Evaluating Decision-Making Scenarios Using Linear Profit Modeling
Analyze cost behaviors and decision-making scenarios using the linear profit model.
Darien Industries operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of $4,700 per month and variable costs of 40 percent of sales. Cafeteria sales are currently averaging $12,000 per month.
Darien has an opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machines is estimated to be 40 percent greater than current sales because the machines are available at all hours. By replacing the cafeteria with vending machines, Darien would receive 16 percent of the gross customer spending and avoid all cafeteria costs. How much does monthly operating income change if Darien Industries replaces the cafeteria with vending machines?
Silky Smooth Lotions
Silky Smooth lotions come in three sizes: 4, 8, and 12 ounces. The following table summarizes the selling prices and variable costs per case of each lotion size.
Per 4 Ounce 8 Ounce 12 Ounce
Price $36.00 $66.00 $72.00
Variable Cost $13.00 $24.50 $27.00
Fixed costs are $771,000. Current production and sales are 2,000 cases of 4-ounce bottles; 4,000 cases of 8-ounce bottles; and 1,000 cases of 12-ounce bottles, Silky Smooth typically sells the three lotion sizes in fixed proportions as represented by the preceding sales amounts.
How many cases of 4-, 8-, and 12-ounce lotion bottles must be produced and sold for Silky Smooth to break even, assuming that the three sizes are sold in fixed proportions?
J. P. Max Department Stores
J. P. Max is a department store carrying a large and varied stock of merchandise. Management is considering leasing part of its floor space for $72 per square foot per year to an outside jewelry company that would sell merchandise. Two areas currently in use are being considered: home appliances (1,000 square feet) and televisions (1,200 square feet). These departments had annual profits of $64,000 for appliances and $82,000 for televisions after allocated fixed occupancy costs of $7 per square foot were deducted. Allocated fixed occupancy costs include property taxes, mortgage interest, insurance, and exterior maintenance for the department store.
Considering all the relevant factors, which department should be leased and why?
Data for the Bidwell Company are as follows
(see attached for better formatting)
Sales (100,000) 1,000,000
Cost Fixed Variable
Raw Material $ 0 $300,000
Direct Labor 0 200,000
Factory Cost 100,000 150,000
Selling and Administrative Cost 110,000 50,000 910,000
Total Cost $210,000 $710,000 $90,000
a. Based on the preceding data, calculate break-even sales in units.
b. If Bidwell Company is subject to an effective income tax rate of 40 percent, calculate the number of units Bidwell would have to sell to earn an after-tax profit of $90,000.
c. If fixed costs increase $31,500 with no other cost or revenue factors changing, calculate the break-even sales in units.
The problem deals with determining the break-even units of sales for both multiple products and single products.