Foxwood Company data for 2017:

Sandpaper $ 2,000
Materials-handling costs 70,000
Lubricants and coolants 5,000
Miscellaneous indirect manufacturing labor 40,000
Direct manufacturing labor 300,000
Direct materials inventory, Jan. 1 , 2017 40,000
Direct materials inventory, Dec. 31, 2017 50,000
Finished goods inventory, Jan. 1, 2017 100,000
Finished goods inventory, Dec. 31, 2017 150,000
Work-in-process inventory, Jan. 1, 2017 10,000
Work-in-process inventory, Dec. 31,
2017 14,000
Plant-leasing costs 54,000
Depreciation - plant equipment 36,000
Property taxes on plant equipment 4,000
Fire insurance on plant equipment 3,000
Direct materials purchased 460,000
Revenues 1,360,000
Marketing promotions 60,000
Marketing salaries 100,000
Distribution costs 70,000
Customer-service costs 100,000
 Schedule of Cost of Goods Manufactured
For the year Ended December 31, 2017

Direct materials
Beginning inventory, January 1, 2017 $ 40,000 variable costs
Purchases of direct materials 460,000
Costs of direct materials available for use 500,000
Ending inventory, December 31, 2017 50,000
Direct materials used 450,000
Direct manufacturing labor 300,000
Indirect manufacturing costs

Sandpaper 2,000
Materials-handling costs 70,000
Lubricants and coolants 5,000
Miscellaneous indirect manufacturing labor 40,000
Plant-leasing costs 54,000 fixed costs
Depreciation - plant equipment 36,000
Property taxes on plant equipment 4,000

Fire insurance on plant equipment 3,000 214,000

Manufacturing costs incurred during 2017 964,000

Fixwood Company
Income Statement
For the year Ended December 31, 2017

Revenues 1,360,000
Cost of goods sold
Beginning finished goods inventory, January 1, 2017 100,000
Cost of goods manufactured (see above) 960,000
Cost of good available for sale 1,060,000
Ending finished good inventory, December 31, 2017 150,000 910,000
Gross margin (gross profit) 450,000
Operating costs
Marketing promotions 60,000
Marketing salaries 100,000
Distribution costs 70,000
Customer-service costs 100,000 330,000
Operating income 120,000
P3-48
1 Zahner Corporation
Income Statement
For the Year Ended December 31, 2017
Using Sales Agents Using Own Sales Force

Revenues 35,200,000 35,200,000

Gross margin 17,700,000 17,700,000

Commissions 7,040,000 3,520,000

Fixed costs 4,025,000 11,065,000 7,545,000 11,065,000

Operating income 6,635,000 6,635,000

Contribution margin 14,785,000 18,305,000

CM % 42% 52%

BEP Revenues 19,403,449 22,441,082

DOL 2.23 2.76

The calculations indicate that at sales of $35,200,000, a percentage change in sales and
2 contribution margin will result in 2.23 times that percentage change in operating income if
Zahner continues to use sales agents and 2.76 times that percentage change in operating income
if Zahner employs its own sales staff. The higher contribution margin per dollar of sales and
higher fixed costs gives Zahner more operating leverage, that is, greater benefits (increases in
operating income) if revenues increase but greater risks (decreases in operating income) if
revenues decrease. Zahner also needs to consider the skill levels and incentives under the two
alternatives. Sales agents have more incentive compensation and, hence, may be more motivated
to increase sales. On the other hand, Zahner’s own sales force may be more knowledgeable and
skilled in selling the company’s products. That is, the sales volume itself will be affected by who
sells and by the nature of the compensation plan.
COGS
3 Revenue = X Variable 38%

X - (.38X + .15X) - (4,125,000 + 7,545,000) = 6,635,000

.47X = 6,635,000 + 11,570,000

.47X = $18,205,000
X = $38,734,043
E3-31 Braided Rugs, Inc.
Variable Manufacturing Cost Variable Marketing & Distribution Cost Contribution Margin BEP in Projected
Country Sales Price to Retail Outlets Annual Fixed Costs per Area Rug per Area Rug Per Rug BEP in units revenues Units OI
Portugal $ 250.00 $ 7,500,000 $ 45.00 $ 10.00 $ 195.00 38,462 $ 9,615,385 80,000 $ 8,100,000
Italy 250.00 5,000,000 65.00 15.00 $ 170.00 29,412 $ 7,352,941 80,000 $ 8,600,000
Thailand 250.00 9,000,000 55.00 20.00 $ 175.00 51,429 $ 12,857,143 80,000 $ 5,000,000
Italy is the best location because of low fixed costs. Thailand is the worst; it requires at least 51,429 rugs to be produced to break even.