CVP analysis, income taxes. Brooke Motors is a small car dealership.

On average, it sells a car for $ 27 000, whic

it purchases from the manufacturer for $ 23 000. Each month, Brooke Motors pays $ 48 200 in rent and utilities
and $ 68 000 for salespeople’s salaries. In addition to their salaries, salespeople are paid a commission of $ 600 fo
each car they sell. Brooke Motors also spends $ 13 000 each month for local advertisements. Its tax rate is 40%.
Required:
How many cars must Brooke Motors sell each month to break even?
Brooke Motors has a target monthly net income of $ 51,000. What is its target monthly operating income? How
many cars must be sold each month to reach the target monthly net income of $ 51,000?
e, it sells a car for $ 27 000, which
ays $ 48 200 in rent and utilities
re paid a commission of $ 600 for
ertisements. Its tax rate is 40%.

nthly operating income? How

51,000?
CVP analysis, income taxes. The Express Banquet has two restaurants that are open 24-hours a day. Fixed costs
for the two restaurants together total $459,000 per year. Service varies from a cup of coffee to full meals. The
average sales check per customer is $8.50. The average cost of food and other variable costs for each customer is
$3.40. The income tax rate is 30%. Target net income is $107,100.
Required:
1. Compute the revenues needed to earn the target net income.
2. How many customers are needed to break even? To earn net income of $107,100?
3. Compute net income if the number of customers is 170,000.
 pen 24-hours a day. Fixed costs
up of coffee to full meals. The
ariable costs for each customer is

100?
CVP analysis, margin of safety. Suppose Doral Corp.’s breakeven point is revenues of $1,100,000.
Fixed costs are $660,000.
Required:
1. Compute the contribution margin percentage.
2. Compute the selling price if variable costs are $16 per unit.
3. Suppose 95,000 units are sold. Compute the margin of safety in units and dollars.
ues of $1,100,000.

ars.
Operating leverage. Color Rugs is holding a two-week carpet sale at Jerry’s Club, a local warehouse store. Color
Rugs plans to sell carpets for $500 each. The company will purchase the carpets from a local distributor for $350
each, with the privilege of returning any unsold units for a full refund. Jerry’s Club has offered Color Rugs two
payment alternatives for the use of space.
Option 1: A fixed payment of $5,000 for the sale period
Option 2: 10% of total revenues earned during the sale period
Assume Color Rugs will incur no other costs.
Required:
Calculate the breakeven point in units for (a) option 1 and (b) option 2.
At what level of revenues will Color Rugs earn the same operating income under either option?
For what range of unit sales will Color Rugs prefer option 1?
For what range of unit sales will Color Rugs prefer option 2?
Calculate the degree of operating leverage at sales of 100 units for the two rental options.
Briefly explain and interpret your answer to requirement 3.
b, a local warehouse store. Color
from a local distributor for $350
Club has offered Color Rugs two

er either option?

l options.
 Sales mix, three products. Bobbie’s Bagel Shop sells only coffee and bagels. Bobbie estimates that every time she
sells one bagel, she sells four cups of coffee. The budgeted cost information for Bobbie’s products for 2011 follow

Coffee Bagels
Selling Price $ 2.50 $ 3.75
Product ingredients $ 0.25 $ 0.50
Hourly sales staff (cost per unit) $ 0.50 $ 1.00
Packaging $ 0.50 $ 0.25
Fixed Costs:
Rent on store and equipment $ 5,000.00
Marketing and advertising cost $ 2,000.00
Required:
How many cups of coffee and how many bagels must Bobbie sell in order to break even assuming the sales mix
four cups of coffee to one bagel, given previously?
If the sales mix is four cups of coffee to one bagel, how many units of each product does Bobbie need to sell to e
operating income before tax of $28,000?
Assume that Bobbie decides to add the sale of muffins to her product mix. The selling price for muffins is $3.00
the related variable costs are $0.75. Assuming a sales mix of three cups of coffee to two bagels to one muffin, ho
many units of each product does Bobbie need to sell in order to break even? Comment on the results.
 estimates that every time she
bbie’s products for 2011 follows:

even assuming the sales mix of

t does Bobbie need to sell to earn

ing price for muffins is $3.00 and

two bagels to one muffin, how
ment on the results.
 Contribution margin, decision making. Lurvey Men’s Clothing’s revenues and cost data for 2011 are as follows:

