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Johnson Company is required to earn a net income of $80,000. Assume that fixed costs are $42,000 and the contribution margin per oil change is $10 and the sales price per oil change is now $32. How many oil changes must the company make?
Total net income (units) = (FC + NI)/CM --> (42,000 + $80,000) / $10 = 12,200 oil changes
Total net income ($) = (FC + NI) / CMR --> ($42,000 + $80,000) / 31.25% = $390,400
CMR = UCM / unit selling price --> $10/$32 = 31.25% cmr
Given the following information, calculate the number of units required to break even if the selling price increases by 15%
selling price: $50 per unit
variable cost: $33.50 per unit
fixed costs: $129,600
Current units sold: 6000 units
increases by 15% = 115%
1.15 x $50 unit = 57.50 is new selling price per unit
SP per unit - VC per unit --> 57.50 - 33.30 = $24 UCM
B/E units: FC/UCM --> 129,600/24 = 5400 units to break even
Citizen Music produces 60,000 CDs to record to music. The CDs have the following costs: Variable costs $31,000 and fixed costs $6000. A supplier has offered to produce the 60,000 CDs for Citizen at a total cost of $38,000. If the CDs are outsourced, Citizen would save 70% in fixed costs, and another product could be made using the released production capacity to generate an additional profit of $4000. What is the increase or decrease in Net Income that would result from purchasing the CDs from the supplier
MAKE: Variable costs are $31,000, Fixed Costs are $6000, and opportunity cost is $4000 (additional profit). so the total cost is $41,000
BUY: purchase price $38,000 and fixed costs $1800. So, total cost is $39,800.
Make $41,000 - Buy $39,800 = $1200 cost savings, increase in NI
Ortega Company manufactures hard drives. The market for hard drives is very competitive. The current market price for a computer hard drive is $46. Ortega would like to profit $13 per drive. What target cost should Ortega set to accomplish this objective?
market price - desired profit = target cost
desired profit = ROI/unit
$46 - $13 = $33
Margin of safety ratio and in $
Margin of safety in $ Formula = actual sales - break-even sales
margin of safety ratio (%) = Margin of Safety in Dollars / Actual (Expected) Sales
McCormick Industries sells widgets and has the following sales and cost data for 2023:
selling price per unit: $250
VC per unit $150
Fixed costs: $35,000
Assume sales = 400 units
Prepare a CVP income statement
sales - VC = CM
CM - FC = net income
$250 x 400 units = 100,000
$150 x 400 units = 60,000
100,000 - 60,000 = 40,000
40,000 - 35,000 FC = 5000
selling price: $50/unit
variable cost: $30/unit
Fixed costs:$100,000
Current units sold: 6000 units
SP unit - VC unit = UCM --> 50 - 30 = 20 UCM
7000 units sold (new) - 6000 units sold (old) = 1000 extra units
1000 extra units x $20 UCM = 20,000 extra cm
20,000 - 12,000 extra FC (given) = $8000 NI increase
A company has 3 product lines, one of which reflects the follwoing results:
sales: $215,000
variable expenses: $125,000
contribution margin: 90,000
Fixed Expenses: 130,000
Net loss: $(40,000)
If the product line is eliminated, 30% of the fixed expenses are avoidable. What is the increase or decrease in net income that would result from eliminating the product line?
Fixed costs eliminated - CM lost = change in NI
$39,000 - (90,000) = -51,000
$51,000 decrease in NI, keep the product line
The heating division of Kobe International produces a heating element that it sells to its customers for $48 per unit. Its variable cost per unit is $21, and its fixed cost per unit is $6. Top management of Kobe International would like the heating division to transfer 14,800 heating units to another division within the company at a price of $25. The heating division is operating with excess capacity. What is the minimum trasnfer price that the heating division would be willing to accept?
Excess capacity means there is no ($0) opportunity cost
opportunity cost + variable costs = minimum transfer price
$0 + $21 = $21
net income formula
sales
- variable costs
= contribution margin
contribution margin
- fixed costs
= net income
McCormick Industries sells widgets and has the following sales and cost data for 2023:
selling price per unit: $250
VC per unit $150
Fixed costs: $35,000
Assume sales = 400 units
calculate CM per unit and CMR. Then use it to find break even point in sales dollars and units. Then use B/E to find margin of safety dollar amount and ratio
CM per unit = UCM
UCM = sales price a unit - variable costs a unit
250 - 150 = $100 UCM
CMR = UCM / Selling price a unit
100 / 250 = 40%
Break even ($)
FC / CMR --> 35,000 / 0.40 = $87,500
Break even in units
FC/UCM --> 35,000 / 100 = 350 units
MOS $ = actual sales - B/E sales
100,000 - 87,500 = 12,500
MOS % = MOS $ / actual sales
12,500 / 100,000 = 12.5%
Sage Corporation manufactures two products with the following characteristics.
