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# Werth Company produces tie

Accounting

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1. Werth Company produces tie racks. The estimated fixed costs for the year are
\$288,000, and the estimated variable costs per unit are \$14. Werth expects to produce
and sell 60,000 units at a price of \$20 per unit.
A.
Calculate the contribution margin ratio
Sales = \$20 x 60,000 = \$1,200,000
[60,000 x (\$20 - \$14)] \$1,200,000 = 30%
B.
Calculate the contribution margin of each tie rack.
\$20 - \$14 = \$6 per unit
C.
Determine the break-even point in units.
20X - [14X + 288,000] = 0
X= 48,000 units
D.
Determine Werth's margin of safety ratio.
(60,000 - 48,000) x \$20 = \$240,000
\$240,000 \$1,200,000 = 20%
2 - Donough Company had the following income statement:
Sales revenue (800 units)
\$80,000
Cost of goods sold:
Fixed costs
\$20,000
Variable costs
18,500
38,500
Gross profit
\$41,500
Operating expenses:
Fixed costs
12,000
Variable costs
13,500
25,500
Operating income
\$16,000
A. How much is Donough's contribution margin?
Sales less variable costs: \$80,000 - \$18,500 - \$13,500 = \$48,000
B. How many units must Donough sell in order to break even?
CM per unit = \$48,000/800 = \$60
\$60 X - [\$20,000 + \$12,000] = 0
X = 534 units
3 - Evans Company makes and sells cologne. This product has a unit sales price of \$40
and a unit variable cost of \$24. Fixed expenses are \$32,000 per month.

1. Calculate the contribution margin ratio.
(\$40 - \$24)/\$40 = .40 or 40%
2. Calculate the contribution margin of each unit.
\$40 - \$24 = \$16
3. How many units must Evans sell to break even?
\$32,000/\$16 = 2,000 units
4. How much will total sales be at break even?
2,000 x \$40 = \$80,000
5. How much will total variable costs be at break even?
2,000 x \$24 = \$48,000
6. How many units must Evans sell in order to report income before taxes of \$28,000?
(\$32,000 + \$28,000)/\$16 = 3,750 units
7. If the company sells 3,500 units, how much is:
A. the total contribution margin?
3,500 x \$16 = \$56,000
B. income for the period?
(\$40 x 3,500) - (\$24 x 3,500) - \$32,000 = \$24,000
C. The margin of safety in dollars?
Difference in sales: \$140,000 - \$80,000 = \$60,000
D. Operating leverage?
\$56,000/\$24,000 = 2.33
8. Based on sales of 3,500 units, by what percentage would profit increase if sales
increased by 20%?
*2.33 x 20% = 46.6%
*this is operating leverage from 7.D.
4 - In Company manufactures and sells two products, Dings and Dongs. In provides you
with the following:
Dings
Dongs
Selling price per unit
\$20
\$16
Variable cost per unit
10
12
Monthly fixed costs are \$23,200. Thirty percent of sales each month are for Dings, while
the remaining 70% are for Dongs.
A. Calculate the contribution margin per unit for each product.
Dings: \$20 - \$10 = \$10
Dongs: \$16 - \$12 = \$4

B. Calculate the weighted-average contribution margin ratio
Weghted average CM per unit = (.30*\$10) + (.70*\$4) = \$5.80
Weighted average sales price = (.30*\$20) + (.70*16) = \$17.20
WACM = \$5.80/\$17.20 = 33.72%
5 - Allen Company sells homework machines for \$100 each. Variable costs per unit are
\$75 and total fixed costs are \$62,000. Allen is considering the purchase of new
equipment that would increase fixed costs to \$84,000, but decrease the variable costs
per unit to \$60. At that level Allen Company expects to sell 3,000 units next year.
What is Allen’s break-even point in units if it purchases the new equipment?
SP VC FC = 0
\$100X - \$60X 84,000 = 0
X = 2,100 units
How many units can Allen's sales drop before he loses his 'cushion'?
Margin of safety = Current sales in units - breakeven sales in units
= 3,000 units - 2,100 units = 900 units
6- Aukens Company produces homework machines. During July of 2004, Aukens
produced and sold 600 units at \$40 per unit. At July’s level of production, it costs
Aukens \$18 variable costs per unit and fixed costs of \$5 per unit. How much will total
sales be if Aukens earns a profit of \$8,000?
Total fixed costs at 600 units = \$5 x 600 units = \$3,000
Total fixed costs at all other levels of production = \$3,000
Selling price
- Variable costs
- Fixed costs =
Net income
\$40 X
- \$18 X
- \$3,000 =
\$8,000
X =
500 units
\$40 x 500 units =
\$20,000
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