Chapter 4
Short-Term Decision Making
Exercises
E4.1
Use the following information to determine the profit equation:
Selling price per unit
$ 222
Variable cost per unit
130
Fixed cost per year
50,600
E4.2
Ward’s Inc. sells a product for $75 per unit. The variable cost per unit is $47. The fixed
cost per year is $250,000.
A.
What is the contribution margin per unit?
B.
What is the breakeven point in units?
C.
What is the contribution margin ratio?
D.
What is the breakeven point in dollars?
E4.3
The Bryant Company has produced a new product. The management of Bryant Company
must determine a selling price; however, the variable costs are unknown. The fixed costs
are $450,000. Management plans to set the selling price so that variable cost is 45% of
the selling price.
A.
B.
C.
E4.4
Calihan Company has a product contribution margin of $50. The fixed costs are
$300,000. Calihan Company desires a target profit before taxes of $150,000 per year.
A.
B.
C.
E4.5
What is the contribution margin ratio?
What is the breakeven point in dollars?
If management desires a profit of $100,000, what will total sales be?
What is the breakeven point in units?
How many units must be sold to achieve the target profit?
If fixed costs increase 5 percent, how many units must be sold to achieve the
target profit?
Ambert Apparel makes lightweight jackets. Each jacket sells for $17.50. The variable
cost per jacket is $11.00. The fixed costs are $175,000. The after-tax target profit level
is $25,000. Ambert Apparel is subject to a 30% income tax rate.
A.
What is the breakeven point in units?
B.
What is the breakeven point in dollars?
C.
To achieve the profit goal, what must the before-tax profit be?
D.
How many units must be sold to achieve the profit goal after taxes?
E4.6
Rush Company has the following cost-volume-profit relationships:
Breakeven point in units
20,000
Variable cost per unit
$7.50
Fixed cost per period
$50,000
A.
What is the contribution margin per unit?
B.
What is the selling price per unit?
C.
What is the total profit if 20,001 units are sold?
E4.7
Backpackers, Inc. plans to manufacture packs for hiking and camping. The following
costs are expected to be incurred in the manufacturing process. Determine whether each
of the following costs is a product cost or a nonproduct cost. Use P for product cost and
NP for nonproduct cost.
__________ A. Cost of fabric
__________ B. Cost of the factory building
__________ C. Cost of advertising in various outdoor magazines
__________ D. Cost of leather for trim
__________ E. Cost of thread used to sew packs together
__________ F. Cost of shelving to store production supplies
__________ G. Salary of the chief executive officer
__________ H. Cost of zippers
__________ I. Wages of sales personnel (salary plus commission)
__________ J. Cost of delivery vehicle
__________ K. Cost of utilities used in the factory building
__________ L. Cost of utilities used in the corporate office
__________ M. Production supervisor’s salary
__________ N. Setup costs to change production from one style pack to another
__________ O. Research costs to design and develop pack
__________ P. Property taxes on factory building
E4.8
Chavez Co. produces and sells duffel bags that are priced at $60 each. Chavez has
received a request for a special order for 500 duffel bags at a price of $48 each. The
current unit cost to produce a bag is $32 (direct material, $20; direct labor, $8; and unitrelated overhead, $4). Chavez Co. has the capacity to produce the special order;
however, one additional production run will be required costing $2,000. Should the order
be accepted? Why or why not.
E4.9
Whitney, Inc. manufactures a unique hand lotion formulated for extremely dry weather.
It also makes the containers the lotion is sold in. Production costs for the 15,000
containers needed annually are as follow:
Direct materials
$35,000
Direct labor
15,000
Unit-related overhead
5,000
Product-sustaining overhead
6,000
Allocated facility-sustaining overhead 14,000
A supplier has offered to provide all 15,000 containers at a price of $4.50 per container.
If Whitney, Inc. accepts the offer, it will rent the released space for an annual rental fee of
$12,000. Should Whitney, Inc. make or buy the containers?
E4.10 In addition to selling custom-designed jewelry, Darrah’s Jewelry Store also offers repair
and appraisal services. After reading the following profit report, decide whether Darrah’s
should drop the appraisal service.
Revenues
Cost of sales (service)
Product margin
Facility-sustaining costs
Profit
Jewelry Sales
$90,000
45,000
$45,000
15,000
$20,000
Repair Service
$45,000
25,000
$20,000
15,000
$ 5,000
Appraisals
$5,000
1,000
$4,000
15,000
$(11,000)