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# Breakeven analysis

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1
A company has a 30% income tax rate, a contribution margin ratio of 25%, and fixed costs of \$440,000. What sales volume is necessary to achieve an after tax income of \$84,000?

2
Cost Function for Expedia Expedia provides travel services on the Internet. In the first quarter of 2001, Expedia reported an operating loss of \$19 million on sales revenue of \$57 million. In the first quarter of 2002, sales revenue had more than doubled to \$116 million, and Expedia had operating income of \$18 million. Assume that fixed costs were the same in 2002 as in 2001.

1. Compute the operating expenses for Expedia in the first quarter of 2001. In the first quarter of 2002.
2. Determine the cost function for Expedia, that is, the total fixed cost and the variable cost as a percentage of sales revenue.
3. Explain how Expedia's operating income could increase by \$37 million with an increase in sales of \$59 million, while it had an operating loss of \$19 million on its \$57 million of sales in the first quarter of 01

3
Identify and compute total discretionary fixed costs and total committed fixed costs from the following list of prepared by an accounting company:
dollars
Depreciation 47,000
Health insurance for co employees 21,000
management salaries 85,000
payment o long term debt 50,000
property tax 32,000
ground maintenance 9,000
office remodeling 21,000
Research and development 46,000

4
HP had been outsourcing to Acer and using overtime for as much as 20% of production -- HP's plants and assembly lines were running at 100% of capacity and the demand was sufficient for an additional 20%. HP had considered increasing its capacity by new highly automated assemly lines and plants. The investment in high technology and capacity expansion was rejected.

Assume that all maternal and labor costs are variable with respect to the level of production and that all other costs are fixed. Consider one of HP's plants that makes the Pavillion model. The increase in annual fixed costs to convert the pant to use the fully automated assembly lines is \$20 million. The resulting labor costs would be significantly reduced and there would be no need for overtime or outsourced production. The annual costs, in millions of dollars, of the build option and the existing costs that include the outsourcing and overtime are given in the following tables.

BUILD OPTION
% current capacity 60 100 120
Material costs 18 30 36
Labor costs 6 10 12
Other costs 40 40 40
total Costs 64 80 88

HP Existing costs using outsourcing/overtime
% current capacity 60 100 120
Material costs 18 30 36
Labor costs 18 30 44
Other costs 20 20 20
total Costs 56 80 100

1 Prepare a line graph showing total costs for the two options
a) Build a new assembly
b) Continue to use overtime and outsource production of the pavillion
c) Give an explanation of the cost behavior of the two options?

2 Which option enables HP's management to control risk better? Explain? Asses the cost-benefit trade-off associated with each option.
3 A Solid understanding of cost behavior is an important prerequisite to effective managerial control of costs. Suppose you are an HP Exec. Currently, the production and sales level is approaching the 100% of capacity and the economy is expected to remain strong for one year. While sales and profits are good now, you are aware of the availability inherent in computer business. Would you recommend HP in building automated assembly lines in-order to service potential near-term increases in demand, or would you recommend against building, looking to a future downturn in business? Discuss the reasoning.

5
Classify each of the following as DIRECT (D) or INDIRECT (I), Variable (V) or FIXED (F).. For each of the 10 items you will have D/I or V/F
1 Factory Rent
2 Salary of factory store room clerk
3 Cement for a road builder
4 Supervisor training program
5 Abrasives (sand paper)
6 Cutting bits in machinery dept
7 Food for a factory cafeteria
8 Workers compensation insurance in a factory
9 Steel scrap for a blast furnace
10 Paper towels for a factory washroom