CVP Analysis answer questions 3-21 on page 86 and also Chapter 2 Video Case: answer the accompany question on page 59
Diego Motors is a small car dealership. On average, it sells a car for
$25,000, which it purchases from the manufacturer for $22,000. Each month, Diego Motors pays $50,000 in
rent and utilities and $60,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a
commission of $500 for each car they sell. Diego Motors also spends $10,000 each month for local advertisements.
Its tax rate is 40%.
Chapter 2 Video Case
THREE DOG BAKERY: Understanding Cost Terms
“Going to the dogs” has been good for Mark Beckloff and DanDye. Back in 1989, they founded the first bakery just for four leggedcanine friends with little more than the desire to satisfythe finicky palate of their beloved 114-pound, deaf Great Dane, Gracie. The small venture has grown from a single store indowntown Kansas City to more than 40 locations worldwide,including Japan and Korea. Their dog treats are made from
wholesome ingredients such as flour, eggs, carrots, spinach
Answer
THREE DOG BAKERY: Understanding Cost Terms
1.Various cost objects for Three Dog Bakery are:
Product:Dog biscuits and treats (125 different kinds)
Service:Telephone orders for dogalog sales
Project:Investigation of new store locations
Customer: PetsMart, the national pet store chain
Activity:Development and updating of the e-commerce Web site
Department: Finance, Marketing, Sales, Production, Shipping, Receiving, and so on.
2.Cost ItemD or IF or V
- Salary of the production department manager who oversees
manufacturingDF
b.Salaries of founders Dan Dye and Mark BeckloffIF
c.Cardboard trays used to package sets of twelve specialty biscuitsDV
d.Salary of the graphic designer who prepares the Dogalog Neither*
illustrations and layout
- Annual maintenance service agreement for the shrink-wrap machineDF
f.Wages paid to assembly line workers who mix Snickerpoodle
ingredients in batchesDV
g.Air conditioning costs for the entire baking commissaryDF
h.Cost of flour, eggs, and carob icing for Rollover biscuitsDV
*Design costs are not related to production and hence are neither direct nor indirect costs of production.
3.Three Dog Bakery is a manufacturing company but it is engaged in the manufacturing and merchandising sectors. With respect to manufacturing, it produces baked dog biscuits and treats at the central baking warehouse. Raw ingredients are purchased and converted into finished goods on the assembly line.
With respect to merchandising, the company operates retail stores. In addition to baked dog treats, these stores also sell merchandise from other manufacturers (dog bowls, hats, leashes, collars, etc.).
Three Dog Bakery does not provide services per se so it is not engaged in the service sector.
- When Wal-Mart purchases Lick ‘n Crunch cookies for sale in its stores, the purchase is an inventoriable cost. The cost of purchasing the cookies is considered an asset (inventory) on the balance sheet and it only becomes cost of goods sold as a matching expense against revenues when the cookies are sold. Inventoriable costs of Lick ‘n Crunch Cookies include the cost of the cookies plus any incoming freight, insurance, and handling costs for the cookies.
Chapter 3
3-21 CVP analysis, income taxes. Diego Motors is a small car dealership. On average, it sells a car for$25,000, which it purchases from the manufacturer for $22,000. Each month, Diego Motors pays $50,000 inrent and utilities and $60,000 for salespeople’s salaries. In addition to their salaries, salespeople are paid acommission of $500 for each car they sell. Diego Motors also spends $10,000 each month for local advertisements.
Its tax rate is 40%.
1. How many cars must Diego Motors sell each month to break even?
2. Diego Motors has a target monthly net income of $54,000. What is its target monthly operating income?
How many cars must be sold each month to reach the target monthly net income of $54,000?
1.Monthly fixed costs = $50,000 + $60,000 + $10,000 =$120,000
Contribution margin per unit = $25,000 – $22,000 – $500 =$ 2,500
Breakeven units per month = = = 48 cars
2. Tax rate40%
Target net income$54,000
Target operating income =$90,000
= 84 cars