Problem 1: Muscle Beach Current Operating Data
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MegeMuscle
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PowerGym
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ProForce
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Selling price per unit
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$140
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$200
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$290
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Contribution margin per unit
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42
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77
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58
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Monthly sales volume-units
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3,000
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2,000
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1,000
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Fixed expenses per month
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Total of $320,000
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a. Calculate the contribution margin ratio of each product
b. Calculate the firm’s overall contribution margin ratio
c. Calculate the firm’s monthly break-even point in sales dollars
d. Calculate the firm’s monthly operating income
e. management is considering the elimination of the ProForce model due to its low sales volume and low contribution margin ration. As a result, total fixed expenses can be reduced to $270,000 per month. Assuming that this change would not affect the other models, would you recommend the elimination of the ProForce model, and why?
f. Assume the same facts as in part e. Assume also that the sales volume for the PowerGym model will increase by 500 units per month if the ProForce model is eliminated. Would you recommend the elimination of the ProForce model, and why?
Problem 2. Clark and Spencer Operating Results in 2006
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Clarke Inc.
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Spencer Co.
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Sales
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$420,000
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$420,000
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Variable expenses
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84,000
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252,000
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Contribution margin
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$336,000
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$168,000
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Fixed expenses
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294,000
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126,000
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Operating income
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$42,000
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$42,000
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a. Calculate the break-even point for each firm in terms of revenue
b. What observations can you draw by examining the break-even point of each firm given that they earned an equal amount of operating income on identical sales volumes in 2006?
c. Calculate the amount of operating income )or loss) that you would expect each firm to report in 2007 if sales were to :
1. increase by 20%
2. decrease by 20%
d. Using the amounts computed in c above, calculate the increase or decrease in the amount of operating income expected in 2007 from the amount reported in 2006
e. Explain why an equal percentage increase (or decrease) in sales for each firm would have such differing effects on operating income
f. Calculate the ratio of contribution margin to operating income for each firm in 2006
g. Multiply the expected increase in sales of 20% for 2007 by the ratio of contribution margin to operating income for 2006 computed in f for each firm
h. Multiply your answer in g by the operating income of $42,000 reported in 2006 for each firm
i. Compare your answer in h with your answer in d. What conclusion can be drawn about the effects of operating leverage from the steps you performed in f, g, and h
E-13.8, Product costing –manufacturing overhead, pages 517-518. This illustrates the issues for allocating manufacturing overhead.
Problem 3:
Nautical Footware Company manufacturing overhead is assigned to production on a machine-hour basis. For 2007, it was estimated that manufacturing overhead would total $487,200 and that 33,600 machine hours would be used.
a. Calculate the predetermined overhead application rate that will be used for absorption costing purposes during 2007
b. During May, 5,860 pairs of shoes were made. Raw materials costing $28,468 were used, and direct labor costs totaled $28,800. A total of 2,840 machine hours were worked during the month of May. Calculate the cost per pair of shoes made during May
c. At the end of May, 1, 578 pairs of shoes were in ending inventory. Calculate the cost of the ending inventory and the cost of the shoes sold during May