Problem 1: CVP computations. Patel Manufacturing sold 200,000 units of its product for $ 30 per unit in 2008. Variable cost per unit is $ 25 and total fixed costs are $ 800,000.
Required:
1. Calculate (a) contribution margin and (b) operating income.
2. Patel's current manufacturing process is labor intensive. Kate Schoenen, Patel's production manager, has proposed investing in state- of- the- art manufacturing equipment, which will increase the annual fixed costs to $ 2,400,000. The variable costs are expected to decrease to $ 16 per unit. Patel expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenen's pro-posal affect your answers to ( a) and ( b) in requirement 1?
3. Should Patel accept Schoenen's proposal? Explain
Problem 2: CVP analysis, changing revenues and costs. Sunshine Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Canadian Air. Sunshine's fixed costs are $ 22,000 per month. Canadian Air charges passengers $ 1,000 per round- trip ticket.
Required
Calculate the number of tickets Sunshine must sell each month to ( a) break even and ( b) make a target operating income of $ 10,000 per month in each of the following independent cases.
1. Sunshine's variable costs are $ 35 per ticket. Canadian Air pays Sunshine 8% commission on ticket price.
2. Sunshine's variable costs are $ 29 per ticket. Canadian Air pays Sunshine 8% commission on ticket price.
3. Sunshine's variable costs are $ 29 per ticket. Canadian Air pays $ 48 fixed commission per ticket to Sunshine. Comment on the results.
4. Sunshine's variable costs are $ 29 per ticket. It receives $ 48 commission per ticket from Canadian Air. It charges its customers a delivery fee of $ 5 per ticket. Comment on the results.
Problem 3: CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $ 0.50 per unit. Fixed costs are $ 900,000 per year. Variable costs are $ 0.30 per unit.
Required: Consider each case separately:
1.
a. What is the current annual operating income?
b. What is the present breakeven point in revenues?
Compute the new operating income for each of the following changes:
2. A $ 0.04 per unit increase in variable costs
3. A 10% increase in fixed costs and a 10% increase in units sold
4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold
Compute the new breakeven point in units for each of the following changes:
5. A 10% increase in fixed costs
6. A 10% increase in selling price and a $ 20,000 increase in fixed costs
Problem 4: Contribution margin, decision making. Schmidt Men's Clothing's revenues and cost data for 2009 are:
Revenues $ 500,000
Cost of goods sold ( 40% of sales) 200,000
Gross margin 300,000
Operating costs:
Salaries fixed $ 150,000
Sales commissions ( 10% of sales) 50,000
Depreciation of equipment and fixtures 12,000
Store rent ($ 4,000 per month) 48,000
Other operating costs 50,000 310,000
Operating income ( loss) $( 10,000)
Mr. Schmidt, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $ 40,000 variable costs, which vary with sales volume, and $ 10,000 ( fixed) costs.
Required
1. Compute the contribution margin of Schmidt Men's Clothing.
2. Compute the contribution margin percentage.
3. Mr. Schmidt estimates that he can increase revenues by 20% by incurring additional advertising costs of $ 10,000. Calculate the impact of the additional advertising costs on operating income.