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# Cost accounting: CVP, contribution margin, operating income

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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.

\$2.19

## CVP Problems and Cost Accounting

1. Eastman Kodak Company produces and sells cameras, film, and other imaging products. A condensed 2000 income statement follows (in millions):

Sales \$13,994
Cost of goods sold 8,019
Gross Margin 5,975
Other operating expenses 3,761
Operating income \$2,214

Assume that \$1,800 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, \$3,000 million of the other operating expenses is fixed.

1. Compute the total contribution margin for 2000 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.
2. Suppose that sales for Eastman Kodak were predicted to increase by 10% in 2001 and that the cost behavior was expected to continue in 2001 as it did in 2000. Compute the predicted operating income for 2001. By what percentage did this predicted 2001 operating income exceed the 2000 operating income?
3. What assumptions were necessary to compute the predicted 2001 operating income in requirement 2?

Calculate breakeven and target profit volumes.
Apply critical thinking skills to analyze business situations.

2. Boeing is the largest commercial airplane manufacturer in the world. In 1996, it began development of the 757-300, a 240-passenger plane with a range up to 4,010 miles. First deliveries took place in 1999, at a price of about \$70 million per plane.

Assume that Boeing's annual fixed costs for the 757-300 are \$950 million, and its variable cost per airplane is \$45 million.

1. Compute Boeing's break-even point in number of 757-300 airplanes and in dollars of sales.
2. Suppose Boeing plans to sell forty-two 757-300 airplanes in 2002. Compute Boeing's projected operating profit.
3. Suppose Boeing increased its fixed costs by \$84 million and reduced variable costs per airplane by \$2 million. Compute its operating profit if forty-two 757-300 airplanes are sold. Compute the break-even point. Comment on your results.
4. Ignore requirement 3. Suppose fixed costs do not change, but variable costs increase by 10% before deliveries of 757-300 airplanes begin in 2002. Compute the new break-even point. What strategies might Boeing use to help assure profitable operations in light of increases in variable cost?

Calculate breakeven and target profit volumes.
Apply critical thinking skills to analyze business situations.

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