Hearth Manufacturing Company produces two models of wood burning stoves, Cozy Kitchen and All-House. Presented is sales information for 2012.
Cozy Kitchen All-House Total Units manufactured and sold 1,000 1,500 2,500 Sales revenue $300,000 $750,000 $1,050,000 Variable costs (200,000) (450,000) (650,000) Contrribution margin $100,000 $300,000 400,000 Fixed costs (240,000) Before-tax profits 160,000 Income taxes (40%) (64,000) After-tax profit $96,000
a) Determine the current break-even point in sales dollars.
b) With the current product mix and break-even point, determine the average contribution margin and unit sales.
c) Sales representatives believe that total unit sales will increase to 3,000 units, with the sales mix likely shifting to 80% Cozy Kitchen and 20% All House over the next few years. Evaluate the desirability of this projection.
Hearth Manufacturing Company produces two models of wood burning stoves, Cozy Kitchen and All-House. Presented is sales information for 2012.
| Cozy Kitchen | All-House | Total | |
| Units manufactured and sold | 1,000 | 1,500 | 2,500 |
| Sales revenue | $300,000 | $750,000 | $1,050,000 |
| Variable costs | (200,000) | (450,000) | (650,000) |
| Contrribution margin | $100,000 | $300,000 | 400,000 |
| Fixed costs | (240,000) | ||
| Before-tax profits | 160,000 | ||
| Income taxes (40%) | (64,000) | ||
| After-tax profit | $96,000 |
a) Determine the current break-even point in sales dollars.
b) With the current product mix and break-even point, determine the average contribution margin and unit sales.
c) Sales representatives believe that total unit sales will increase to 3,000 units, with the sales mix likely shifting to 80% Cozy Kitchen and 20% All House over the next few years. Evaluate the desirability of this projection.
Related questions
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.
| Requirement 1 | ||||
| Units | Price | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 2 | ||||
| Contribution Margin per Unitin Dollars = Selling Price â Variable Costs | ||||
| Selling Price | Variable Costs | Contribution Margin per Unit | ||
| Contribution Margin Ratio =Contribution Margin/Selling Price | ||||
| Contribution Margin | Selling Price | Contribution Margin Ratio | ||
| Requirement 3 | ||||
| Break-Even Point = Fixed Costs/ Contribution Margin | ||||
| Fixed Costs | Contribution Margin | Break-Even Point in Units (Rounded) | ||
| Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales | ||||
| Break-Even Point in Units | Selling Price per Unit | Break-Even Point in Sales (Rounded) | ||
| Requirement 4A | ||||
| Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales | ||||
| Current Unit Sales | Break-Even Point in Sales | Margin of Safety in Units | ||
| Requirement 4B | ||||
| Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars | ||||
| Current Sales in Dollars | Break-Even Point in Dollars | Margin of Safety in Dollars | ||
| Requirement 4C | ||||
| Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales | ||||
| Margin of Safety in Units | Current Unit Sales | Margin of Safety Percentage | ||
| Requirement 5 | ||||
| Degree of Operating Leverage =Contribution Margin / Operating Income | ||||
| Contribution Margin | Operating Income | Operating Leverage | ||
| Requirement 6 | ||||
| Units | $ Per Unit | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Operating Leverage | Times % Increase | Increase would be XX% | ||
| Prior Income | $ | From Part 1 | ||
| Increase | $ | Prior Income X XX% Above | ||
| Total | $ | |||
| Requirement 7 | ||||
| Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin | ||||
| Fixed Costs + Target Income | Divided by Contribution Margin | # of Units (Rounded) | ||
| Fixed Costs | $ | |||
| Target Income | $ | |||
| Total | $ | $ | X | |
| # of Units Above X $ Per Unit | ||||
| Proof | Revenue | XX,XXX X $XX.XX | $ | |
| Variable Costs | XX,XXX X $X.XX | $ | ||
| Contribution Margin | $ | |||
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 8 | ||||
| Sales Mix | ||||
| Current | Specialty | Total | ||
| Expected Sales Units | X | X | ||
| Revenue = Sales X Price | $ | $ | $ | |
| Variable Costs X Units | $ | $ | $ | |
| Contribution Margin | $ | $ | $ | |
| Fixed Costs | $ | $ | $ | |
| Operating Income | $ | |||
| Prior Net Income FromRequirement 1 | $ | |||
| Additional Operating Income | (Operating Income Above Less Prior Income) | $ | ||
| Decision With Explanation | ||||
1.
Contribution Margin and Contribution Margin Ratio
For a recent year, Wicker Company-owned restaurants had thefollowing sales and expenses (in millions):
| Sales | $32,100 |
| Food and packaging | $8,317 |
| Payroll | 8,100 |
| Occupancy (rent, depreciation, etc.) | 10,023 |
| General, selling, and administrative expenses | 4,700 |
| $31,140 | |
| Income from operations | $960 |
Assume that the variable costs consist of food and packaging,payroll, and 40% of the general, selling, and administrativeexpenses.
a. What is Wicker Company's contributionmargin? Round to the nearest million. (Give answer in millions ofdollars.)
$ million
b. What is Wicker Company's contribution marginratio? Round to one decimal place.
%
c. How much would income from operationsincrease if same-store sales increased by $1,900 million for thecoming year, with no change in the contribution margin ratio orfixed costs? Round your answer to the closest million.
$ million
2.
Break-Even Sales and Sales to Realize Income from Operations
For the current year ending October 31, Yentling Company expectsfixed costs of $533,200, a unit variable cost of $64, and a unitselling price of $95.
a. Compute the anticipated break-even sales(units).
units
b. Compute the sales (units) required torealize income from operations of $124,000.
units
3.
Break-Even Sales
Currently, the unit selling price of a product is $240, the unitvariable cost is $200, and the total fixed costs are $476,000. Aproposal is being evaluated to increase the unit selling price to$270.
a. Compute the current break-even sales(units).
units
b. Compute the anticipated break-even sales(units), assuming that the unit selling price is increased to theproposed $270, and all costs remain constant.
units
4.
Sales Mix and Break-Even Sales
Dragon Sports Inc. manufactures and sells two products, baseballbats and baseball gloves. The fixed costs are $836,000, and thesales mix is 30% bats and 70% gloves. The unit selling price andthe unit variable cost for each product are as follows:
| Products | Unit Selling Price | Unit Variable Cost | ||
| Bats | $70 | $50 | ||
| Gloves | 180 | 110 | ||
a. Compute the break-even sales (units) forboth products combined.
units
b. How many units of each product, baseballbats and baseball gloves, would be sold at break-even point?
| Baseball bats | units |
| Baseball gloves | units |
