# Business & Finance

Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is $1,840,000 based on a sales volume of 230,000 video disks. Disk City has been selling the disks for $23 each. The variable costs consist of the $11 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $460,000.

Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore income taxes.)

Required:

1.

Calculate Disk city’s break-even point for the current year in number of video disks. (Round your answer to the nearest whole number.)

Break-even point

46,000 units

2.

What will be the company’s net income for the current year if there is a 15 percent increase in projected unit sales volume? (Omit the “$” sign in your response.)

Net income

2,185,000 $

3.

What volume of sales (in dollars) must Disk City achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $23? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the “$” sign in your response.)

Volume of sales

7,895,522 $

4.

In order to cover a 30 percent increase in the disk’s purchase price for the coming year and still maintain the current contribution-margin ratio, what selling price per disk must Disk City establish for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the “$” sign in your response.)

Selling price

28.84 $

rev: 02_27_2014_QC_45987, 03_22_2014_QC_45987

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[The following information applies to the questions displayed below.]

Corrigan Enterprises is studying the acquisition of two electrical component insertion systems for producing its sole product, the universal gismo. Data relevant to the systems follow.

Model no. 6754:

Variable costs, $20.00 per unit

Annual fixed costs, $985,900

Model no. 4399:

Variable costs, $11.80 per unit

Annual fixed costs, $1,114,200

Corrigan’s selling price is $64 per unit for the universal gismo, which is subject to a 10 percent sales commission. (In the following requirements, ignore income taxes.)

2.

value: 10.00 points

Required:

1.

How many units must the company sell to break even if Model 6754 is selected? (Do not round intermediate calculations and round your final answer to the nearest whole number.)

Break-even point

26, 221 units

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3.

value: 10.00 points

2-a.

Calculate the net income of the two systems if sales and production are expected to average 42,000 units per year. (Omit the “$” sign in your response.)

Net Income

Model 6754

683,300 $

Model 4399

809,400 $

2-b.

Which of the two systems would be more profitable?

Model 6754

Model 4399 is profitable

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4.

value: 10.00 points

3.

Assume Model 4399 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $430,000 and will be depreciated over a five-year life by the straight-line method. How many units must Corrigan sell to earn $958,000 of income if Model 4399 is selected? As in requirement (2), sales and production are expected to average 42,000 units per year. (Do not round intermediate calculations and round your final answer to the nearest whole number.)

Required sales

47,122 units

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5.

value: 10.00 points

4.

Ignoring the information presented in part (3), at what volume level will the annual total cost of each system be equal? (Round your answer to the nearest whole number.)

Volume level 26,622

units

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6.

value: 10.00 points

Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 41,000 speaker sets:

Sales

$

3,280,000

Variable costs

820,000

Fixed costs

2,310,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $16 per set; annual fixed costs are anticipated to be $2,240,000. (In the following requirements, ignore income taxes.)

Required:

1.

Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States. (Omit the “$” sign in your response.)

Current income

150,000 $

Required sales

3,480,000 $

2.

Determine the break-even point in speaker sets if operations are shifted to Mexico.

Break-even point

35,000 units

3.

Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

a.

If variable costs remain constant, by how much must fixed costs change? (Input the amount as positive value. Omit the “$” sign in your response.)

Fixed costsby

210,000 $

b.

If fixed costs remain constant, by how much must unit variable cost change? (Input the amount as positive value. Do not round your intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Variable costsby

6 $

4.

Determine the impact (increase, decrease, or no effect) of the following operating changes.

a.

Effect of an increase in direct material costs on the break-even point.

b.

Effect of an increase in fixed administrative costs on the unit contribution margin.

c.

Effect of an increase in the unit contribution margin on net income.

d.

Effect of a decrease in the number of units sold on the break-even point.

rev: 10_30_2013_QC_38310, 02_27_2014_QC_46037

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7.

value: 10.00 points

Tim’s Bicycle Shop sells 21-speed bicycles. For purposes of a cost-volume-profit analysis, the shop owner has divided sales into two categories, as follows:

Product Type

Sales Price

Invoice Cost

Sales Commission

High-quality

$

500

$

275

$

25

Medium-quality

300

135

15

Three-quarters of the shop’s sales are medium-quality bikes. The shop’s annual fixed expenses are $65,000. (In the following requirements, ignore income taxes.)

