Shawn Pen & Pencil Sets Inc. has fixed costs of $127,400. Its product currently sells for $6 per unit and has variable costs of $3.40 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $320,000 and drive up fixed costs to $188,500. Although the price will remain at $6 per unit, the increased automation will reduce costs per unit to $2.75.
a. Compute the following break-even points. (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Current break-even point units Proposed new break-even point units
b. As a result of Bicâs suggestion, will the break-even point go up or down? The break-even point will go up. The break-even point will go down.
Shawn Pen & Pencil Sets Inc. has fixed costs of $127,400. Its product currently sells for $6 per unit and has variable costs of $3.40 per unit. Mr. Bic, the head of manufacturing, proposes to buy new equipment that will cost $320,000 and drive up fixed costs to $188,500. Although the price will remain at $6 per unit, the increased automation will reduce costs per unit to $2.75.
| a. | Compute the following break-even points. (Do not round intermediate calculations. Round your answers to the nearest whole number.) |
| Current break-even point | units |
| Proposed new break-even point | units |
| b. | As a result of Bicâs suggestion, will the break-even point go up or down? | ||||
|
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Related questions
Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below:
| Sales (13,500 units at $20 per unit) | $ | 252,000 |
| Variable expenses | 126,000 | |
| Contribution margin | 126,000 | |
| Fixed expenses | 141,000 | |
| Net operating loss | $ | (15,000) |
| Required: | |
| 1. | Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.) |
| CM ratio | % |
| Break-even point in units | |
| Break-even point in dollars | $ |
| 2. | The sales manager feels that an $62,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $87,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.) |
| is | $ | |
| 3. | Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values. Omit the "$" sign in your response.) |
| Contribution Income Statement | |
| $ | |
| $ | |
| 4. | Refer to the original data. The company%u2019s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,700? (Do not round intermediate calculations.) |
| Sales units |
| 5. | Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $119,000 per month. |
| a. | Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Omit the "%" and "$" signs in your response.) |
| CM ratio | % | |
| Break-even point in units | ||
| Break-even point in dollars | $ | |
| b. | Assume that the company expects to sell 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Omit the "$" and "%" signs in your response.) |
| Not Automated | Automated | ||||||
| Total | Per Unit | % | Total | Per Unit | % | |
| $ | $ | $ | $ | |||
| $ | $ | |||||
| $ | $ | |||||
| 9. | Johnson Company manufactures widgets. Old Ham Company has approached Jones with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Jones is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced:
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Jones. The remaining manufacturing overhead will continue whether or not Jones makes the components. What is the amount of avoidable costs if Jones buys rather than makes the components? | |||||||||
| A) | $60,000 | |||||||||
| B) | $96,000 | |||||||||
| C) | $124,000 | |||||||||
| D) | $100,000 | |||||||||
10. Below is a performance report that compares budgeted and actual profit of Famous Beer
for the month of April:
| Budget | Actual | Difference | |
| Sales | $200,000 | $202,000 | $2,000 |
| Less: | |||
| Cost of ingredients | $162,000 | $166,000 | $4,000 |
| Salaries | $31,000 | $31,200 | $200 |
| Controllable Profit | $47,000 | $44,800 | -$2,200 |
In evaluating the department in terms of its increase in sales and expenses, what will be
most important to investigate?
Sales
Cost of ingredients
Salaries
All three components have equal importance.
| 11. | Fatimaâs Diner has a contribution margin ratio of 17%. If fixed costs are $176,800, how many dollars of revenue must Fatimaâs generate in order to reach the break-even point? | |
| A) | $282,880 | |
| B) | $1,040,000 | |
| C) | $1,060,800 | |
| D) | $1,105,000 | |
| 12. | New Visions, Inc. is looking to achieve a net income of 15 percent of sales. Hereâs the firmâs profile: Unit sales price is $10; variable cost per unit is $6; total fixed costs are $40,000. What is the level of sales in units required to achieve a net income of 15 percent of sales? | |
| A) | 12,000 units | |
| B) | 21,000 units | |
| C) | 16,000 units | |
| D) | 20,000 units | |
| 13. | At Zikâs Apparel, the break-even point is 2,400 units. If fixed costs total $300,000 and variable costs are $25 per unit, what is the selling price per unit? | |
| A) | $210 | |
| B) | $180 | |
| C) | $5 | |
| D) | $150 | |
14. Which of the following situations will most likely violate cost-volume-profit
assumptions about fixed costs?
