1. A certain company sells its only product for $12 per unit. The variable costs to produce the product are $7 per unit and it costs approximately $1 per unit for selling and administrative costs. The fixed costs of production are $400,000 per period and the fixed selling and administrative costs are $200,000 per year. The company is subject to a 30 percent tax rate. Answer the following questions. a. What is the breakeven point in units? b. What is the breakeven point in dollars? c. How many units must be sold to earn a profit of $70,000 before tax? d. How many units must be sold to earn a profit of $70,000 after tax? e. If the variable costs increase 10 percent, what increase is necessary in selling price to maintain the same breakeven point in units? f. If the fixed costs increase, what is the effect on breakeven? On contribution margin per unit? g. If the tax rate increases, what is the effect on breakeven? On contribution margin per unit? b Документ1 4/11/2020

• Answer:
• a. SP = $12; VC = $8; CM = $4; FC = $600,000
•
• b.
$600,000/4 = 150,000
CM = $4; SP = $12; CM % = 33.3333%
•
• c.
$600,000/33.3333% = $1,800,000
($600,000 + $70,000)/4 = 167,500
• d.
•
$70,000/(1 - .3) = $100,000
• g.
($600,000 + $100,000)/4 = 175,000
• e.
•
To maintain the same breakeven point, CM must remain the same.
VC = $8.80; CM = $4; therefore SP = $12.80
• f. If fixed costs increase, breakeven increases. Fixed costs do not affect contribution margin per unit.
Tax rate increases do not affect breakeven or contribution margin per unit. b Документ1 4/11/2020

• 2. A company has been approached by a supplier with an offer to provide 25,000 units of a production part for $9 per unit. If the company accepts the offer its direct materials costs are expected to decrease by 60 percent, its direct labor costs are expected to decrease by 30 percent, and its unit-related overhead is expected to decrease by 20 percent. A recent per unit cost report when 25,000 units were produced is shown below:
•
•
Direct materials
Direct labor
$10
2
• Manufacturing overhead 8
• Total cost $20
• An analysis of manufacturing overhead reveals that overhead consists of unit-related and facility-sustaining overhead. Facility-sustaining overhead consists of depreciation and other fixed items and is approximately $150,000 per period. If the company accepts the supplier’s offer, it will use the released production facilities to produce another product with an expected contribution of $60,000 per period. Should the company accept or reject the supplier’s offer? b Документ1 4/11/2020

• Answer:
• Total overhead $8 * 25,000 = $200,000
• Less facility-sustaining overhead
• Unit-related overhead
150,000
$ 50,000
• Unit-related overhead per unit $50,000/25,000 = $2
•
• Relevant variables
• Direct materials
• Direct labor
• Unit-related overhead
• Purchase price
• Relevant cost per unit
• * Number of units
• Total relevant unit cost
• Opportunity cost
• Total relevant cost
Make
$10.00
2.00
2.00
-0-
$14.00
25,000
$350,000
60,000
$410,000
Buy
$ 4.00 ($10 * .4)
1.40 ($2 * .7)
1.60 ($2 * .8)
9.00
$16.00
25,000
$400,000
-0-
$400,000 BUY b Документ1 4/11/2020

3.
A company has been approached by a customer with an offer to buy 10,000 units of product but the customer wants a discount of 25 percent off the normal selling price. The company has the capacity to fill the customer’s order. A recent profit report is shown below:
Sales (500,0000 units)
Cost of goods sold
$6,000,000
4,200,000
Gross margin
Selling and administrative cost
$1,800,000
1,000,000
Profit $ 800,000
Unit-related cost of goods sold is 40 percent of the current selling price while unit-related selling and administrative costs are 10 percent of the current selling price. To fill the customer’s order, one additional production run will be required at a cost of $6,000. An additional purchase order will be required at a cost of $500, and shipping costs to the customer will be $800. Should the company accept the customer’s order? b Документ1 4/11/2020

• Answer:
• Current selling price = $6,000,000/500,000 = $12
• Unit-related cost of goods sold = $12 * .4 = $4.80
• Unit-related selling and administrative cost = $12 * .1 = $1.20
• Proposed selling price = $12 * .75 = $9
•
• Relevant variables
• Proposed selling price
• Cost of goods sold
• Selling and administrative
Accept
$9.00
4.80
1.20
Reject
$0.00
0.00
0.00
• Contribution margin
• * Number of units requested
• Total contribution margin
• Additional batch costs:
•
•
Production run
Ordering
• Shipping
• Relevant profit
$3.00
$22,700
10,000
$30,000
( 6,000)
( 500)
( 800)
$0.00
10,000
$0
-0-
-0-
-0-
$0 ACCEPT b Документ1 4/11/2020

4. A merchandising company currently sells three products—A, B, and C. Product profit reports for the last period are shown below:
Sales
Less: cost of goods sold
Gross margin
Product A
$100,000
60,000
40,000
Product B
$200,000
120,000
80,000
Product C
$150,000
90,000
60,000
Less: selling and administrative costs 50,000 60,000 55,000
Profit ($10,000) $20,000 $5,000
A cost analysis reveals that cost of goods sold varies proportionately with sales (60%). Selling and administrative costs are $120,000 plus 10% of sales. The $120,000 of facility-sustaining selling and administrative cost will continue regardless of how many product lines the company maintains.
Should the company keep or drop its existing product lines? b Документ1 4/11/2020

Answer:
If Product A is dropped:
Revenues lost
Costs saved:
Cost of goods sold
Selling & administrative
$100,000
$60,000
10,000
$70,000
Since the revenues lost exceed the costs saved, the company should keep Product A. b Документ1 4/11/2020