QUESTION 1
Bridal Shoppe sells wedding dresses. The cost of each dress is comprised of the following:
Selling price of $1,000 and variable (flexible) costs of $400. Total fixed (capacity-related)
costs for Bridal Shoppe are $90,000.
A. What is the Bridal Shoppe’s total profit when 200 dresses are sold?
Revenues – Flexible Costs – Capacity-Related Costs = Total Profit
200 ($1,000) – 200($400) - $90,000 = $30,000
B. How many dresses must Bridal Shoppe sell to reach the breakeven point?
X = Capacity-Related Costs/Contribution Margin
X = $90,000/$600
X = 150 dresses
C. How many dresses must Bridal Shoppe sell to yield a profit of $60,000?
Total Revenues – Total Costs = Total Profit
$1,000X - $400X - $90,000 = $60,000
$600X = $150,000
X = $150,000/$600
X = 250 dresses
QUESTION 2
Northenscold Company sells several products. Information of average revenue and costs are as
follows:
Selling price per unit
Variable costs per unit:
Direct materials
Direct manufacturing labor
Manufacturing overhead
Selling costs
Annual fixed costs
$20.00
$4.00
$1.60
$0.40
$2.00
$96,000
1. Calculate the number of units Northenscold’s must sell each year to break even.
20X - 8X - 96,000 = 0; X = 8,000 units
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2. Calculate the number of units Northenscold’s must sell to yield a profit of $144,000.
20X – 8X – 96,000 = $144,000; X = 20,000 units
QUESTION 3
Berhannan’s Cellular sells phones for $100. The unit variable cost per phone is $50 plus a
selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed
selling and administrative costs total $2,500.
A. What is the breakeven point in phones?
N = Breakeven in phones
$100N - $50N - $10N - $1,250 - $2,500 = 0
$40N - $3,750 = 0
N = $3,750 / $40 = 93.75 phones
Breakeven Point = 94 phones
c. How many phones must be sold to earn a targeted profit of $7,500?
N = Phones to be sold
$100N - $50N - $10N - $1,250 - $2,500 = $7,500
$40N = $11,250
N = $11,250 / $40 = 281.25 phones
To achieve target profit: Must sell 282 phones
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 1 THROUGH 2:
Kaiser’s Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales
revenue, $28,000 of variable costs, and $12,000 of fixed costs.
1.
Breakeven point in units is:
a.
2,000 units
b.
3,000 units
c.
5,000 units
d.
None of these answers are correct.
$10X – $4X – $12,000 = 0; X = 2,000 units
2.
At the breakeven point of 200 units, variable costs total $400 and fixed costs total $600. The
201st unit sold will contribute ___________ to profits.
a.
$1
b.
$2
c.
$3
d.
$5
$1,000 – $400 – $600 = 0; Sales ($1,000 / 200) – Variable costs ($400 / 200) = $3 CM
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3.
Sales total $200,000 when variable costs total $150,000 and fixed costs total $30,000. The
breakeven point in sales dollars is:
a.
$200,000
b.
$120,000
c.
$ 40,000
d.
$ 30,000
($200,000 – $150,000) / $200,000 = 25% CM%; $30,000 / 0.25 = $120,000 BE sales
4.
What is the breakeven point in units, assuming a product's selling price is $100, fixed costs are
$8,000, unit variable costs are $20, and operating income is $32,000?
a.
100 units
b.
300 units
c.
400 units
d.
500 units
$100N – $20N – $8,000 = 0; $80N = $8,000; N = 100 units
5.
If breakeven point is 100 units, each unit sells for $30, and fixed costs are $1,000, then on a
graph the:
a.
total revenue line and the total cost line will intersect at $3,000 of revenue
b.
total cost line will be zero at zero units sold
c.
revenue line will start at $1,000
d.
All of these answers are correct.
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Beta Company sells blouses in Washington, USA. Blouses are imported from Pakistan and
are sold to customers in Washington at a profit. Salespersons are paid basic salary plus a
decent commission on sales made by them. Sales and expense data is given below:
Selling price per blouse
Variable expenses per blouse:
Invoice cost
Sales commission
Total
Annual fixed expenses:
Rent
Marketing
Salaries
Total
$80.00
———
$36.00
$14.00
———
$50.00
———
$160,000
$300,000
$140,000
———
$600,000
———
Required:
Compute the number of units to be sold to break-even.
Prepare a CVP graph (break-even chart) and show the break-even point on the graph.
If the manage is paid a commission of $6 blouse (in addition to the salesperson’s
commission), what will be the effect on company’s break-even point?
4.
As an alternative to (3) above, company is thinking to pay $6 commission to manager
on each blouse sold in excess of break-even point. What will be the effect of these changes
on the net operating income or loss of the Beta company if 23,500 blouses are sold in a
year?
5.
Refer to the original data. What will be the break-even point of the company if
commission is entirely eliminated and salaries are increased by $214,000? Should the
company make this change?
1.
2.
3.
Solution:
(1) Calculation of break-even point:
Fixed expenses / Contribution margin per unit
$600,000 / $30
20,000 units
or
20,000 units × $80 = $1,600,000
(2) CVP graph or break-even chart:
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(3) Break-even point if manager is also paid a commission of $6 per blouse sold:
The payment of a commission of $6 to manager will decrease the unit contribution margin
and increase the number of units required to sell to break-even.
$600,000 / $24
25,000 Units
Now the company requires 25000 units or $2,000,000 in sales just to break-even.
(4) Effect on net operating income or loss if manager is paid a commission of $6 on
each blouse sold after break-even point:
Sales (23,500 × $80)
$ 1,880,000
Less variable expenses (23,500 ×
1,175,000
$50)
————
705,000
Less manager’s commission
21,000
[(23,500 - 20,000) × 6]
————
684,000
Fixed expenses
600,000
————
Net operating income
84,000
————
(5) Break-even point after elimination of commission and increase in salaries:
$814,000 /$44
18,500 units
or
18,500 × $80 = $14,80,000
Fixed cost after change: $600,000 + 214,000 = 814,000
Unit contribution margin after change: $80 – $36 = $44
With the new system, Beta company will start making profits after selling $18,500 units but
with the old system company needs to sell 20,000 units before making any profit. The change
should, therefore, be implemented.
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