Revenues $ 600,000.00
Cost of goods sold $ 300,000.00
Gross margin $ 300,000.00
Operating costs:
Salaries fixed $ 170,000.00
Sales commissions (10% of sales) $ 60,000.00
Depreciation of equipment and fixtur $ 20,000.00
Store rent ($ 4 500 per month) $ 54,000.00
Other operating costs $ 45,000.00 $ 349,000.00
Operating income (loss) $ (49,000.00)
Mr. Lurvey, the owner of the store, is unhappy with the operating results. An analysis of other operating
costs reveals that it includes $30,000 variable costs, which vary with sales volume, and $15,000 (fixed) costs.
Required:
Compute the contribution margin of Lurvey Men’s Clothing.
Compute the contribution margin percentage.
Mr. Lurvey estimates that he can increase revenues by 15% by incurring additional advertising costs of $13,000
Calculate the impact of the additional advertising costs on operating income.
t data for 2011 are as follows:

lysis of other operating

and $15,000 (fixed) costs.

al advertising costs of $13,000.

 Contribution margin, gross margin, and margin of safety. Mirabella Cosmetics manufactures and sells a face cream to sma
ethnic stores in the greater New York area. It presents the monthly operating income statement shown here to
George Lopez, a potential investor in the business. Help Mr. Lopez understand Mirabella’s cost structure.

Mirabella Cosmetics
Operating Income Statement, June 2011
Units sold 10,000.00
Revenues $ 100,000.00
Cost of goods sold
Variable manufacturing costs $ 55,000.00
Fixed manufacturing costs $ 20,000.00
Total $ 75,000.00
Gross margin $ 25,000.00
Operating costs
Variable marketing costs $ 5,000.00
Fixed marketing & administration co $ 10,000.00
Total operating costs $ 15,000.00
Operating income $ 10,000.00
Required:
Recast the income statement to emphasize contribution margin.
Calculate the contribution margin percentage and breakeven point in units and revenues for June 2011.
What is the margin of safety (in units) for June 2011?
If sales in June were only 8,000 units and Mirabella’s tax rate is 30%, calculate its net income.
 res and sells a face cream to small
come statement shown here to
Mirabella’s cost structure.

revenues for June 2011.

s net income.
 CVP analysis, service firm. Lifetime Escapes generates average revenue of $5,000 per person on its five-day
package tours to wildlife parks in Kenya. The variable costs per person are as follows:

Airfare $ 1,400.00
Hotel accommodations $ 1,100.00
Meals $ 300.00
Ground transportation $ 100.00
Park tickets and other costs $ 800.00
Total $ 3,700.00
Annual fixed costs total $ 520,000.00
Required:
Calculate the number of package tours that must be sold to break even.
Calculate the revenue needed to earn a target operating income of $91,000.
If fixed costs increase by $32,000, what decrease in variable cost per person must be achieved to maintain
the breakeven point calculated in requirement 1?
erson on its five-day

hieved to maintain
 CVP, target operating income, service firm. Snow Leopard Daycare provides daycare for children Mondays thro
monthly variable costs per child are as follows:

Lunch and snacks $ 1,400.00

Educational supplies $ 1,100.00
Other supplies (paper products, toiletries, etc.) $ 300.00
Total $ 2,800.00
Monthly fixed costs consist of the following:

Rent $ 2,150.00
Utilities $ 200.00
Insurance $ 250.00
Salaries $ 2,350.00
Miscellaneous $ 650.00
Total $ 5,600.00
Snow Leopard charges each parent $580 per child.
Required:
Calculate the breakeven point.
Snow Leopard’s target operating income is $10,500 per month. Compute the number of children who must be e
achieve the target operating income.
Snow Leopard lost its lease and had to move to another building. The monthly rent for the new building is $3,1
suggestion of parents, Snow Leopard plans to take children on field trips. The monthly costs of the field trips are
how much should Snow Leopard increase fees per child to meet the target operating income of $10,500 per mon
the same number of children as in requirement 2?
care for children Mondays through Fridays. Its

mber of children who must be enrolled to

nt for the new building is $3,150. At the

nthly costs of the field trips are $1,300. By
ing income of $10,500 per month, assuming
 CVP analysis, income taxes. (CMA, adapted) R. A. Ro and Company, a manufacturer of quality handmade waln
steady growth in sales for the past five years. However, increased competition has led Mr. Ro, the president, to
aggressive marketing campaign will be necessary next year to maintain the company’s present growth. To prepa
marketing campaign, the company’s controller has prepared and presented Mr. Ro with the following data for t

Variable cost (per bowl)

