FINANCE

Exercise 5-8
image1.png

All That Blooms provides environmentally friendly lawn services for homeowners. Its operating costs are as follows.

Depreciation $1,400 per month
Advertising $200 per month
Insurance $2,000 per month
Weed and feed materials $12 per lawn
Direct labor $10 per lawn
Fuel $2 per lawn

All That Blooms charges $60 per treatment for the average single-family lawn. Determine the company’s break-even point in (a) number of lawns serviced per month and (b) dollars.

(a) Break-even point image2.png image3.wmf lawns
(b) Break-even point $image4.png image5.wmf
Exercise 5-13
image6.png

Cannes Company has the following information available for September 2014.

Unit selling price of video game consoles $400
Unit variable costs $275
Total fixed costs $52,000
Units sold 600

(a) Compute the contribution margin per unit.

Contribution margin per unit image7.png image8.wmf

(b) Prepare a CVP income statement that shows both total and per unit amounts.

CANNES COMPANY CVP Income Statement For the Month Ended September 30, 2014
Total Per Unit
image9.png image10.wmf $image11.png image12.wmf $image13.png image14.wmf
image15.png image16.wmf image17.png image18.wmf image19.png image20.wmf
image21.png image22.wmf image23.png image24.wmf $image25.png image26.wmf
image27.png image28.wmf image29.png image30.wmf
image31.png image32.wmf $image33.png image34.wmf

(c) Compute Cannes’ break-even point in units.

Break-even point in units image35.png image36.wmf units

(d) Prepare a CVP income statement for the break-even point that shows both total and per unit amounts.

CANNES COMPANY CVP Income Statement For the Month Ended September 30, 2014
Total Per Unit
image37.png image38.wmf $image39.png image40.wmf $image41.png image42.wmf
image43.png image44.wmf image45.png image46.wmf image47.png image48.wmf
image49.png image50.wmf image51.png image52.wmf $image53.png image54.wmf
image55.png image56.wmf image57.png image58.wmf
image59.png image60.wmf $image61.png image62.wmf
Exercise 5-14
image63.png
Naylor Company had $210,000 of net income in 2013 when the selling price per unit was $150, the variable costs per unit were $90, and the fixed costs were $570,000. Management expects per unit data and total fixed costs to remain the same in 2014. The president of Naylor Company is under pressure from stockholders to increase net income by $52,000 in 2014.
image64.png
image65.png
image66.png (a)

image68.png

Compute the number of units sold in 2013.

image69.png image70.wmf

units

(b) Compute the number of units that would have to be sold in 2014 to reach the stockholders desired profit level

(c ) Assume that Naylor Company sells the same number of units in 2014 as it did in 2013. What would the selling price have to be in order to reach the stockholders desired profit level?

Exercise 5-17
image71.png
Oak Bucket Co., a manufacturer of wood buckets, had the following data for 2013.

Sales

2,600

units

Sales price

$40

per unit

Variable costs

$16.00

per unit

Fixed costs

$19,500

image72.png
image73.png
image74.png (a)

image76.png

What is the contribution margin ratio?

Contribution margin ratio

image77.png image78.wmf

%

(b) What is the break-even point in dollars?

(c ) What is the margin of safety in dollars and as a ratio?

(d) If the company wishes to increase its total dollar contribution margin by 30% in 2014, by how much

will it need to increase its sales if all other factors remain constant?

Problem 5-1A
image79.png
Telly Savalas owns the Bonita Barber Shop. He employs 4 barbers and pays each a base rate of $1,000 per month. One of the barbers serves as the manager and receives an extra $500 per month. In addition to the base rate, each barber also receives a commission of $4.50 per haircut. Other costs are as follows.

Advertising

$200

per month

Rent

$1,100

per month

Barber supplies

$0.30

per haircut

Utilities

$175

per month plus $0.20 per haircut

Magazines

$25

per month

Telly currently charges $10 per haircut.

image80.png
image81.png
image82.png (a)

image84.png

Determine the variable cost per haircut and the total monthly fixed costs. (Round variable costs to 2 decimal places, e.g. 2.25.)

Total variable cost per haircut

$image85.png image86.wmf

Total fixed

$image87.png image88.wmf

( b) Compute the break-even point in units and dollars.

(c ) Prepare a CVP graph, assuming a maximum of 1,800 haircuts in a month. Use increments of 300 haircuts on the horizontal axis and $3,000 on the vertical axis.

Problem 5-5A
image89.png
Mozena Corporation has collected the following information after its first year of sales. Sales were $1,500,000 on 100,000 units; selling expenses $250,000 (40% variable and 60% fixed); direct materials $511,000; direct labor $290,000; administrative expenses $270,000 (20% variable and 80% fixed); manufacturing overhead $350,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
image90.png
image91.png
image92.png (a)

image94.png

Compute (1) the contribution margin for the current year and the projected year, and (2) the fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year.)

(1)

Contribution margin for current year

$image95.png image96.wmf

Contribution margin for projected year

$image97.png image98.wmf

(2)

Fixed Costs

(b) Compute the break-even point in units and sales dollars for the current year.

(c ) The company has a target net income of $200,000. What is the required sales in dollars for the company to meet its target?

(d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?

Chapter 6 homework Chapter 6: Exercises 5, 10, 13, and 14; Problems 1 and 5

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