Product 1 has UCM of $45.92 and product 2 has UCM of $35.90
the machine hours required for production is 0.15 hours for product 1 and 0.10 hours for product 2.
Sages machine hours are limited to 2000 per month. If sage is able to obtain 100 additional machine hours, what product should Sage produce and by how much would they increase their contribution margin if they produce that product using the extra hours?
first contribution margin / machine hours for each product
product 1: $45.92 / 0.15 hours = $306.13/MH
product 2: $35.90 / 0.10 hours $359 / MH
So product 2 has highest CM/MH
$359/MH x 100 MHs = 35,900 increase in CM
Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently, the copy clerk has not been able to process all the necessary copies within the regular work week. Management is considering updating the copier machine with a faster model.
Current copier: original purchase cost $10,000, accumulated depreciation $8,000, estimated operating costs (annual) $7,000, and useful life is 5 years.
new model: original purchase cost $20,000, accumulated depreciation (none), estimated operating costs (annual) $2,600, and useful life is 5 years.
If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.
What is the increase or decrease in net income that would result from replacing the machine?
Retain: operating cost $35,000 ($7,000 x 5 years), and total cost $35,000. There is no new equipment value or salvage value.
Replace: operating cost $13,000 ($2,600 x 5 years), new equipment $20,000, salvage value $1,000 and total cost $32,000 (13,000+20,000-1000)
35,000 - 32,000 = 3000 increase in NI if replace equipment. 3000 in cost savings increases NI
The heating division of Kobe International produces a heating element that it sells to its customers for $40 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $8. Top management of Kobe International would like the heating division to transfer 15,100 heating units to another division within the company at a price of $35. The heating division is operating at full capacity. Assume that if the units are sold internally, Kobe would save $2 per unit in variable costs due to reduced selling expenses. What is the minimum transfer price that the heating division would be willing to accept?
Full capacity = opportunity cost, which means Contribution margin is lost from the external sales that are sacrificed
opportunity cost + Internal variable costs = Minimum transfer price (MTP)
opportunity cost = CM --> $40 external selling price - $25 VC cost per unit = $15 opp. cost
$25 ext. VC - $2 savings = $23 Int. VC
$15 opp. cost + $23 = $38 MTP
SP per unit - VC per unit --> $40 - $25 = $19 CM opp. cost
UCM formula and CMR formula
UCM (unit contribution margin) = unit selling price (SP) - unit variable costs (VC)
CMR (unit contribution ratio) = Unit Contribution Margin / Unit Selling Price
Compute the CVP income statement with the following information.
sales per unit $60
variable costs $40
Fixed costs $1,200,000
Units sold 100,000
1. sales $6,000,000
2. variable costs 4,000,000
3. Contribution Margin 2,000,000
4. Fixed costs 1,200,000
5. net income $800,000
Formulas:
1. selling price per unit x units sold --> $60 x 100,000 units = 6,000,000
2. variable cost per unit x units sold --> $40 x 100,000 units = 4,000,000
3. CM = sales - VC --> 6,000,000 - 4,000,000 = 2,000,000
4. NI = CM - FC --> $2,000,000 - 1,200,000 = $800,000 NI
an investment banker is analyzing 2 companies that manufacture furniture. 1 company uses traditional, labor-intensive appraoch and the other comany uses an automated, mechanized appraoch. CVP income statements for the 2 companies are shown below
sales: traditional = $396,000 and automated $396,000
Variable costs: traditional = $319,000 and automated $156,000
Contribution Margin: traditional = 77,000 and automated 240,000
Net Income: traditional = $50,000 and automated $50,000
using the Degree of Operating Leverage, determine the effect on each companys net income if sales decrease by 10% and if sales increase by 8%
first find degree of operating leverage by CM/NI
traditional: 77,000 CM / 50,000 NI =1.54
automated: 240,000CM / 50,000 NI = 4.8
If sales decrease by 10%:
traditional: 1.54 x (.10) = 15.4% decrease in NI
automated 4.8 x (.10) = 48% decrease in NI
If sales increase by 8%:
traditional: 1.54 x (0.08) = 12.32% increase in NI
auto: 4.8 x (0.08) = 38.4% increase in NI
Spencer Chemical Corporation produces an oil-based chemical product, which it sells to paint manufacturers. In 2023, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12 per gallon. The costs per unit to manufacture a gallon of the chemicals are presented below:
Direct materials $6.00, Direct Labor $1.20, Variable manufacturing overhead $0.80, Fixed manufacturing overhead $0.60 and total manufacturing costs $8.60.
The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $0.60, variable manufacturing overhead $0.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon.
What is the increase or decrease in net income that would result from processing the chemical further into paint?
sell chemical:
sales price per unit $12, DM: $6, DL: $1.20, variable manufacturing overhead $0.80, fixed manufacturing overhead: $0.60 and total $8.60.
