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# Profit and Break Even Points

1. C-V-P Analysis
The Last Outpost is a tourist stop in a western resort community. Kerry Yost, the owner of the
shop, sells hand-woven blankets for an average price of \$30 per blanket. Kerry buys the blankets
from weavers at an average cost of \$21. In addition, he has selling expenses of \$3 per blanket.
Kerry rents the building for \$300 per month and pays one employee a fixed salary of \$500
per month.
1. Determine the number of blankets Kerry must sell to break even.
2. Determine the number of blankets Kerry must sell to generate a profit of \$1,000 per month.
3. Assume that Kerry can produce and sell his own blankets at a total variable cost of \$16 per
blanket, but that he would need to hire one additional employee at a monthly salary of \$600.
a. Determine the number of blankets Kerry must sell to break even.
b. Determine the number of blankets Kerry must sell to generate a profit of \$1,000 per
month.

Cash Budgeting?Hospital
2. The management of West Valley Memorial Hospital needs to prepare a cash budget for July 2006. The following information is available:

a. The cash balance on July 1, 2006, is \$236,000.
b. Actual services performed during May and June and projected services for July are:
May June July
Cash services (bills paid by individuals
as they leave the hospital) . . . . . . . . . . . . . . . . . . \$110,000 \$ 90,000 \$120,000
Credit services (bills paid by insurance
companies and Medicare) . . . . . . . . . . . . . . . . . . 900,000 1,000,000 875,000

Credit sales are collected over a 2-month period, with 60% collected during the month the service is performed and 40% in the following month.
c. Hospital personnel plan to purchase \$80,000 of supplies during July on account. Accounts payable are usually paid one-half in the month of purchase and one-half in the following month. The accounts payable balance on July 1, 2006, is \$35,000.
d. Salaries and wages paid during July will be approximately \$600,000. (Ignore income and other tax withholdings.)
e. Depreciation on the hospital and equipment for July will be \$100,000.
f. A short-term bank loan of \$80,000 (including interest) will be repaid in July.
g. All other cash expenses for July will total \$56,000.
Prepare the hospital's July cash budget.

3. Pro-Forma Income Statement
Silver Company has asked you to prepare a pro-forma income statement for the coming year.
The following information is available:
Expected sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$1,240,000
Manufacturing costs:
Variable cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625,000
Fixed overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
Selling expenses:
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Other:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35%
Prepare a pro-forma contribution margin income statement for Silver Company.

Prepare a 350 -word executive summary in which you explain how outsourcing would impact the pro-forma income statement. For this one number 3. Cite sources.

4. Importance of Manufacturing Overhead Allocation
The percentages of product costs comprised by direct materials, direct labor, and manufacturing
overhead for three companies are as follows:
Company A Company B Company C
Direct materials . . . . . . . . . . . . . . . . . . . 7% 21% 42%
Direct labor . . . . . . . . . . . . . . . . . . . . . . 13 42 49
Manufacturing overhead . . . . . . . . . . . . 80 37 9
100% 100% 100%
Based on this information, which of these three companies would probably improve its product
costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.

5. Product Cost Hierarchy
For the following list of costs, indicate by the appropriate letter which category of activities each
cost applies to: unit level (U), batch level (B), product line (P), or facility support (F):

a. Machine fine-tuning adjustment cost (required after the production of each unit)
b. Salary of vice president of finance
c. Machine inspection cost (required after the completion of each day's production)
d. Cost of the external audit firm
e. Direct labor
f. Product testing cost (performed at the start of each day's production)
g. Direct materials
h. Factory security cost
i. Machine straight-line depreciation cost (Generally, machines are dedicated to producing a
particular type of product.)
j. Warehousing cost (Each type of product has its own warehouse.)
k. Employee training cost (Training is generally specific to different types of products.)

#### Solution Preview

Prepare a 350 -word executive summary in which you explain how outsourcing would impact the pro-forma income statement. For this one number 3. Cite sources.

Outsourcing is the delegation or transfer of non core processes/operations and tasks to a third party, so that an organization can focus on its core activities. It results in cost savings and improves the operating efficiency of the organizations.

Krajewski and Ritzman (2002) define outsourcing as "allotting work to suppliers and distributors to provide needed services and materials and to perform those processes that the organization does not perform itself." While such a definition is easy to comprehend, knowing when and how to outsource is much more complex.
It will make sense to outsource when:
? It helps in reducing capital investment: Supplier reaps the benefit of higher demand to pay for capital and aggregation of demand to smooth uncertainty.
? Focus on Core Competency: buyer is able to focus on its core strength (its talents, skills, and knowledge that differentiate it from its competitors and give it an advantage)
? Increased Flexibility
? Ability to better reacts to changes in customer demand
? Its cost efficient

? It has relatively less control on delivery and quality. It may not have the benefits of economies of scale.
? Loss of Competitive Knowledge: may open up the opportunity for competitors. New designs can only be introduced based upon supplier's agenda - not buyers.

Already a significant share of manufactured goods is sourced in China; and similarly, there is a significant market for Outsourced software from India. Major automation suppliers like Honeywell, Invensys, Emerson, Rockwell and General Electric are transferring software development to India and manufacturing to China.

Software development in India has been booming in recent years. India now sells \$6 bn worth of software annually to the US, with 60% annual growth projected over the next decade. Unique requirements and the services each destination may offer.

Hence following will be the impact on income statement:
1. It will help in focusing on the core areas as the secondary work can be contracted outside.
2. it will lead to optimum utilization of the resources
3. It can lead to economies of scale and specialization which will reduce costs and improve ...

#### Solution Summary

Profit and Break-Even Points are investigated.

\$2.19