EXERCISE 5-11 Missing Data; Basic CVP Concepts [LOS-1, LO5-9] Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contribution format income statement for each case, enter the known data, and then compute the missing items.) a. Assume that only one product is being sold in each of the four following case situations: Contribution Net Operating Units Variable Margin Fixed Income Case Sold Sales Expenses. per Unit, © Expenses (Loss) 1. 15,000 $180,020 $120,000 2 $50,000 2 2. 2 $100,090 2 $10 $32,000 ‘$8,000 3. 10,000 2 $70,000 $13 7 $12,000 4, 6,000 $300,090 2 2 $100,000 _$(10,000) b. Assume that more than one product is being sold in each of the four following case situations: Net Operating Variable Fixed Income Sales Expenses Expenses (Loss) ‘$500,000 2 2 $7,000 $400,030 $260,000 $100,000 2 2 2 $130,000 $20,000 $600,030 $420,000 2 (6,000) EXERCISE 5-16 Break-Even Analysis and CVP Graphing [LO5-2, LO5~4, LO5-5] The Hartford Symphony Guild is planning its annual dinner-dance. The dinnerdance committee has assembled the following expected costs for the event: Dinner (per person) .. ree $18 Favors and program toe person) eon $2 ee $2,800 Rental o ballroom .. cee $900 Professional entertainment during intermission .... $1,000 Tickets and advertising . $1,300 The committee members would like to charge $35 per person for the evening's activities. Required: 1, Compute the break-even point for the dinner-dance (in terms of the number of persons who must attend). 2. Assume that last year only 300 persons attended the dinner-dance. If the same number attend this year, what price per ticket must be charged in order to break even? 3. Refer to the original data (S35 ticket price per person). Prepare a CVP graph for the dinner- dance from zero tickets up to 600 tickets sold.EXERCISE 5-18 Break-Even and Target Profit Analysis; Margin of Safety; CM Ratio [LO5~1, LO5-3, LO5-5, LO5-6, LO5-7] Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Total Per Unit Sale sesee, $450,000 $30 Variable expenses . : 180,000 12 Contribution margin Beer 270,000) Fixed expenses i 216,000 Net operating income ......... $ 54,000 Required: 1. What is the monthly break-even point in unit sales and in dollar sales? 2. Without resorting to computations, what is the total contribution margin at the break-even point? 3. How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target sales level. 4. Refer to the original data. Compute the company’s margin of safety in both dollar and per- centage terms, 5. What is the company’s CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to inerease?PROBLEM 5-20 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO5-1, LOS-3, LO5-4, LOS-5, LO5-6, LOS-] Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15 per ball, of which 60% is direct labor cost. Last year, the company sold 30,000 of these balls, with the following results: Sales (80.000 balls) . ‘$750,000 Variable expenses 450,000, Contribution margin . 300,000, Fixed expenses . 210,000, Net operating income . . Required: i 2, ‘Compute (a) the CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year’s sales level. Duc to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year If this change takes place and the selling price per ball remains con- ‘tant at $25, what will be the new CM ratio and break-even point in balls? Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? Refer agai ing price of to the data in (2) above. The president feels that the company must raise the sell- its basketballs. If Northwood Company wants to maintain the same CM hat selling price per ball must it charge next year to cover the increased labor Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company’s new CM ratio and new break-even point in balls? Refer to the data in (5) above. a. Ifthe new plant is built, how many balls will have to be sold next year to earn the same net operating income, $90,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 30,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage, c, If you were a member of top management, would you have been in favor of constructing the new plant? Explain,PROBLEM 5-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO5-4, LO5-5, LO5-7, LO5-8) Morton Company’s contribution format income statement for last month is given below: Sales (15,000 units x $30 per re - $450,000 Variable expenses 315,000 Contribution margin . 135,000 Fixed expenses 20,000 Net operating income . The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic condi- tions. The company has a lange amount of unused capacity and is studying Way's of improving profits. Co New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $9 per unit. However, fixed expenses would increase to a total of $225,000 each month, Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses. 2. Refer to the income statements in (1) above. For both present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (¢) the margin of safety in both dollar and percentage terms. 3. Refer again to the data in (I) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase.) 4. Refer to the original data. Rather then purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales com- missions, which are currently included in variable expenses, the company would pay sales- persons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be $180,000; and its net operating income ‘would inerease by 20%. Compute the break-even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager's proposal?PROBLEM 5-30 Graphir 105-8) Incremental Analysis; Operating Leverage [LO5-2, LO5~4, LO5-5, LO5-6, Angie Silva has recently opened The Sandal Shop in Brisbane, Australia, a store that specializes in fashionable sandals. Angie has just received a degree in business and she is anxious to apply the principles she has learned to her busin In time, she hopes to open a chain of sandal shops. As a first step, she has prepared the following analysis for her new store: Sales price per pair of sandals . $40 Variable expenses per pair of sandals 16 Contribution margin per pair of sandals . $24 Fixed expenses per year: Buildirg rental. $15,000, Equipment depreciation 7,000 Selling . 20,000 Administrative 18,000 Total fixed expenses $60,000 Required: How many pairs of sandals must be sold each year to break even? What does this represent in total sales dollars? Prepare a CVP graph ora profit graph for the store from zero pairs up to 4,000 pairs of sandals sold each year. Indicate the break-even point on your graph. ‘Angie has decided that she must earn at least $18,000 the first year to justify her time and effort. How many pairs of sandals must be sold to reach this target profit? Angie now has two salespersons working in the store—one full time and one part time. It will cost her an additional $8,000 per year to convert the part-time position to a full-time position, Angie believes that the change would bring in an additional $25,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.) Refer to the original data. During the first year, the store sold only 3.000 pairs of sandals and reported the following operating results: Sales (3,000 pairs) . $120,000 Variable expenses . 48,000 Contribution margin 72,000 Fixed exoenses . . 60,000 Net operating income a. What is the store’s degree of operating leverage? bb. Angie is confident that with a more intense sales effort and with a more creative adver- tising program she can increase sales by 50% next year. What would be the expected percentage increase in net operating income? Use the degree of operating leverage to compute your answer.