Question 1: Cost Estimation and regression Analysis:
Dali financial services prepares tax returns for small businesses. Data on the company’s total costs and output for the past six months appear in the table that follows. The result of the regression analysis are also provided.
a. Plot the data and regression line on a graph.
b. Estimate total monthly costs for a month when 330 tax returns are prepared, using estimates from regression output.
|
Month
|
|
Taxreturns prepared
|
Total costs
|
|
January
|
|
200
|
$160,000
|
|
February
|
|
280
|
192,000
|
|
March
|
|
300
|
198,000
|
|
April
|
|
260
|
180,000
|
|
May
|
|
260
|
186,000
|
|
June
|
|
240
|
170,000
|
Question 2: Cost- volume- profit; volume defined in sales dollars. An excerpt from the income statement of the Donelean Company follows. Estimated fixed costs in year 1 are $660,000.
Donelean Company
Income Statement
Year Ended December 31, Year 1
|
Sales
|
|
|
|
|
3,000,000
|
|
Operating Expenses:
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
1,425,000
|
|
|
Selling Costs
|
|
|
|
450,000
|
|
|
Administrative costs
|
|
|
|
225,000
|
|
|
Total operating Costs
|
|
|
|
|
2,100,000
|
|
Profit
|
|
|
|
|
900,000
|
a. What percentage of sales revenue is variable cost?
b. What is the break-even point in sales dollars for Donelean Company?
c. Prepare a cost-volume-profit graph for Donelean Company.
d. If sales revenue falls to $2,500,000, what will be estimated amount of profit?
e. What amount of sales dollars produces a profit of $1,000.000?
Question 3: CVP analysis and financial modeling( adapted from CMA exam). Storage devices Incorporated is a retailer for high tech recording disks. The projected operating profit for the current year is $200,000 based ona sales volume of 200,000 units. The company has been selling the disks for $16 each; variable costs consist of the $10 purchase price and $2 handling cost. The companys annual fixed costs are $600,000.
Management is planning for the coming year, when it expects that the unit purchase price of the disks will increase by 30 percent.
a. Calculate the companys breakeven point for the current year in units.
b. What will be the companys operating profit for the current year if there is a 20 percent increase in projected unit sales volume?
c. What volume of dollar sales must be achieved in the coming year to maintain the current year’s operating profit if the selling price remains at $16?
d. Would the use of a financial model be helpful to the firm in addressing issues such as those raised in requirements b. and c.? Explain.
Question 4: CVP analysis. A company is decideing which of two new thermostat systems to produce and sell. The Basic system has variable costs of $8 per unit, excluding sales commissions, and annual fixed costs of $520,000; the Deluxe system has variable costs of $6.40, excluding sales commissions, and fixed costs of $672,000. The company’s selling price is $32 per unit for the Basic model and $38 for the deluxe model. The company pays a 10 percent sales commission.
a. Which of the two systems will be more profitable for the firm if sales are expected tp average 150,000 units per year?
b. How many units must the company sell to break even if it selects the deluxe system?
c. Suppose the Basic system requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $224,000 and will be depreciated over a 10 year life by the straight-line method. How many units must the company sell to earn 400,000 of income, after considering depreciation, if the Basic system is selected?
d. Ignoring the information presented in part c., at what volume level will management be indifferent between the Basic system and the Deluxe system?