Instructions:
1. complete the following activities in good form. Use excel or
word only. Provide all supporting calculations to show how you arrived at
your numbers
Part A: Changes in Fixed and Variable Costs; Break-Even and Target
Profit Analysis
Neptune Company produces toys and other items for use in beach and resort areas. A
small, inflatable toy has come onto the market that the company is anxious to produce
and sell. The new toy will sell for $2.80 per unit. Enough capacity exists in the
company’s plant to produce 30,300 units of the toy each month. Variable expenses to
manufacture and sell one unit would be $1.78, and fixed expenses associated with the
toy would total $45,859 per month.
The company’s Marketing Department predicts that demand for the new toy will exceed
the 30,300 units that the company is able to produce. Additional manufacturing space
can be rented from another company at a fixed expense of $2,293 per month. Variable
expenses in the rented facility would total $1.96 per unit, due to somewhat less efficient
operations than in the main plant.
Required:
1. What is the monthly break-even point for the new toy in unit sales and dollar sales.
2. How many units must be sold each month to attain a target profit of $10,752 per
month?
3. If the sales manager receives a bonus of 20 cents for each unit sold in excess of the
break-even point, how many units must be sold each month to attain a target profit that
equals a 24% return on the monthly investment in fixed expenses?
(For all requirements, Round “per unit” to 2 decimal places, intermediate and final
answers to the nearest whole number.)
Part B: CVP Applications; Contribution Margin Ratio; Break-Even
Analysis; Cost Structure
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—
PEM, Inc., has been experiencing financial difficulty for some time. The company’s
contribution format income statement for the most recent month is given below:
Sales (12,500 units × $30 per unit) $ 375,000
Variable expenses 187,500
Contribution margin 187,500
Fixed expenses 210,000
Net operating loss $ (22,500 )
Required:
1. Compute the company’s CM ratio and its break-even point in unit sales and dollar
sales.
2. The president believes that a $6,700 increase in the monthly advertising budget,
combined with an intensified effort by the sales staff, will result in an $85,000 increase
in monthly sales. If the president is right, what will be the increase (decrease) in the
company’s monthly net operating income?
3. Refer to the original data. The sales manager is convinced that a 10% reduction in
the selling price, combined with an increase of $35,000 in the monthly advertising
budget, will double unit sales. If the sales manager is right, what will be the revised net
operating income (loss)?
4. Refer to the original data. The Marketing Department thinks that a fancy new
package for the laptop computer battery would grow sales. The new package would
increase packaging costs by $0.60 per unit. Assuming no other changes, how many
units would have to be sold each month to attain a target profit of $4,800?
5. Refer to the original data. By automating, the company could reduce variable
expenses by $3 per unit. However, fixed expenses would increase by $53,000 each
month.
a. Compute the new CM ratio and the new break-even point in unit sales and dollar
sales.
b. Assume that the company expects to sell 20,300 units next month. Prepare two
contribution format income statements, one assuming that operations are not
automated and one assuming that they are. (Show data on a per unit and percentage
basis, as well as in total, for each alternative.)
c. Would you recommend that the company automate its operations (Assuming that the
company expects to sell 20,300)?
Part C: Relevant Cost/Special Order Decisions
Polaski Company manufactures and sells a single product called a Ret. Operating at
capacity, the company can produce and sell 30,000 Rets per year. Costs associated
with this level of production and sales are given below:
Unit Total
Direct materials $ 15 $ 450,000
Direct labor 8 240,000
Variable manufacturing overhead 3 90,000
Fixed manufacturing overhead 9 270,000
Variable selling expense 4 120,000
Fixed selling expense 6 180,000
Total cost $ 45 $ 1,350,000
The Rets normally sell for $50 each. Fixed manufacturing overhead is $270,000 per
year within the range of 25,000 through 30,000 Rets per year.
Required:
1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets
through regular channels next year. A large retail chain has offered to purchase 5,000
Rets if Polaski is willing to accept a 16% discount off the regular price. There would be
no sales commissions on this order; thus, variable selling expenses would be slashed
by 75%. However, Polaski Company would have to purchase a special machine to
engrave the retail chain’s name on the 5,000 units. This machine would cost $10,000.
Polaski Company has no assurance that the retail chain will purchase additional units in
the future. What is the financial advantage (disadvantage) of accepting the special
order?
2. Refer to the original data. Assume again that Polaski Company expects to sell only
25,000 Rets through regular channels next year. The U.S. Army would like to make a
one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.80 per Ret,
and it would reimburse Polaski Company for all costs of production (variable and fixed)
associated with the units. Because the army would pick up the Rets with its own trucks,
there would be no variable selling expenses associated with this order. What is the
financial advantage (disadvantage) of accepting the U.S. Army’s special order?
3. Assume the same situation as described in (2) above, except that the company
expects to sell 30,000 Rets through regular channels next year. Thus, accepting the
U.S. Army’s order would require giving up regular sales of 5,000 Rets. Given this new
information, what is the financial advantage (disadvantage) of accepting the U.S. Army’s
special order?
Part D: Relevant Cost/Make or Buy Decision
Silven Industries, which manufactures and sells a highly successful line of summer
lotions and insect repellents, has decided to diversify in order to stabilize sales
throughout the year. A natural area for the company to consider is the production of
winter lotions and creams to prevent dry and chapped skin.
After considerable research, a winter products line has been developed. However,
Silven’s president has decided to introduce only one of the new products for this coming
winter. If the product is a success, further expansion in future years will be initiated.
The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type
tube. The product will be sold to wholesalers in boxes of 24 tubes for $14 per box.
Because of excess capacity, no additional fixed manufacturing overhead costs will be
incurred to produce the product. However, a $130,000 charge for fixed manufacturing
overhead will be absorbed by the product under the company’s absorption costing
system.
