# Cost accounting: CVP, contribution margin, operating income

3.17

CVP computations. Patel Manufacturing sold 200,000 units of its product for $ 30 per unit in 2008. Variable cost per unit is $ 25 and total fixed costs are $ 800,000.

Required

1. Calculate (a) contribution margin and (b) operating income.

2. Patel's current manufacturing process is labor intensive. Kate Schoenen, Patel's production manager, has proposed investing in state- of- the- art manufacturing equipment, which will increase the annual fixed costs to $ 2,400,000. The variable costs are expected to decrease to $ 16 per unit. Patel expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenen's pro-posal affect your answers to ( a) and ( b) in requirement 1?

3. Should Patel accept Schoenen's proposal? Explain

3.18

CVP analysis, changing revenues and costs. Sunshine Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Canadian Air. Sunshine's fixed costs are $ 22,000 per month. Canadian Air charges passengers $ 1,000 per round- trip ticket.

Required

Calculate the number of tickets Sunshine must sell each month to ( a) break even and ( b) make a target operating income of $ 10,000 per month in each of the following independent cases.

1. Sunshine's variable costs are $ 35 per ticket. Canadian Air pays Sunshine 8% commission on ticket price.

2. Sunshine's variable costs are $ 29 per ticket. Canadian Air pays Sunshine 8% commission on ticket price.

3. Sunshine's variable costs are $ 29 per ticket. Canadian Air pays $ 48 fixed commission per ticket to Sunshine. Comment on the results.

4. Sunshine's variable costs are $ 29 per ticket. It receives $ 48 commission per ticket from Canadian Air. It charges its customers a delivery fee of $ 5 per ticket. Comment on the results.

3.20

CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $ 0.50 per unit. Fixed costs are $ 900,000 per year. Variable costs are $ 0.30 per unit.

Required

Consider each case separately:

1. a. What is the current annual operating income?

b. What is the present breakeven point in revenues?

Compute the new operating income for each of the following changes:

2. A $ 0.04 per unit increase in variable costs

3. A 10% increase in fixed costs and a 10% increase in units sold

4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold

Compute the new breakeven point in units for each of the following changes:

5. A 10% increase in fixed costs

6. A 10% increase in selling price and a $ 20,000 increase in fixed costs

3.30

Contribution margin, decision making. Schmidt Men's Clothing's revenues and cost data for 2009 are:

Revenues $ 500,000

Cost of goods sold ( 40% of sales) 200,000

Gross margin 300,000

Operating costs:

Salaries fixed $ 150,000

Sales commissions ( 10% of sales) 50,000

Depreciation of equipment and fixtures 12,000

Store rent ($ 4,000 per month) 48,000

Other operating costs 50,000 310,000

Operating income ( loss) $( 10,000)

Mr. Schmidt, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $ 40,000 variable costs, which vary with sales volume, and $ 10,000 ( fixed) costs.

Required

1. Compute the contribution margin of Schmidt Men's Clothing.

2. Compute the contribution margin percentage.

3. Mr. Schmidt estimates that he can increase revenues by 20% by incurring additional advertising costs of $ 10,000. Calculate the impact of the additional advertising costs on operating income.

#### Solution Summary

Nicely laid out computations so you have a template for work on this and other problems.