Problem No.

1
Super-Tees Company plans to sell 12,000 T-shirts at $16 each in the coming year. Product costs include:

Direct materials per T-shirt $5.75

Direct labor per T-shirt $1.25
Variable overhead per T-shirt $0.60
Total fixed factory overhead $43,000

Variable selling expense is the redemption of a coupon, which averages $0.80 per Tshirt; fixed selling and
administrative expenses total $19,000

Required:
1. Calculate the following:
a. Variable product cost per unit
Direct Materials $5.75
Direct Labor $1.25
Variable Overhead $0.60
Total Variable Product Cost Per Unit $7.60

b. Total variable cost per unit

Direct Materials $5.75
Direct Labor $1.25
Variable Overhead $0.60
Variable Selling Expenses $0.80
Total Variable Cost Per Unit $8.40

c. Contribution margin per unit

Contribution Margin = Sales Price – Variable Cost Per Unit
= $16 – $8.40
Contribution Margin Per Unit = $7.60

d. Contribution margin ratio (rounded to four significant digits)

Contribution Margin Ratio = Total Contribution x 100
Sales
= $7.60 x 100
$16
Contribution Margin Ratio = 47.5%

e. Total fixed expense for the year

= Total Fixed Factory Overhead + Fixed Selling and Administrative Expenses
= $43,000 + $19,000
 = $62,000

2. Prepare the contribution-margin-based income statement for Super-Tees Company for the coming year.
Super-Tees Company
Contribution Margin Income Statement
Sales (12,000 x $16) $192,000
Less:
Variable Material Cost (12,000 x $5.75) $69,000
Variable Labor Cost (12,000 x $1.25) $15,000
Variable Overheads (12,000 x $0.60) $7,200 $ 91,200
Contribution Margin $100,800
Less: Fixed Cost $ 43,000
Total Income $57,800

3. What if the per unit selling expense increased from $0.80 to $1.75? Calculate the new values for the
following:
a. Variable product cost per unit
Direct Materials $5.75
Direct Labor $1.25
Variable Overhead $0.60
Total Variable Product Cost Per Unit $7.60

b. Total variable cost per unit

Direct Materials $5.75
Direct Labor $1.25
Variable Overhead $0.60
Variable Selling Expenses $1.75
Total Variable Cost Per Unit $9.35

c. Contribution margin per unit

Contribution Margin = Sales Price – Variable Cost Per Unit
= $16 – $9.35
Contribution Margin Per Unit = $6.65

d. Contribution mirin ratio (rounded to four significant digits)

Contribution Margin Ratio = Total Contribution x 100
Sales
= $6.65 x 100
$16
Contribution Margin Ratio = 41.56%

e. Total fixed expense for the year

= Total Fixed Factory Overhead + Fixed Selling and Administrative Expenses
 = $43,000 + $19,000
= $62,000

Problem No. 2
Jay-Zee Company makes an in-car navigation system. Next year, Jay-Zee plans to sell 16,000 units at a
price of $320 each. Product costs include:

Direct Materials $68

Direct Labor $40
Variable overhead $12
Total fixed factory overhead $500,000

Variable selling expense is a commission of 5 percent of price; fixed selling and administrative expenses
total $116,400.

Required:
1. Calculate the sales commission per unit sold. Calculate the contribution margin per unit.

= 5% x $320
Sales Commission Per Unit = $16

Contribution Margin = Sales Price – Variable Cost Per Unit

= $320 – $136
Contribution Margin Per Unit = $184

*Variable Cost Per Unit = $68 + $40 + $12 + $16

= $136

2. How many units must Jay-Zee Company sell to break even? Prepare an income statement for the
calculated number of units.
Break Even Units =Fixed Cost
Sales – Variable Cost
= $616,400
$320 - $136
= $616,400
$184
Break-Even Units = 3,350 units
Jay-Zee Company
Income Statement for 3,350 units

Sales (3,350 x $320) $1,072,000

 Less: Variable Cost
Direct Materials (3,350 x $68) $227,800
Direct Labor (3,350 x $40) $134,000
Variable Overhead (3,350 x $12) $40,200
Variable Selling Expense (3,350 x $16) $53,600 $455,600
Contribution Margin $616,400
Less: Fixed Costs
Fixed Factory Overhead $500,000
Fixed Selling and Administrative Expense $116,400 $616,400
Net Income $0

3. Calculate the number of units Jay-Zee Company must sell to achieve target operating income (profit) of
S333,408.
= Fixed Costs + Profit
Sales – Variable Cost
= $616,400 + $333,408
$320 – $136
= $949,808
$184
= 5,162 units

4. What if the Jay-Zee Company wanted to achieve a target operating income of $322,000? Would the
number of units needed increase or decrease compared to your answer in Requirement 3? Compute the
number of units needed for the new target operating income.
= Fixed Costs + Profit
Sales – Variable Cost
= $616,400 + $322,000
$320 – $136
= $938,400
$184
= 5,100 units
In conclusion, the number of units needed decreased, compared to my answer in Requirement 3.

Problem No. 3
Vanderberg. Inc, produces and sells to products: a ceiling fan and a table fan. Vanderberg plans to sell
30,000 ceiling fans and 70,000 table fans in the coming years. Product price and cost information includes:

Ceiling Fan Table Fan

Price $60 $15
Unit Variable Cost $12 $7
Direct Fixed Cost $23,600 $45,000
Common fixed selling and administrative expenses total $85,000.

Required:
1. What is the sales mix estimated for next year (calculated to the lowest whole number for each product?
Sales mix of ceiling fans to table fans = 30,000:70,000 = 3:7

2. Using the sales mix from Requirement 1, form a package of ceiling fans and table fans. How many
ceiling fans and table fans are sold at break-even?

