PE 21-1A

The manufacturing costs of Jake Industries for the first three months of the year are provided below.

TOTAL COST / PRODUCTION
JANUARY / $180,000 / 2,500 UNITS
FEBURARY / 250,000 / 5,000
MARCH / 145,000 / 3,200

Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost.

a.$28 per unit = ($250,000 – $180,000)/(5,000 – 2,500)

b.$110,000 = $250,000 – ($28 × 5,000), or $180,000 – ($28 × 2,500)

PE 21-2A

Skinny Company sells 15,000 units at $20 per unit. Variable cost are $18 per unit, and fixed cost are 10,000. Determine (a) the contribution margin ratio, (b) the unit contribution margin and (c) income from operations.

a.$10% = ($20 – $18)/$20, or ($300,000 – $270,000)/$300,000

b.$2 per unit = $20 – $18

c.

Sales ………………………...... $300,000 (15,000 units × $20 per

...... unit)

Variable costs...... 270,000 (15,000 units × $18 per

unit)

Contribution margin...... $ 30,000 (15,000 units × $2 per

...... unit)

Fixed costs...... 10,000

Income from operations...... $ 20,000

PE21-3A

Frankel Enterprises sells a product for $25 per unit. The variable cost is $20 per unit, while fixed cost are $25,000. Determine (a) the break-even point in sales units and (b) the break=even point if selling price increased to $28 per unit.

a.5,000 units = $25,000/($25 – $20)

b.3,125 units = $25,000/($28 – $20)

PE21-4A

Melka Inc. sells a product for $80 per unit. The variable cost is $70 per unit, and fixed cost $25,000. Determine (a) the break-even point in sales units and (b) the break-even point in sales units if the company desires to target profit of $25,000.

a.2,500 units = $25,000/($80 – $70)

b.5,000 units = ($25,000 + $25,000)/($80 – $70)

PE21-5A

Simon Inc. has fixed cost of $150,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are provided below:

PRODUCT / SELLING PRICE / VARIABLE COST PER UNIT / CONTRIBUTIONMARGIN PER UNIT
X / $100 / $60 / $40
Y / 140 / 125 / 15

The sales mix for products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y.

Unit selling price of E: = [($100 × 0.60) + ($140 × 0.40)]= $116

Unit variable cost of E: = [($60 × 0.60) + ($125 × 0.40)]= 86

Unit contribution margin of E:= $30

Break-Even Sales (units) = 5,000 units = $150,000/$30

PE21-6A

Ross Enterprises reports the following data:

SALES $600,000

VARIABLE COSTS 250,000

FIXXED COST 100,000

Determine Ross Enterprise’s operating leverage.

1.4 = ($600,000 – $250,000)/($600,000 – $250,000 – $100,000) = $350,000/$250,000

PE21-7A

Miller Inc. has sales of $100,000, and the break-even point in sales dollars is $800,000 Determine the company’s margin of safety.

20% = ($1,000,000 – $800,000)/$1,000,000

Ex21-7

W and O Inc. decided to use the high-low method to estimate the total cost and the fixed and variable cost components of the total cost. The data for various levels of production are as fallows:

UNITS PRODUCED / TOTAL COST
10,000 / $750,000
22,500 / 845,000
30,000 / 950,000

<!--[if !supportLists]-->a.<!--[endif]-->Determine the variable cost per unit and the fixed cost.

<!--[if !supportLists]-->b.<!--[endif]-->Based on part (a), estimate the total cost for 25,000 units

of production.

a.Variable Cost per Unit =

Variable Cost per Unit =

Variable Cost per Unit = = $10.00 per unit

The fixed cost can be determined by subtracting the estimated total variable cost from the total cost at either the highest or lowest level of production, as follows:

Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost

Highest level:

$950,000 = ($10.00 × 30,000 units) + Fixed Cost

$950,000 = $300,000 + Fixed Cost

$650,000 = Fixed Cost

Lowest level:

$750,000 = ($10.00 × 10,000 units) + Fixed Cost

$750,000 = $100,000 + Fixed Cost

$650,000 = Fixed Cost

b.Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost

Total cost for 25,000 units:

Variable cost:

Units...... 25,000

Variable cost per unit...... ×$10.00

Total variable cost...... $250,000

Fixed cost...... 650,000

Total cost...... $900,000

EX21-10

For a recent year, Mc Donald’s had the following sales and expenses (in millions):

<!--[if !supportLists]--><!--[endif]-->Sales $15,352

<!--[if !supportLists]--><!--[endif]-->Food and packaging 4,204

<!--[if !supportLists]--><!--[endif]-->Payroll 4,040

<!--[if !supportLists]--><!--[endif]-->Occupancy (rent, dep. etc.) 1,022

<!--[if !supportLists]--><!--[endif]-->General ,Selling and Admin Ex. 2,200

<!--[if !supportLists]-->o<!--[endif]--> 12,486

<!--[if !supportLists]--><!--[endif]-->Income from operations 2,866

Assume that the variable cost consist of food and packaging, payroll, and 40% of the general, selling and administrative expenses.