Direct materials $ 3.25
Direct manufacturing labor $ 8.00
Variable overhead (manufacturing, marketing, etc.) $ 2.50
Total variable cost per bowl $ 13.75
Fixed costs
Manufacturing $ 25,000.00
Marketing, distribution, and customer service $ 110,000.00
Total fixed costs $ 135,000.00
Selling price $ 25.00
Expected sales, 20,000 units $ 500,000.00
Income tax rate 40%
Required:
What is the projected net income for 2011?
What is the breakeven point in units for 2011?
Mr. Ro has set the revenue target for 2012 at a level of $550,000 (or 22,000 bowls). He believes an additional ma
for advertising in 2012, with all other costs remaining constant, will be necessary to attain the revenue target. W
for 2012 if the additional $11,250 is spent and the revenue target is met?
What is the breakeven point in revenues for 2012 if the additional $11,250 is spent for advertising?
If the additional $11,250 is spent, what are the required 2012 revenues for 2012 net income to equal 2011 net in
At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2012 net income of $60,
 quality handmade walnut bowls, has had a
Mr. Ro, the president, to believe that an
resent growth. To prepare for next year’s
the following data for the current year, 2011:

elieves an additional marketing cost of $11,250

ain the revenue target. What is the net income

advertising?
ome to equal 2011 net income?
2012 net income of $60,000 is desired?
 Choosing between compensation plans, and operating leverage. (CMA, adapted) Marston Corporation manufact
products that are sold through a network of external sales agents. The agents are paid a commission of 18% of re
considering replacing the sales agents with its own salespeople, who would be paid a commission of 10% of reve
salaries of $2,080,000. The income statement for the year ending December 31, 2011, under the two scenarios is

Marston Corporation
Income Statement
For theYear Ended December 31, 2011
Using Sales Agents Using Own Sales Force
Revenues $ 26,000,000.00
Cost of goods sold
Variable $ 11,700,000.00 $ 11,700,000.00
Fixed $ 2,870,000.00 $ 14,570,000.00 $ 2,870,000.00
Gross margin $ 11,430,000.00
Marketing costs
Commissions $ 4,680,000.00 $ 2,600,000.00
Fixed costs $ 3,420,000.00 $ 8,100,000.00 $ 5,500,000.00
Operating income $ 3,330,000.00
Required:
Calculate Marston’s 2011 contribution margin percentage, breakeven revenues, and degree of operating leverag
scenarios.
Describe the advantages and disadvantages of each type of sales alternative.
In 2012, Marston uses its own salespeople, who demand a 15% commission. If all other cost behavior patterns a
much revenue must the salespeople generate in order to earn the same operating income as in 2011?
 Marston Corporation manufactures pharmaceutical
paid a commission of 18% of revenues. Marston is
aid a commission of 10% of revenues and total
2011, under the two scenarios is shown here.

Using Own Sales Force

$ 26,000,000.00

$ 14,570,000.00
$ 11,430,000.00

$ 8,100,000.00
$ 3,330,000.00

and degree of operating leverage under the two

l other cost behavior patterns are unchanged, how

g income as in 2011?
Sales mix, three products. The Ronowski Company has three product lines of belts - A, B, and C with
contribution margins of $3, $2, and $1, respectively. The president foresees sales of 200,000 units in the coming
period, consisting of 20,000 units of A, 100,000 units of B, and 80,000 units of C. The company’s fixed costs for
the period are $255,000.
Required:
What is the company’s breakeven point in units, assuming that the given sales mix is maintained?
If the sales mix is maintained, what is the total contribution margin when 200,000 units are sold? What is the
operating income?
What would the operating income be if 20,000 units of A, 80,000 units of B, and 100,000 units of C were sold?
What is the new breakeven point in units if these relationships persist in the next period?
elts - A, B, and C with
s of 200,000 units in the coming
. The company’s fixed costs for

mix is maintained?
000 units are sold? What is the

d 100,000 units of C were sold?

xt period?
 Sales mix, two products. The Stackpole Company retails two products: a standard and a deluxe version of a lugg
income statement for next period is as follows:

