machinery depreciation.....................80,000
Lease of equipment for sales staff.....................20,000
Accounting staff salaries....................70,000
Required
1. Prepare a contribution margin income statement for the company.
2. Compute its contribution magin per unit and its contribution margin ration.

Analysis component
3. Interpret the contribution margin and contribution margin ration ...

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• BSc, University of Virginia
• MSc, University of Virginia
• PhD, Georgia State University
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