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# break-even point, contribution margin

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Hilton, Maher, & Selto, chap. 1, 2

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.

Compute the total contribution margin for 2000 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.
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?
What assumptions were necessary to compute the predicted 2001 operating income in requirement 2?

Question 11.

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.

Compute Boeing's break-even point in number of 757-300 airplanes and in dollars of sales.

Suppose Boeing plans to sell forty-two 757-300 airplanes in 2002. Compute Boeing's projected operating profit.

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.

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?

#### Solution Preview

Compute the total contribution margin for 2000 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.

Contribution margin is equal to Sales Revenue-Variable Costs.

Variable Costs= Total Costs- Fixed Costs= 8019-1800=6219 million

Contribution Margin= 13994-6219= 7775 million.

Contribution Margin percentage= (7775/13994)*100= 55.55%

Contribution Margin differes from Gross Margin because fixed costs are not included while calculating contribution margin while fixed costs is deducted from sales revenues to calculate gross margin.

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? What assumptions were necessary to compute the predicted 2001 operating income in requirement 2?

New Sales Revenue: 13994+ 10% of 13994= 13994+1399.4=15393.4 million

Predicted Operating Income for 2001:

As mentioned in the question, the cost behavior was expected to be the ...

#### Solution Summary

Compute the new break-even point. What strategies might Boeing use to help assure profitable operations in light of increases in variable cost?

\$2.19