ACC 406 Lecture Notes - Lecture 4: Contribution Margin, Break Even, Fixed Cost

The project requires the comparison of two competing proposals. Only one will be selected. The details of the proposals are as follows:

1. The Production Manager wants to invest $250,000 into new manufacturing equipment that will improve the efficiency and quality of the production process. The production manager has been pushing for this investment for months and has stated that the variable manufacturing cost of the product will decrease by $10 per unit. The investment will cause an increase in the fixed manufacturing costs in the form of annual depreciation expense of $50,000 on the new equipment.
The accounting numbers are as follows:
i. Decrease in Variable cost of $10 per unit
ii. Increase to annual Fixed cost of $50,000

2. The Sales Manager wants to implement a 3 year marketing campaign at a total cost of $150,000 ($50,000 annually for 3 years) and to decrease the selling price of the product by $13 dollars. He guarantees this will increase sales units by 25%.
The accounting numbers are as follows:
i. Decrease in Selling price per unit of $13
ii. Increase in annual marketing expense (fixed cost) of $50,000
iii. Increase in sales units by 25% (at the new lower per unit selling price)

You will need to complete a Contribution Margin Report based on the current revenue and expenses and also one for each of the proposals. In addition to the Contribution Margin Report you will also need to include the following calculations for the current and for each of the proposals: The Breakeven point in sales units and dollars, the margin of safety in dollars and percentage. For the analysis of the two proposals ignore the net present value of cash flows.
After you have completed your analysis you will need to make your recommendation on the course of action that will be the most advantageous to the company. Be complete in your analysis and prepare a memo to your boss Sally outlining your findings and provide support for your recommendation. [Be sure to include “all” of the information that the data is providing.]

Student Name:

Manning Enterprises

Set up a Contribution Margin Statement for Product A to use for your analysis

You gathered the following per unit information from the Company's accounting system for Product A:

Unit Sales 5,344
Sales Price per Unit $225.00
Variable Cost per unit $137.00
Total Traceable Fixed Cost $357,245.00

Using the above data prepare a current contribution margin report and a Forecasted contribution margin report (one for each of the proposals reflecting each of their proposed changes). You use a template that you kept from when you took Managerial Accounting . You saved all of the templates you used in Managerial Accounting because you knew someday you would need them!

Production Propsal

Current Per Unit % of Sales Current Proposed per Unit % of Sales Forecasted based on Proposal Difference

Units Sold
Sales

Variable Cost

Contribution Margin

Traceable Fixed Cost
Profit (Loss)

Sales Proposal

Current Per Unit % of Sales Current Proposed per Unit % of Sales Forecasted based on Proposal Difference
Units Sold
Sales
Variable Cost
Contribution Margin

Traceable Fixed Cost
Profit (Loss)



Current

Breakeven in Sales Units ______
Breakeven in Sales Dollars ______
Margin of Safety in sales dollars _____
Margin of Safety %


Production Propsal

Breakeven in Sales Units _______
Breakeven in Sales Dollars _____
Margin of Safety in sales dollars ______
Margin of Safety %

Sales Proposal

Breakeven in Sales Units ______
Breakeven in Sales Dollars _____
Margin of Safety in sales dollars ______
Margin of Safety % ______

1) All of the following are examples of product costs except:

depreciation on the company's administrative offices.

salary of the plant manager.

insurance on the factory equipment.

rental costs of the factory facility.

2) Period costs:

are treated as expenses in the period they are incurred

are directly traceable to products

include direct labor

are also referred to as manufacturing overhead costs

.

3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:

Direct materials $30

Direct manufacturing labor 5

Variable manufacturing overhead 10

Fixed manufacturing overhead 40

Total manufacturing costs $85

The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?

a. $85,000

b. $170,000

c. $107,500

d. $102,500

4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:

overstate period expenses on the income statement.

overstate the cost of goods sold on the income statement.

understate the cost of goods manufactured.

have no effect on the cost of goods manufactured.

5) In CVP analysis, focusing on target net income rather than operating income:

a. will increase the breakeven point

b. will decrease the breakeven point

c. will not change the breakeven point

d. does not allow calculation of breakeven point

6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.

a. True

b. False

7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.

a. True

b. False

8) Which of the following statements is correct with regard to a CVP graph?

A CVP graph shows the maximum possible profit.

A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

A CVP graph assumes that total expense varies in direct proportion to unit sales.

A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?

10) The principal difference between variable costing and absorption costing centers on:

whether variable manufacturing costs should be included as product costs.

whether fixed manufacturing costs should be included as product costs.

whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

none of these.

11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?

3,300 hot dogs

3,000 hot dogs

2,727.27 hot dogs

2,728 hot dogs

12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

What is Shun's unit product cost under absorption costing for last year?

$4.10

$4.55

$5.85

$6.30.

Use the following information to answer questions 13 to 15:

Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.

13) Calculate the number of equivalent units for materials.

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

14) Calculate the number of equivalent units for conversion?

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:

The total cost per equivalent unit for May was:

$5.02

$5.10

$5.12

$5.25

Teri Hall has recently opened Sheer Elegance, Inc., a storespecializing in fashionable stockings. Ms, Hall has justcompleted a course in managerial accounting, and she believes thatshe can apply certain aspects of the course to herbusiness. She is particularly interested in adopting thecost volume-profit (CVP) approach to decisionmaking. Thus, she has prepared the followinganalysis:

Sales price per pair of stockings.................... $2.00

Variable expense per pair of stockings...........$0.80

contribution margin per pair of stockings....... $1.20

Fixed expense per year:

Building rental.................$12,000

Equipment depreciation... 3,000

Selling..............................30,000

Administrative..................15,000

Total fixed expense.........$60,000

Required:

1. How many pairs of stockings must be sold to breakeven? What does this represent in total dollarsales?

2. Prepare a CVP graph or a profit graph for the store from zeropairs up to 70,000 pairs of stockings sold eachyear. Indicate the break-even point on the graph.

3. How many pairs of stockings must be sold to earn a $9.000target profit for the first year?

4.Ms. Hall now has one full-time and one part-time salespersonworking in the store. It will cost her an additional$8,000 per year to convert the part-time position to a full-timeposition. Ms. Hall belieces that the change would bringin an additional $20,000 in sales each yar. Should she convert theposition? Use the incremental approach. (Do not prepare an incomestatement.)

5. Refer to the original data. Actual operatingresults for the first year are as follows:

Sales.........................$125,000

Variable expense....... 50,000

contribution margin.......75,000

Fixed expenses.............60,000

Net operating income..$15,000

a. What is the store's degree of operating leverage?

b. Ms. Hall is confident that with some effort she can increasesales by 20%next year. What would be the expectedpercentage increase in net operating income? Use thedegree of operating leverage concept to compute your answer.