| A) | When production volume increases beyond the capacity of the plant, a second shift will be added instead of building a new plant. |
| B) | The companyâs raw material supplier typically allows volume discounts when larger amounts of the raw material are purchased. |
| C) | Fixed costs per unit decrease as volume increases. |
| D) | As volume increases, per unit fixed manufacturing overhead remain constant. |
15. Neighborhood Grill Company is a start up with the following profile:
Unit selling price = $200; Variable cost per unit = $100; Fixed Costs = $36,000;
Tax rate = 25%. How many units should Neighborhood Grill sell to achieve an
after-tax target income of $6,000?
| A) | 200 |
| B) | 460 |
| C) | 440 |
| D) | 300 |
| 16. | Northern Apparel Company owns two stores and management is considering eliminating the South store due to declining sales. Segmented contribution income statements are as follows and common fixed costs are allocated on the basis of sales.
Northern feels that if they eliminate the South store, sales in the North store will decline by 20%. If they close the South store, overall company net income will: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A) | decline by $90,000. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| B) | decline by $85,625. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C) | decline by $62,000. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| D) | decline by $20,000. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 17. | Forest Park, a best-selling toy has a selling price of $15. If the contribution margin ratio is 40% and if the fixed costs are $60,000, how many Forest Parks must the company sell to realize a profit of $450,000? | |
| A) | 30,000 | |
| B) | 34,000 | |
| C) | 85,000 | |
| D) | 100,000 | |
Information for Questions 18
Anderson Manufacturing makes a single product. Budget information regarding the current period is given below:
|
| Revenue (100,000 units at $8.00) | $800,000 |
| Direct materials | 150,000 | |
| Direct labor | 125,000 | |
| Variable manufacturing overhead | 235,000 | |
| Fixed manufacturing overhead | 110,000 | |
| Net income | $180,000 |
Dye Company approaches Anderson with a special order for 15,000 units at a price of $7.50 per unit. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Anderson is operating at capacity and will incur an additional $50,000 in fixed manufacturing overhead if the order is accepted.
| 18. | What is the incremental income (loss) associated with accepting the special order? | |
| A) | ($14,000) | |
| B) | $36,000 | |
| C) | ($23,500) | |
| D) | $27,000 | |
| 19. | Auto Zone believes it can sell 3,500,000 of a new vehicle charger for $8 each. There will be $3,000,000 in fixed costs associated with the charger. If the company desires to make a profit of $2,000,000 on the charger, what is the target variable cost per charger? | |
| A) | $7.25 | |
| B) | $9.00 | |
| C) | $6.57 | |
| D) | $9.40 | |
| 20. | On July 26, 2012, Radio Shack announced disappointing 2nd quarter earnings that caused the stock to fall 29% to all time lows. Although sales were up 1.2% to $953.2 million gross profit fell 16.6% to $360.3 million. Assuming Radio Shackâs store count and fixed costs were the same in the 2nd quarter of 2011 and 2012, which of the following statements is the best explanation for the decrease in the firmâs profitability? | |
| A) | Opportunity costs decreased. | |
| B) | Margin of safety decreased. | |
| C) | Contribution margin decreased. | |
| D) | Selling price decreased. | |
| 21 | Paul's Pizza produced and sold 2,000 pizzas last month and had fixed costs of $6,000. If production and sales are expected to increase by 10% next month, which of the following statements is true? | |
| A) | Total fixed costs will decrease. | |
| B) | Fixed cost per unit will decrease. | |
| C) | Total fixed costs will increase. | |
| D) | Fixed cost per unit will increase. | |
| 22. | The Synergy Company uses cost-plus pricing with a 50% mark-up. The company is currently selling 100,000 units at $12 per unit. Each unit has a variable cost of $6. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 80,000 units and the company wants to continue to earn a 50% return, what price should the company charge? | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A) | $13.50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| B) | $14.55 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C) | $12.75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| D) Use the following to answer question 23: Taylor's Treasures has collected the following information over the last six months.
| $10.95 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
