Finance Questions

timer Asked: Apr 25th, 2013

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E4.5 Crow, Inc., a not-for-profit company, has a product contribution margin of $40. The fixed costs are $800,000. Crow, Inc., has set a target profit of $35,000 per year. LO 2
  A. What is the breakeven point in units?
  B. How many units must be sold to achieve the target profit?
  C. If fixed costs decrease 10 percent, how many units must be sold to achieve the target profit?

P 4.8 Buchanan Enterprises has projected its income before taxes as follows:
 Sales (800,000 units) $16,000,000
Variable costs     2,000,000
Contribution margin  $14,000,000
Fixed costs     8,000,000
Income before taxes  $6,000,000
  A. What is the selling price per unit?
  B. What is the variable cost per unit?
  C. What is the contribution margin per unit?
  D. What is the contribution margin ratio?
  E. What is the breakeven point in units?
  F. What is the breakeven point in dollars?

P 4.10 Crawford sells three types of games to national toy companies. These games are known internally as Gamma, Omega, and Lambda. Recently the Gamma and Lambda lines have not shown acceptable profits. The most recent monthly results are:
Gamma Omega Lambda Unit sales 1,800 400 1,500 Sales $900 $1,200 $1,500 Cost of goods sold 810 600 1,245 Gross margin 90 600 255 Selling and administrative cost 204 218 240 Profit $(114) $ 382 $ 15
  Additional analysis reveals that $150 per month in facility-sustaining selling and administrative cost is charged to each product line. The remaining costs are assumed to vary directly with the number of units sold. Crawford is analyzing the following alternatives:
  1. Discontinue the Gamma line and increase advertising at a cost of $10 per month for the Lambda line. This is expected to increase Lambda sales by 20 percent.
  2. Discontinue the Gamma and Lambda lines and focus solely on the Omega line. This is expected to increase Omega sales by 40 percent.
  3. Increase promotion of both the Gamma and Lambda lines. The promotion will increase selling costs by $25 per month for each line. Unit sales of Gamma are expected to increase by 15 percent while unit sales of Lambda are expected to increase by 10 percent.
  4. Do nothing. Leave the Gamma, Lambda, and Omega lines as they are.
  A. Evaluate each alternative. Which alternative is best for Crawford Company?
  B. What additional factors should Crawford consider before making this decision?

P 5.4 Bunkowske Company plans to introduce a new product next year. This product has a two-year life and an estimated demand of 20,000 units annually. The product will be produced 50 weeks each year. Bunkowske estimates the following costs:

  • Direct materials will be $16 per unit.
  • Setup costs will be $200 per week. Ten setups will be required per week.
  • Design costs will be $40,000 in total.
  • Specialized equipment must be rented for $15,000 per week.
  • Research and development costs are estimated at $500,000.
  • Labor will be paid $20 per hour. Five employees will be assigned to this product and each employee will work 35 hours on the product.
Bunkowske Company uses cost-plus pricing whereby the selling price of each of its products are 150 percent of the life-cycle costs. Determine the selling price of this product.

P 5.9 Praeuner Company has surveyed the market and set a target selling price of $2,000 per unit for its product. Praeuner believes it can sell 100,000 units of this product over its two-year life. Praeuner requires a 20 percent return on selling price. Therefore its target cost per unit is $1,600. Praeuner has gathered the following budgeted cost data:
Unit cost   $ 1,200
Batch cost (batch size = 1,000)   15,000
Product-sustaining cost (annual)   480,000
Facility-sustaining cost (annual)   900,000
In addition to the previous costs, Praeuner will incur $5,000,000 in research and development costs before the product is manufactured. Required:

  A. What is the total target cost for this product's life?
  B. What is the total budgeted cost for this product over its two-year life?
  C. Should Praeuner develop this product? Why?

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