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Werth Company produces tie

Subject

Accounting

Type

Essay

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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.

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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

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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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