Standard Carrier Deluxe Carrier

Units Sold 187,500.00 62,500.00
Revenues at $28 and $50 per unit $ 5,250,000.00 $ 3,125,000.00
Variable costs at $18 and $30 per unit $ 3,375,000.00 $ 1,875,000.00
Contribution margin $ 1,875,000.00 $ 1,250,000.00
Fixed costs
Operating income
Required:
Compute the breakeven point in units, assuming that the planned sales mix is attained.
Compute the breakeven point in units (a) if only standard carriers are sold and (b) if only deluxe carriers are sol
Suppose 250,000 units are sold but only 50,000 of them are deluxe. Compute the operating income. Compute th
units. Compare your answer with the answer to requirement 1. What is the major lesson of this problem?
a deluxe version of a luggage carrier. The budgeted

Total 1
250,000.00 Mix 3:1
$ 8,375,000.00
$ 5,250,000.00 St De
$ 3,125,000.00 SP 28.00 50
$ 2,250,000.00 VCU 18 30
$ 875,000.00 CMU 10.00 20.00

. Package method
nly deluxe carriers are sold.
ting income. Compute the breakeven point in CM pack 50.00
on of this problem? BEP package 45000

St Unit 135000
De Unit 45000

3 St De
Mix 4 1
Package method
CM package 60.00
BEP package 37500

St Unit 150000
De Unit 37500
საშუალო შეწონილი
Average Price method
CM av. 12.5
BEP av. 180000

St Unit 135000
De Unit 45000

საშუალო შეწონილი
Average Price method
CM av. 12
BEP av. 187500

St Unit 150000
De Unit 37500
 Gross margin and contribution margin. The Museum of America is preparing for its annual appreciation
dinner for contributing members. Last year, 525 members attended the dinner. Tickets for the dinnerware
$24 per attendee. The profit report for last year’s dinner follows.

Ticket Sales $ 12,600.00

Cost of dinner $ 15,300.00
Gross margin $ (2,700.00)
Invitations and paperwork $ 2,500.00
Profit (loss) $ (5,200.00)
This year the dinner committee does not want to lose money on the dinner. To help achieve its goal, the
committee analyzed last year’s costs. Of the $15,300 cost of the dinner, $9,000 were fixed costs and $6,300
were variable costs. Of the $2,500 cost of invitations and paperwork, $1,975 were fixed and $525 were
variable.
Required:
Prepare last year’s profit report using the contribution margin format.
The committee is considering expanding this year’s dinner invitation list to include volunteer members (in
addition to contributing members). If the committee expands the dinner invitation list, it expects
attendance to double. Calculate the effect this will have on the profitability of the dinner assuming fixed
costs will be the same as last year.
 nual appreciation
s for the dinnerware

chieve its goal, the

xed costs and $6,300
d and $525 were

lunteer members (in

, it expects
ner assuming fixed
 Deciding where to produce. (CMA, adapted) The Domestic Engines Co. produces the same power generators in
Peoria and an older plant in Moline. The following data are available for the two plants:

Peoria
Selling price $ 150.00
Variable manufacturing cost per unit $ 72.00
Fixed manufacturing cost per unit $ 30.00
Variable marketing and distribution cost per unit $ 14.00
Fixed marketing and distribution cost per unit $ 19.00
Total cost per unit $ 135.00
Operating income per unit $ 15.00
Production rate per day 400.00 units
Normal annual capacity usage 240.00 units
Maximum annual capacity 300.00 units
All fixed costs per unit are calculated based on a normal capacity usage consisting of 240 working days. When th
240, overtime charges raise the variable manufacturing costs of additional units by $3.00 per unit in Peoria and
Engines Co. is expected to produce and sell 192,000 power generators during the coming year. Wanting to take
income per unit at Moline, the company’s production manager has decided to manufacture 96,000 units at each
Moline operates at capacity (320 units per day 300 days) and Peoria operates at its normal volume (400 units per
Required:
Calculate the breakeven point in units for the Peoria plant and for the Moline plant.
Calculate the operating income that would result from the production manager’s plan to produce 96,000 units a
Determine how the production of 192,000 units should be allocated between the Peoria and Moline plants to m
Engines. Show your calculations.
 s the same power generators in two Illinois plants, a new plant in
o plants:

Moline
$ 150.00
$ 88.00
$ 15.00
$ 14.00
$ 14.50
$ 131.50
$ 18.50
320.00 units
240.00 units
300.00 units
g of 240 working days. When the number of working days exceeds
by $3.00 per unit in Peoria and $8.00 per unit in Moline. Domestic
coming year. Wanting to take advantage of the higher operating
anufacture 96,000 units at each plant, resulting in a plan in which
ts normal volume (400 units per day 240 days).

ant.
plan to produce 96,000 units at each plant.
e Peoria and Moline plants to maximize operating income for Domestic