FINANCE

Exercise 6-5
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Hall Company had sales in 2014 of $1,560,000 on 60,000 units. Variable costs totaled $720,000, and fixed costs totaled $500,000. A new raw material is available that will decrease the variable costs per unit by 25% (or $3). However, to process the new raw material, fixed operating costs will increase by $150,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold. (a) Prepare a projected CVP income statement for 2014, assuming the changes have not been made. (Round per unit cost to 2 decimal places, e.g. 5.25 and all other answers to 0 decimal places, e.g. 1,225.)

HALL COMPANY CVP Income Statement For the Year Ended December 31, 2014
Total Per Unit
image100.png image101.wmf $image102.png image103.wmf $image104.png image105.wmf
image106.png image107.wmf image108.png image109.wmf image110.png image111.wmf
image112.png image113.wmf image114.png image115.wmf $image116.png image117.wmf
image118.png image119.wmf image120.png image121.wmf
image122.png image123.wmf $image124.png image125.wmf

(b) Prepare a projected CVP income statement for 2014, assuming that changes are made as described. (Round per unit cost to 2 decimal places, e.g. 5.25 and all other answers to 0 decimal places, e.g. 1,225.)

HALLCOMPANY CVP Income Statement For the Year Ended December 31, 2014
Total Per Unit
image126.png image127.wmf $image128.pngimage129.wmf $image130.pngimage131.wmf
image132.png image133.wmf image134.pngimage135.wmf image136.pngimage137.wmf
image138.png image139.wmf image140.pngimage141.wmf $image142.pngimage143.wmf
image144.png image145.wmf image146.pngimage147.wmf
image148.png image149.wmf $image150.pngimage151.wmf
Exercise 6-10

image152.png

Personal Electronix sells television iPads and iPods. The business is divided into two divisions along product lines. CVP income statements for a recent quarter’s activity are presented below.

iPad Division

iPod Division

Total

Sales

$600,000

$400,000

$1,000,000

Variable costs

420,000

260,000

680,000

Contribution margin

$180,000

$140,000

320,000

Fixed costs

120,000

Net income

$200,000

image153.png
image154.png
image155.png (a)

image157.png

Determine sales mix percentage and contribution margin ratio for each division. (Round answers to 0 decimal places, e.g. 15%.)

Sales Mix Percentage

iPad division

image158.png image159.wmf

%

iPod division

image160.png image161.wmf

%

Contribution Margin Ratio

iPad division

image162.png image163.wmf

%

iPod division

image164.png image165.wmf

%

(b) Calculate the company’s weighted-average contribution margin ratio.

(c ) Calculate the company’s break-even point in dollars.

(d) Determine the sales level in dollars for each division at the break-even point.

Exercise 6-13
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Billings Company manufactures and sells two products. Relevant per unit data concerning each product follow.

Product

Basic

Deluxe

Selling price

$40

$52

Variable costs

$20

$22

Machine hours

0.5

0.8

image167.png
image168.png
image169.png (a)

image171.png

(1) Compute the contribution margin per machine hour for each product.

Basic

Deluxe

Contribution margin per machine hour

$image172.png image173.wmf

$image174.png image175.wmf

(2) If 1,000 additional machine hours are available, which product should Billings manufacture? image176.png image177.wmf

(b) Prepare an analysis showing the total contribution margin if the additional hours are:

(1) Divided equally between the products

(2) Allocated entirely to the product identified in part (b)

Exercise 6-14
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The CVP income statements shown below are available for Armstrong Company and Contador Company.

Armstrong Co. Contador Co.
Sales $500,000 $500,000
Variable costs 240,000 50,000
Contribution margin 260,000 450,000
Fixed costs 160,000 350,000
Net income $100,000 $100,000
(a)
image179.png

Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.)

Degree of Operating Leverage
Armstrong image180.png image181.wmf
Contador image182.png image183.wmf

(b) Assuming that sales revenue increase by 10%, prepare a variable costing income statement for each company.

Problem 6-1A
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Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 80,000 units of product: Net sales $2,000,000; total costs and expenses $2,135,000; and net loss $135,000. Costs and expenses consisted of the following.

Total Variable Fixed
Cost of goods sold $1,468,000 $950,000 $518,000
Selling expenses 517,000 92,000 425,000
Administrative expenses 150,000 58,000 92,000
$2,135,000 $1,100,000 $1,035,000

Management is considering the following independent alternatives for 2014.

1. Increase unit selling price 25% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling $200,000 to total salaries of $40,000 plus a 5% commission on net sales.
3. Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50.

(a) Compute the break-even point in dollars for 2014. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Break-even point $image185.png image186.wmf

(b) Compute the break-even point in dollars under each of the alternative courses of action. (Round contribution margin ratio to 4 decimal places e.g. 0.2512 and final answers to 0 decimal places, e.g. 2,510.)

Break-even point
1. Increase selling price $image187.png image188.wmf
2. Change compensation $image189.png image190.wmf
3. Purchase machinery $image191.png image192.wmf

Which course of action do you recommend? image193.png image194.wmf

Problem 6-5A
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The following CVP income statements are available for Viejo Company and Nuevo Company.

Viejo Company Nuevo Company
Sales $500,000 $500,000
Variable costs 280,000 180,000
Contribution margin 220,000 320,000
Fixed costs 180,000 280,000
Net income $40,000 $40,000
(a1)
image196.png

Calculate Contribution margin ratio. (Round answers to 2 decimal places, e.g. 0.32.)

Contribution Margin Ratio
Viejo Company image197.png image198.wmf
Nuevo Company image199.png image200.wmf

(a) Compute the break-even point in dollars and the margin of safety ration for each company.

(b) Compute the degree of operating leverage for each company and interpret your results

(c) Assuming that sales revenue increase by 20%, prepare a CVP income statement for each company.

(d) Assuming that sales revenue decreases by 20%, prepare a CVP income statement for each company

(e) Discuss how the cost structure of these two companies affects their operating leverage and profitability.

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