# Accounting BA/510

Anonymous

Question description

Problem 3-25: Break-Even Analysis; Pricing

Detmer Holdings AG of Zurich, Switzerland, has just introduced a new fashion watch for which the company is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each SFr2 per unit reduction in the selling price. (SFr2 denotes 2 Swiss francs.) The company’s present selling price is SFr90 per unit, and variable expenses are SFr60 per unit. Fixed expenses are SFr840,000 per year. The present sales volumes (at the SFr90 selling price) is 25,000 units.

Required:

1.  What is the present yearly net operating income or loss?

2.  What is the present break-even point in units and in Swiss franc sales?

3.  Assuming that the marketing studies are correct, what is the maximum profit that the company can earn yearly? At how many units and at what selling price per unit would the company generate this profit?

4.  What would be the break-even point in units and in Swiss franc sales using the selling price you determined in (3) above (i.e., the selling at the level of maximum profits)? Why is this break-even point different from the break-even point you computed in (2) above?

Problem 3-26 Changes in Cost structure; Break-Even Analysis; Operating Leverage; Margin of Safety

Frieden Company’s contribution format income statement for the most recent month is given below:

Sales (40,000 units)……………\$800,000

Variable expenses………………..560,000

240,000

Contribution margin……………..192,000

Fixed expenses……………………..\$48,000

The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerable from year to year according to general economic conditions. The company has large amount of unused capacity and is studying ways of improving profits.

Required:

1.  New equipment has come on the market that would allow Frieden Company to automate a portion of its operations. Variable expenses would be reduced by \$6 per unit. However, fixed expenses would increase to a total \$432,000 each month. Prepare two contribution format income statement, one showing present operations and one showing how operations would appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses.

2.  Refer to the income statements in (1) above. For both present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollars, and (c)  the margin of safety in both dollar and percentage terms.

3.  Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? Assume that ample funds are available to make the purchase.)

4.  Refer to the original data. Rather than purchase new equipment, the marketing managers argues that the company’s marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company invest heavily in advertising. The marketing manager claims that this new approach would increase unit sales by 50% without any change in selling price; the company’s new monthly fixed expenses would be \$240,000; and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager’s proposal?

Problem 3-28 Graphing; Incremental Analysis; Operating Leverage

Teri Hall has recently opened Sheer Elegance, Inc., a store specializing in fashionable stockings. Ms. Hall has just completed a course in managerial accounting, and she believes that she can apply certain aspects of the course to her business. She is particularly interested in adopting the cost-volume-profit (CVP) approach to decision making. Thus, she has prepared the following analysis:

Sales price per pair of stockings…………………………. \$2.00

Variable expense per pair of stockings …………………… .80

Contribution margin per pair of stockings ……………\$1.20

Fixed expense per year:

Building rental…………………………………………………\$12,000

Equipment depreciation………………………………......\$3,000

Selling ……………………………………………………………..\$30,000

Total fixed expense…………………………………………..\$60,000

Required:

1.  How many pairs of stockings must be sold to break-even? What does this represent in total dollar sales?

2.  Prepare a CVP graph or a profit graph for the store from zero pairs up to 70,000 pairs of stockings sold each year. Indicate the break-even point on the graph.

3.  How many pairs of stockings must be sold to earn a \$9,000 target profit for the first year?

4.  Ms. Hall now has one full-time and one part-time salesperson working in the store. It will cost her an additional \$8,000 per year to convert the part-time position to a full-time position. Ms. Hall believes that the change would bring in an additional \$20,000 in sales each year. Should she convert the position? Use the incremental approach. (Do not prepare an income statement.)

5.  Refer to the original data. Actual operating results for the first year are as follows:

Sales……………………………………\$125,000

Variable expenses………………….50, 000

Contribution margin……………….75, 000

Fixed expenses……………………….60, 000

Net operating income……………\$15,000

a.  What is the store’s degree of operating leverage?

b.  Ms. Hall is confident that with some effort she can increase sales by 20% next year. What would be the expected percentage increase in net operating income?  Use the degree of operating leverage concept to compute your answer.

Durham Company uses a job-order costing system. The following transactions took place last year:

a.  Raw materials requisitioned for use in production. \$40,000 (80 % direct and 20% indirect).

b.  Factory utility costs incurred, \$14, 600.

c.  Depreciation recorded on plant and equipment, \$28,000. Three-fourths of the depreciation relates to factory equipment, and the remainder relates to selling and administrative equipment.

d.  Costs for salaries and wages were incurred as follows:

Direct labor…………………..\$40,000

Indirect labor………………..\$18,000

Sales commissions…………\$10,000

e.  Insurance costs incurred, \$3,000 (80% relates to factory operations, and 20% relates to selling and administrative activities).

f.  Miscellaneous selling administrative expenses incurred, \$18,000.

g.  Manufacturing overhead was applied to production. The company applies overhead on the basis of 150% of direct labor cost.

h.  Goods that cost \$130,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.

i.  Goods that had cost \$120,000 to manufacture according to their job cost sheets were sold for \$200,000.

Required:

1.  Determine the underapplied or overapplied overhead for the year.

2.  Prepare an income statement for the year. ( Hint: No calculations are required to determine the cost of goods sold before any adjustment for underapplied or overapplied overhead.)

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