Using the estimated sales and production of 130,000 boxes of Chap-Off, the Accounting
Department has developed the following manufacturing cost per box:
Direct material $ 5.80
Direct labor 4.20
Manufacturing overhead 2.50
Total cost $ 12.50
The costs above relate to making both the lip balm and the tube that contains it. As an
alternative to making the tubes for Chap-Off, Silven has approached a supplier to
discuss the possibility of buying the tubes. The purchase price of the supplier’s empty
tubes would be $1.95 per box of 24 tubes. If Silven Industries stops making the tubes
and buys them from the outside supplier, its direct labor and variable manufacturing
overhead costs per box of Chap-Off would be reduced by 10% and its direct materials
costs would be reduced by 20%.
Required:
1. If Silven buys its tubes from the outside supplier, how much of its own Chap-Off
manufacturing costs per box will it be able to avoid? (Hint: You need to separate the
manufacturing overhead of $2.50 per box that is shown above into its variable and fixed
components to derive the correct answer.)
2. What is the financial advantage (disadvantage) per box of Chap-Off if Silven buys its
tubes from the outside supplier?
3. What is the financial advantage (disadvantage) in total (not per box) if Silven buys
130,000 boxes of tubes from the outside supplier?
4. Should Silven Industries make or buy the tubes?
5. What is the maximum price that Silven should be willing to pay the outside supplier
for a box of 24 tubes?
6. Instead of sales of 130,000 boxes of tubes, revised estimates show a sales volume of
161,000 boxes of tubes. At this higher sales volume, Silven would need to rent extra
equipment at a cost of $51,000 per year to make the additional 31,000 boxes of tubes.
Assuming that the outside supplier will not accept an order for less than 161,000 boxes
of tubes, what is the financial advantage (disadvantage) in total (not per box) if Silven
buys 161,000 boxes of tubes from the outside supplier? Given this new information,
should Silven Industries make or buy the tubes?
7. Refer to the data in (6) above. Assume that the outside supplier will accept an order
of any size for the tubes at a price of $1.95 per box. How many boxes of tubes should
Silven make? How many boxes of tubes should it buy from the outside supplier?
Part E: Relevant Cost/Sell or Process Further
Come-Clean Corporation produces a variety of cleaning compounds and solutions for
both industrial and household use. While most of its products are processed
independently, a few are related, such as the company’s Grit 337 and its Sparkle silver
polish.
Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a pound
to make, and it has a selling price of $6.80 a pound. A small portion of the annual
production of Grit 337 is retained in the factory for further processing. It is combined
with several other ingredients to form a paste that is marketed as Sparkle silver polish.
The silver polish sells for $5.00 per jar.
This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The
additional direct variable costs involved in the processing of a jar of silver polish are:
Other ingredients $ 0.60
Direct labor 1.40
Total direct cost $ 2.00
Overhead costs associated with processing the silver polish are:
Variable manufacturing overhead cost 25 % of direct labor cost
Fixed manufacturing overhead cost (per month)
Production supervisor $ 3,200
Depreciation of mixing equipment $ 1,500
The production supervisor has no duties other than to oversee production of the silver
polish. The mixing equipment is special-purpose equipment acquired specifically to
produce the silver polish. It can produce up to 6,500 jars of polish per month. Its resale
value is negligible and it does not wear out through use.
Advertising costs for the silver polish total $3,800 per month. Variable selling costs
associated with the silver polish are 5% of sales.
Due to a recent decline in the demand for silver polish, the company is wondering
whether its continued production is advisable. The sales manager feels that it would be
more profitable to sell all of the Grit 337 as a cleaning powder.
Required:
1. How much incremental revenue does the company earn per jar of polish by further
processing Grit 337 rather than selling it as a cleaning powder? (Round your answer
to 2 decimal places.)
2. How much incremental contribution margin does the company earn per jar of polish
by further processing Grit 337 rather than selling it as a cleaning powder? (Round your
intermediate calculations and final answer to 2 decimal places.)
3. How many jars of silver polish must be sold each month to exactly offset the
avoidable fixed costs incurred to produce and sell the polish? (Round your
intermediate calculations to 2 decimal places.)
4. If the company sells 8,700 jars of polish, what is the financial advantage
(disadvantage) of choosing to further process Grit 337 rather than selling is as a
cleaning powder? (Enter any “disadvantages” as a negative value. Round your
intermediate calculations to 2 decimal places.)
5. If the company sells 10,900 jars of polish, what is the financial advantage
(disadvantage) of choosing to further process Grit 337 rather than selling is as a
cleaning powder? (Enter any “disadvantages” as a negative value. Round your
intermediate calculations to 2 decimal places.)
Part F: Relevant Cost/Shutting Down or Continuing to Operate a Plant
Birch Company normally produces and sells 43,000 units of RG-6 each month. The
selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing
overhead costs total $160,000 per month, and fixed selling costs total $38,000 per
month.
Employment-contract strikes in the companies that purchase the bulk of the RG-6 units
have caused Birch Company’s sales to temporarily drop to only 9,000 units per month.
Birch Company estimates that the strikes will last for two months, after which time sales
of RG-6 should return to normal. Due to the current low level of sales, Birch Company is
thinking about closing down its own plant during the strike, which would reduce its fixed
manufacturing overhead costs by $48,000 per month and its fixed selling costs by 10%.
Start-up costs at the end of the shutdown period would total $13,000. Because Birch
Company uses Lean Production methods, no inventories are on hand.
Required:
1. What is the financial advantage (disadvantage) if Birch closes its own plant for two
months?
2. Should Birch close the plant for two months?
3. At what level of unit sales for the two-month period would Birch Company be
indifferent between closing the plant or keeping it open?
