The following data are available for a product manufactured and sold by Logan Company: Compute the following: (a) Contribution margin per unit: $ 84
(b) Number of units that must be sold to break-even: 5,572 units
(c) Dollar sales volume to produce income of $864,000 before taxes: $ 3,363,636
Computations:
Contribution margin: This is the profit earned for each unit sold.
Contribution margin per unit = sales price per unit – variable cost per unit = $ 212 - $ 128 = $ 84
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Break-even point: This is the point where the position of an organization is such that it neither incurs loss nor generates any profit.
Break-even (in units) = Fixed cost / contribution margin per unit = $ 468,000 / $84 = 5,572 units
Contribution margin ratio = Contribution margin per unit / sales price per unit * 100
= $84/ $212* 100
= 39.6%
Dollar sales value = ( Fixed cost + Desired income before taxes) / contribution margin ratio
= ($468,000 + $ 864,000) / 39.6%
= $ 3,363,636
2. Incremental analysis
Information regarding current operations of the Farrell Corporation is given below: A proposed addition to Farrell’s factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company’s accountants have determined that the proposed addition will add $320,000 to fixed costs each year. Variable costs are expected to be at the same percentage as they currently are before the proposed addition.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost. Fixed cost dealing with the current operation is a sunk cost since irrespective of the proposed addition, the cost will not change while the other cost is an incremental cost that is associated with the project.
(b) Calculate by how much the proposed addition will either increase or reduce operating income. Show all work.
Particulars | Current | Proposed | Difference |
Sales | 950,000.00 | 1,700,000.00 | 750,000.00 |
Less Variable Costs | (450,000.00) | (805,263.16) | (355,263.16) |
Contribution | 500,000.00 | 894,736.84 | 394,736.84 |
Fixed Costs | (310,000.00) | (630,000.00) | (320,000.00) |
Income | 190,000.00 | 264,736.84 | 74,736.84 |
Operating income will increase by 74,736.84.
3. Responsibility income statement-preparation
GAMELAND VILLAGE |
Segments |
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Income Statement by Product LinesFor the Month Ended April 30, 20__ |
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Gameland Village | Software | Video Games | ||||
Dollars | % | Dollars | % | Dollars | % | |
Sales | 600000 | 100.00% | 400000 | 100.00% | 200000 | 100.00% |
Variable Costs | (372000) | (62.00)% | (260000) | (65.00)% | (112000) | (56.00)% |
Contribution margin | 228000 | 38.00% | 140000 | 35.00% | 88000 | 44.00% |
Tracable fixed cost | (36000) | (6.00)% | (20000) | (5.00)% | (16000) | (8.00)% |
Departmental margins | 192000 | 32.00% | 120000 | 30.00% | 72000 | 36 |
Common fixed cost | (42000) | (7.00)% | 0.00% | 0.00% | ||
Income from operations | 150000 | 25.00% |
4. Standard cost system labor variance
The following computations of March labor variances for Sam’s Supply Company are incomplete. The missing items are labeled (a) through (d).
Labor rate variance = 4,800 hours [ (a) – $8.50] = $350 favorable Labor efficiency variance = (b) [ (c) – 5,000 hours] = $ (d)
On the appropriately labeled line, identify each missing item by name (a through c) and show the missing value (a through d). Show supporting computations in the space provided.
(a) = $ 8.5729
(b) $ 8.5729
(c) 4,800 hours
(d) = $ 1,714.58 F
(e) During March, the supervisor left for vacation without arranging for a replacement. Which variances would have been most affected by this situation? The labor efficiency variance (when one assumes that the supervisor is on paid vacation)
Computation:
4,800 hours ´ [(a) – $8.50] = $350 favorable
(a-8.50) = .0729
a = 8.5729
Standard rate = a = 8.5729
b = Standard rate = 8.5729
c = Actual hours = 4800
Labor efficiency variance = (b) ´ [(c) – 5,000 hours]
LEV = 8.5729(4800-5000)
LEV =1714.58 F = d 5. Capital budgeting
Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000, and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows: All revenue and expenses other than depreciation will be received and paid in cash. Compute the following for this proposal:
(a) Annual net cash flow: $ 95,000
(b) Payback period: 4.7 years
(c) Return on average investment: 25.33 %
(d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360): $ 249,200
Computation
Annual net cash flow = Depreciation + Incremental net income = $38,000 + $57,000 = $ 95,000
Payback period = Project cost/ Annual net cash flow = 450,000 / 95,000 = 4.7 years
Average Return on Investment = Incremental net income / (project cost /2)
= $57,000 / ($ 45,000 /2)
Net present value = (Annual net cash flow * discounting factors) - project cost
= $95,000 * 7.36 - $450,000/2
= 249,200