Net income: $3.40 (12-8.60)
Process Further: sales price per unit $15.50, DM: $7.70 (6.00 + 1.70), DL: $1.80 (1.20 + 0.60), variable manufacturing overhead $1.30 (0.80 + 0.50), fixed manufacturing overhead: $0.60 and total $11.40
Net income: 4.10 (15.50 - 11.40)
$4.10 - $3.40 = $0.70 per unit NI increase from processing further
40,000 units x $0.70 per unit = $28,000 increase in NI if process further
Jaymes Corporation produces high-performance rotors. It expects to produce 30,000 rotors in the coming year. It has invested $7,909,091 to produce rotors. The company has a required return on investment of 11%. What is the ROI per unit?
ROI per unit = (ROI% x amount invested)/units produced
(11% x $7,909,091)/30,000 units
= $29 ROI per unit
break even in units = Fixed Costs / Unit Contribution Margin
break even in $ = fixed costs / contribution margin ratio
Rose Tyler is considering opening a car wash service with an established company. She estimates that the following costs will be incurred during her first year of operations:
Rent: $8,000
Depreciation on equipment: $6,000
Wages: $10,950
Fixed Utility costs: $1400
Single-use rags $2.00 per rag. 3 used per wash
Cleaning products will cost $2.50 per wash
Franchise fee of $1.10 per wash
Variable utility costs $0.90 per wash.
Rose anticipates she can provide premium car wash service at $19 each. Determine the break even point in number of car washes (units) and sales dollars ($)
1. break even point in number pf car washes (units)
FC / ucm --> FC (8000 + 6000 + 10950 + 1400) / UCM which is selling price ($19) - variable costs (10.50). = 26350/8.50 = 3100 car washes
got variable costs by adding $6 ($2 x 3) + 2.50 + 1.10 + 0.90
2. break even in dollars
FC / CMR --> FC 26350 / CMR, which is (UCM / unit selling price), so 8.50/19 = 44.74%
26350/.4474 = $58,900 break even in $
Blue Chance CO. sells computers and video game systems. The business is divided into two divisions along product lines. Variable Costing income standards for the current year are presented below:
Sales = 700,000 computers, 300000 VG systems and total is 1,000,000
variable costs = 420000 computers, 210000 VG systems and total is 630,000
Contribution Margin = 280000 computers, 90000 VG systems and total is 370,000
Fixed costs is 296,000 and net income is 74,000
1) calculate the company's weighted average contribution margin ratio
2) calculate company's break even point in dollars
3) determine the sales level, in dollars, for each division at the break even point
1. WACMR --> CMR x sales mix
CMR computers --> 280,000/700,000 = 40%
CMR VG --> 90,000/300,000 = 30%
sales mix computers --> 700,000/1,000,000 = .70
sales mix VG --> 300,000 / 1,000,000 = .30
WACMR (.40 x .70) + (.30 x .30) = .37 (37%)
2) break even
FC/WACMR --> 296,000/0.37 = 800,000
3) break-even point $
Computers --> 800,000 x .70 = 560,0000
VG --> 800,000 x .30 = 240,000
Kuhn Bicycle Company has been manufacturing its own seats for bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor costs per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year. A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. What is the increase or decrease in Net Income that would result from purchasing the BCycle seats from the supplier?
Make:
Direct Materials: $400,000 (50,000 bikes x $8)
Direct labor: $450,000 (50,000 bikes x $9)
Variable Manufacturing costs:$270,000 (450,000DL x 60%)
Fixed manufacturing costs: $30,000 (given)
no purchase price
Total to make: $1,150,000
BUY:
NO DM, DL, or variable manufacturing costs
Fixed manufacturing costs: $30,000 (given)
purchase price: $1,050,000 (50,000 bikes x $21)
Total: $1,080,000
$1,150,000 - $1,080,000 = 70,000 cost savings
NI increases by $70,000 if purchase bicycle seats instead of making
Kaspar Corporation makes a commercial grade cooking griddle. The following information is avaiable for Kaspar Corporations anticipated annual volume of 32,900 units
Direct materials $18 per unit
Direct Labor $5 per unit
Variable Manufacturing Overhead $13 per unit
Fixed Manufacturing Overhead Total $384,800
Variable selling and administrative expenses $7 per unit
Fixed selling and administrative expenses $164,500 total
The company uses a 44% markup percentage on the total cost
Compute the target selling price
Total cost per unit
$384,800 / 32,900 units = $12 fixed MOH per unit
$164,500 / 32,900 units = $5 fixed S&A per unit
$18 + $5 + $13 + $7 + $12 + $5 = $60 total cost per unit
target selling price = cost + markup
target selling price = cost + (cost x markup %)
Target selling price = $60 + ($60 x 44%) = $86.40
WAUCM and WACMR
WAUCM= (UCM x sales mix %) + (UCM x sales mix %)
WACMR = (CMR x sales mix %) + (CMR x sales mix %)