ACCT 203 Chapter Notes - Chapter 4: Contribution Margin, Net Present Value, Cash Flow

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.

1. Compute net income before tax.

2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

3. Calculate the break-even point in units and dollars ofrevenue.

4. Calculate the margin of safety:

In units

In sales dollars

As a percentage

5. Calculate the degree of operating leverage.

6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Oslo Company prepared the following contribution format Income Statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

Sales                               $20,000

Variable Expense             ($12,000)

Contribution Margin           $ 8,000

Fixed Expenses                ($6, 000)

Net Operating Income   $2, 000

Required:

1. What is the contribution margin per unit?

2. What is the contribution margin ratio?

3. What is the variable expense ratio?

4. If sales increase to  1,001 units, what would be the net operating income?

5. If sales decline to 900 units, what would be the net operating income?

6. If the selling price increase by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

7. If the variable cost per unit increases by $1, spending on advertising increases by $1,500, and unit sales increases by 250 units. What would be the net operating income?

8. What is the break-even point in unit sales?

9. What is the break-even point in dollar sales?

10. How many units must be sold to achieve a target profit of $5,000? 

11. What is the margin of safety in dollars? What is the margin of safety percentage?

12. What is the degree of operating leverage?

13. Using the degree of operating leverage, what is the estimated percentage increase in net operating income of a 5% increase in sales?

14. Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $6,00 and the total fixed expenses are $12,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?

15. Using the degree of operating leverage that you compute in the previous question, what is the estimated percentage increase in net operating income of a 5$ increase in sales?