<!--[if !supportLists]-->a.<!--[endif]-->What is McDonald’s contribution margin? Round to the nearest million.

<!--[if !supportLists]-->b.<!--[endif]-->What is McDonald’s contribution margin Ratio? Round to two decimal places.

<!--[if !supportLists]-->c.<!--[endif]-->How much would income from operations increase if same-store increased by $450 million for the coming year, with no change in the contribution margin ratio or fixed cost?

a.

Sales...... $15,352

Variable costs:

Food and packaging...... $5,204

Payroll...... 4,040

General, selling, and administrative expenses (40% × $2,220)888

Total variable costs...... $10,132

Contribution margin...... $5,220

b.

Contribution Margin Ratio =

Contribution Margin Ratio = = 34.00%

c.Same-store sales increase...... $450,000,000

Contribution margin ratio [from part (b)]...... ×34.00%

Increase in income from operations...... $153,000,000

EX21-21

Candies Inc. manufactures and sells two products, marshmallow bunnies and jelly beans. The fixed costs are $350,000 and the sales mix is 70% marshmallow bunnies and 30% jelly beans. The unit selling price and the unit variable cost for each product are as follows:

PRODUCTS / UNIT SELLING PRICE / UNIT VARAIBLE COST
Marshmallow bunnies / $2.40 / $1.00
Jelly beans / 1.80 / 0.90

<!--[if !supportLists]-->a.<!--[endif]-->Compare the break-even sale (units ) for the overall product, E

<!--[if !supportLists]-->b.<!--[endif]-->How many units of each product, marshmellow bunnies and jelly beans, would be sold at the break-even point?

a.Unit Selling Price of E = ($2.40 × 0.70) + ($1.80 × 0.30)

Unit Selling Price of E = $1.68 + $0.54 = $2.22

Unit Variable Cost of E = ($1.00 × 0.70) + ($0.90 × 0.30)

Unit Variable Cost of E = $0.70 + $0.27 = $0.97

Unit Contribution Margin of E = $2.22 – $0.97 = $1.25

Break-Even Sales (units) =

Break-Even Sales (units) = = 280,000 units

b.196,000 units of marshmallow bunnies (280,000 units × 0.70)

84,000 units of jelly beans (280,000 units × 0.30)

EX21-23

<!--[if !supportLists]-->a.<!--[endif]-->If Larker Company, with a break-even point at $450,000 of sales, has actual sales of$500,000, what is the margin of safety expressed (1) in dollars and (2) as a percentage of sales?

<!--[if !supportLists]-->b.<!--[endif]-->If the margin of safety for Porter Company was 20%, fixed costs were $600,000, and variable costs were 70% of sales, what was the amount of actual sales (dollars)?

a.(1)$50,000 ($500,000 – $450,000)

(2)10% ($50,000/$500,000)

b.The break-even point (S) is determined as follows:

Sales = $600,000 + 70% Sales

Sales – 70%Sales = $600,000

30% Sales = $600,000

Sales = $2,000,000

If the margin of safety is 20%, the sales are determined as follows:

Sales = $2,000,000 + 20% Sales

Sales – 20%Sales = $2,000,000

80%Sales = $2,000,000

Sales = $2,500,000

EX21-25

Juras Inc. and Hinson Inc. have the following operating data:

JURAS / HINSON
SALES / $160,000 / $215,000
VARIABLE COSTS / 130,000 / 115,000
CONTRIBUTION MARGIN / $30,000 / $115,000
FIXED COSTS / 20,000 / 75,000
INCOME FROM OPERATIONS / $10,000 / $25,000

<!--[if !supportLists]-->a.<!--[endif]-->Compare the operating leverage for Juras Inc. Hinson Inc.

<!--[if !supportLists]-->b.<!--[endif]-->How much would income from operations increase for each company if the sales of each increased by 10%

<!--[if !supportLists]-->c.<!--[endif]-->Why is there a difference in the increase in income from operations for the two companies?

a.Juras Inc.:

Operating Leverage =

Operating Leverage = = 3.00

Hinson Inc.:

Operating Leverage =

Operating Leverage = = 4.00

b.Juras Inc.’s income from operations would increase by 30% (3.00 × 10%), or $3,000 (30% × $10,000), and Hinson Inc.’s income from operations would increase by 40% (4.00 × 10%), or $10,000 (40% × $25,000).

c.The difference in the increases of income from operations is due to the difference in the operating leverages. Hinson Inc.’s higher operating leverage means that its fixed costs are a larger percentage of contribution margin than are Juras Inc.’s. Thus, increases in sales increase operating profit at a faster rate for Hinson than for Juras.