Ceiling Fan Table Fan Total

Unit Selling Price $60 $15
Less: Unit Variable Cost $12 $7
Unit Contribution Margin $48 $8
Sales Mix 3 7
Package Contribution Margin 144 56 $200

Break-Even Packages = Total Fixed Costs/Package Contribution Margin

= ($23,600 + $45,000 + $85,000)/ $200
= 768 packages

Break-Even Ceiling Fans = 3 x 768 = 2,304 units

Break-Even Table Fans = 7 x 768 = 5,376 units

3. Prepare a contribution-margin-based income statement for Vandenberg, Inc., based on the unit sales
calculated in Requirement 2.
Vandenberg, Inc.
Contribution Margin Income Statement
For the Coming Year

Ceiling Fans Table Fans Total

Sales $138,240 $80,640 $218,880
Less: Variable Expenses 27,648 37,632 65,280
Contribution Margin $110,592 $43,008 $153,600
Less: Direct Fixed Expenses 23,600 45,000 68,600
Product Margin $86,992 ($1,992) $85,000
Less: Common Fixed Expenses 85,000
Operating Income $0

4. What if Vandenberg. Inc., wanted to earn operating income equal to $14,400? Calculate the number of
ceiling fans and table fans that must be sold to earn this level of operating income (Hint Remember to form
a package of ceiling fans and table fans based on the sales mix and to first calculate the number of
packages to earn an operating income of $14,400).
 Packages = Total Fixed Costs/Package Contribution Margin
= ($23,600 + $45,000 + $85,000 + $14,400)/ $200
= 840 packages

Ceiling Fans = 3 x 840 = 2,520 units

Table Fans = 7 x 840 = 5,880 units

Problem No. 4
Dupli-Pro Copy Shop provides photocopying service. Next year, Dupli-Pro estimates it will copy 2,800,000
pages at a price of $0.08 each in the coming year. Product costs include:

Direct materials $0.015

Direct labor $0.004
Variable overhead $0.001
Total fixed overhead $80,000

There is no variable selling expenses; fixed selling and administrative expenses total $46,000.

Required:
1. Calculate the break-even point in units.
Break-Even Units = Total Fixed Costs/(Price – Variable Costs)
= ($80,000 + $46,000)/( $0.08 – $0.02)
= $126,000/$0.06
= 2,100,000

2. Calculate the break-even point in sales revenue.

Break-Even Sales Dollars = Break-Even Units x Price
= 2,100,000 x $0.08 = $168,000

3. Calculate the margin of safety in units for the coming year.

Margin Of Safety = 2,800,000 units – 2,100,000 units = 700,000 units

4. Calculate the margin of safety in sales revenue for the coming year.
Estimated Sales Dollars for the coming year = 2,800,000 x $0.08 = $224,000
Margin of Safety in Sales Dollars = $224,000 - $168,000 = $56,000

5. What if the total selling and administrative expenses are reduced to $38,800?
Recalculate:
a. Break-even point in units
Break-Even in Units = ($38,000 + $80,000)/( $0.08 - $0.02) = 1,980,000
b. Break-even point in sales revenue
Break-Even in Sales Dollars = Break-Even Units x Price
= 1,980,000 x $0.08 = $158,400

c. Margin of safety in units for the coming year

Margin Of Safety = 2,800,000 units – 1,980,000 units = 820,000 units

d. Margin of safety in sales revenue for the coming year

Margin of Safety in Sales Dollars = $224,000 - $158,400 = $65,600

Problem No. 5
Ringsmith Company is considering two different processes to make its product -process 1 and process 2.
Process 1 requires Ringsmith to manufacture subcomponents of the product in-house. As a result,
materials are less expensive, but fixed overhead is higher. Process 2 involves purchasing all
subcomponents from outside suppliers. The direct materials costs are higher. but fixed factory overhead is
considerably lower. Relevant data for a sales level of 30,000 units follow:

Process 1 Process 2
Sales $ 8,010,000 $ 8,010,000
Variable expenses 2,700,000 4,200,000
Contribution Margin $5,310,000 $3,810,000
Less total fixed expenses 3,650,625 1,428,750
Operating income $1,659,375 $2,381,250
Unit Selling price $267 $267
Unit variable cost $90 $140
Unit contribution margin $177 $127

Required:
1. Compute the degree of operating leverage for each process.
Degree of Operating Leverage = Total Contribution Margin/Profit
Degree of Operating Leverage
Process 1 Process 2
$5,310,000/$1,659,375 = 3.2 $3,810,000/$2,381,250 = 1.6

2. Suppose that sales are 20 percent higher than budgeted. By what percentage will operating income
increase for each process? What will be the increase in operating income for each system? What will be
the total operating income for each process?

Increase in Operating Income Percentage

 Process 1 Process 2
3.2 x 20% = 64% 1.6 x 20% = 32%

Increase in Operating Income

Process 1 Process 2
0.64 x $1,659,375 = $1,062,000 0.32 x $2,381,250= $762,000

New Operating Income

Process 1 Process 2
$1,062,000 + $1,659,375 = $2,721,375 $762,000 + $2,381,250= $3,143,250

3. What if unit sales are 10 percent lower than budgeted? By what percentage will operating income
decrease for each process? What will be the total operating income for each process?

Decrease in Operating Income Percentage

Process 1 Process 2
3.2 x 10% = 32% 1.6 x 10% = 16%

Decrease in Operating Income

Process 1 Process 2
0.32 x $1,659,375 = $531,000 0.16 x $2,381,250= $381,000

New Operating Income

Process 1 Process 2
$1,659,375 + $531,000 = $1,128,375 $2,381,250 + $381,000 = $2,000,250