Required:

1.

Compute the unit contribution margin for each product type. (Omit the “$” sign in your response.)

Bicycle Type

Unit Contribution Margin

High-quality

200 $

Medium-quality

150

2.

What is the shop’s sales mix? (Omit the “%” sign in your response.)

Sales mix

High-quality bicycles

25 %

Medium-quality bicycles

75 %

3.

Compute the weighted-average unit contribution margin, assuming a constant sales mix. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

Weighted-average unit contribution margin

162.50 $

4.

What is the shop’s break-even sales volume in dollars? Assume a constant sales mix. (Round intermediate calculations to 2 decimal places. Omit the “$” sign in your response.)

Break-even sales volume

140,000 $

5.

How many bicycles of each type must be sold to earn a target net income of $48,750? Assume a constant sales mix. (Round intermediate calculations to 2 decimal places.)

Number of bicycles

High-quality

175

Medium-quality

525

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8.

value: 10.00 points

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.)

Revenue

$

500,000

Less: Variable expenses

300,000

Contribution margin

$

200,000

Less: Fixed expenses

150,000

Net income

$

50,000

Consider each requirement independently.

Required:

1.

Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue represented by each item on the income statement. (Input all amounts as positive values. Omit the “$” & “%” signs in your response.)

Amount

Percent

Revenue

500,000

Variable expenses

300,000

Contribution margin

200,000

Fixed expenses

150,000

Net income

50,000

2.

Suppose the hotel’s revenue declines by 15 percent. Use the contribution-margin percentage to calculate the resulting decrease in net income. (Omit the “$” sign in your response.)

Decrease in net income

30,000 $

3.

What is the hotel’s operating leverage factor when revenue is $500,000?

Operating leverage factor

4

4.

Use the operating leverage factor to calculate the increase in net income resulting from a 20 percent increase in sales revenue. (Omit the “%” sign in your response.)

Percentage increase in net income

80 %

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9.

value: 10.00 points

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.)

Revenue

$

500,000

Less: Variable expenses

300,000

Contribution margin

$

200,000

Less: Fixed expenses

150,000

Net income

$

50,000

Required:

1.

Prepare a contribution income statement if the hotel’s volume of activity increases by 20 percent, and fixed expenses increase by 40 percent. (Input all amounts as positive values. Omit the “$” sign in your response.)

Revenue

600,000 $

Less: Variable expenses

360,000

Contribution margin

240,000 $

Less: Fixed expenses

210,000

Net income

30,000 $

2.

Prepare a contribution income statement if the ratio of variable expenses to revenue doubles. There is no change in the hotel’s volume of activity. Fixed expenses decline by $25,000. (Input all amounts as positive values except losses which should be indicated with a minus sign. Omit the “$” sign in your response.)

Revenue 500,000

$

Less: Variable expenses 600,000

Contribution margin (100,000)

$

Less: Fixed expenses 125,000

Net loss (225,000)

$

10.

value: 10.00 points

Hydro Systems Engineering Associates, Inc. provides consulting services to city water authorities. The consulting firm’s contribution-margin ratio is 20 percent, and its annual fixed expenses are $120,000. The firm’s income-tax rate is 40 percent.

Consider each requirement independently.

Required:

1.

Calculate the firm’s break-even volume of service revenue. (Omit the “$” sign in your response.)

Break-even volume

600,000 $

2.

How much before-tax income must the firm earn to make an after-tax net income of $48,000?. (Omit the “$” sign in your response.)

Before tax income

80,000 $

3.

What level of revenue for consulting services must the firm generate to earn an after-tax net income of $48,000? (Omit the “$” sign in your response.)

Service revenue

1,000 000 $

4.

Suppose the firm’s income-tax rate rises to 45 percent. What will happen to the break-even level of consulting service revenue?

The break-even level of consulting service revenue will change.

The break-even level of consulting service revenue will not change.

decrease

decrease

Increase

No effect

Increase

No effect

100

60

40

30

10