Analysis of Cost, Volume, and Pricing to Increase Profitability

1. Goff Corporation sells products for $75 each that have variable costs of $50 per unit.
Goff's fixed cost is $350,000.

Required:

Calculate the contribution margin per unit, then use the per unit contribution margin approach to
find the break-even point in units and dollars.

2. Canton Company produces and sells toasters. The following unit cost information
assumes a production and sales volume of 15,000 units:

Direct materials $ 9
Direct labor 6
Variable overhead 2
Fixed overhead 3
Variable selling and administrative costs 1
Fixed selling and administrative costs 4

Required:

1) Compute the budgeted selling price per unit assuming Canton uses a cost-plus pricing strategy
and a markup equal to 75% of production cost.

2) Compute the firm's total fixed costs.

3) Compute the firm's contribution margin per unit given the budgeted selling price you
computed in Requirement 1.

4) Compute the firm's break-even point in units and dollars, using the selling price you calculated
in Requirement 1.

5) Using the unit contribution margin, compute the firm's estimated profit if 15,000 units are
sold.

3. Phillips Company can sell 15,000 units of its new product at a selling price of $116. The
unit cost is $72. The company's target profit is 40% of sales. The Vice President of
Marketing has learned that a competitor plans to introduce a similar product for $104.
The Vice President has recommended that Phillips match the competitor's price. She
believes the lower selling price will increase sales volume by 20%.

Required:

1) Compute the company's net income assuming the product is sold for $116 and the costs
remain at $72. Assume there were no additional costs.

2) Compute the product's target cost if it is sold at a $116 selling price.

3) Compute the company's net income if the target cost computed in Requirement 2 is achieved.
4) Compute the change in income from Requirement 1 if the product is sold for $104, costs
remain at $72, and volume is increased by 20%.

4. Fox Company believes that a market exists for an electronic game with a sales price of
$40 per unit. The annual fixed costs are estimated at $700,000.

Required:

Fox forecasts sales of 50,000 units and wants to earn a profit of $200,000 per year. What is the
maximum amount of variable costs per unit that will allow it to achieve its profit goal?

5. Anton Company produces and sells bicycles for $500. The variable costs per unit are
$300 plus a sales commission of 15% of the selling price. Total fixed costs consist of
$16,000 in fixed overhead and $9,000 in fixed selling and administrative costs.

Required:

1) Compute the contribution margin per unit.

2) Compute the break-even point in units and dollars.

3) How many units must be sold to earn a profit of $20,000?

4) What would be the break-even point in units if the sales commission is reduced to $20 per unit
sold?

6. Larimore Company sales are $560,000. The company has variable costs equal to 40% of
sales and total fixed costs of $150,000.

Required:

1) What is the company's break-even point in sales dollars?

2) Compute the company's operating leverage at its current sales level.

3) Compute the percentage change in income that will accompany a 10% increase in sales.

4) Compute the company's net income and operating leverage if sales increase by 10%.
(Rounded to one decimal place.)

5) Describe the effect on operating leverage as a company's sales increase and it moves further
beyond its break-even point.
 7. The following information is for a product manufactured and sold by Drake Company:

Sales price per unit: $100

Variable cost per unit: $30
Total annual fixed costs: $350,000

Required:

1) Calculate the contribution margin per unit.

2) How many units must Crane sell to break even?

3) How many units must Crane sell to achieve a profit of $35,000?

134) The following information is for a product of Lanier Company:

Last year, the variable cost per unit was $25. Total fixed costs were $800,000. At a volume of
170,000 units, the company achieved a profit of $50,000.

Required:

What was the unit sales price for the product last year?

8. During the current year, Goldblum Co. sold 160,000 units of its product at a selling price
of $40. The variable cost per unit was $30, and Goldblum reported net income for the
year of $220,000. What was the amount of Goldblum's fixed costs for the year?

9. The Varsity Club sells souvenir items at university sporting events for $24 each. The
souvenir items cost $16 each. The club is negotiating with the university administration to
sell the items in a kiosk in the university student center. Three rental arrangements are
under consideration:

Option 1: Pay rent of $2,000

Option 2: Pay rent of $1,200 plus 10% of revenue
Option 3: Pay the university 25% of revenue

The club estimates that it will be able to sell 300 souvenir items during the period.

Required:

1) Compute the break-even point in units for each of the three options.

2) Assuming the club reaches its sales target, which option should be chosen?
 10. Lush Lawn, Inc. produces and sells electric lawn trimmers for $120 each. The variable
costs of each mower total $80 while total monthly fixed costs are $6,000. Current
monthly sales are $48,000. The company is considering a proposal that will decrease the
selling price by 10%, increase monthly fixed costs by 50%, and increase unit sales to 450
units per month.

Required:

1) Compute the company's current break-even point in units and dollars.

2) What is the company's current margin of safety in units, dollars, and percentage?

3) Compute the company's margin of safety in units assuming the proposal is accepted.

4) Compute the increase or decrease in profit assuming the proposal is accepted.

11. During the current year, Vanguard Company sold 80,000 of its only product at a selling
price of $60 per unit. Variable costs were $18 per unit, and Vanguard's margin of safety
for the year was 25,000 units.

Required:

1) Calculate Vanguard's margin of safety ratio for the current year.

2) What was the amount of Vanguard's fixed costs for the current year?

12. Beacon Company makes a product that has a variable cost of $25 per unit and a selling
price of $45 per unit. Annual fixed costs total $860,000. Beacon's net income last year
was $240,000. Beacon's management is considering lowering the selling price to $35.

Required:

1) How many units did Beacon sell last year?

2) If Beacon Company wants to maintain the same level of income that it had last year, how
many units would it have to sell at the new selling price of $35?

13. The Victor Company sells two products. The following information is provided:

Unit selling price $ 100 $ 150

Unit variable cost $ 30 $ 70
Number of units produced and sold 20,000 60,000

What is the weighted average contribution margin per unit?

14. Zed Company sells two kinds of mainframe computer power supplies. The company
projected the following cost information for the two products:

Standard Heavy-Duty
Supply Supply
Unit selling price $ 250 $ 120
Unit variable cost $ 110 $ 50
Number of units produced and sold 7,000 3,000

Assume that total fixed costs are $428,400. How many units of the standard supply unit would
be included in the total number of units required to break even with the projected sales mix?
(Round your answer to the nearest whole unit)

15. Broadway Company produces and sells two models of calculators. The following
monthly data are provided:

Standard Premium
Unit selling price $ 100 $ 150
Unit variable manufacturing cost $ 60 $ 90
Unit variable selling and administrative cost $ 15 $ 30
Number of units produced and sold 3,000 1,000

Total monthly fixed costs are expected to be $15,000. What is the break-even point in
sales dollars at the expected sales mix? (Do not round intermediate calculations.)

Cost Accumulation, Tracing, and Allocation

1. A number of costs that are commonly allocated are listed in the following table followed
by two alternative cost allocation bases.

Cost Description Allocation Base Alternatives

Cafeteria costs Direct labor costs Number of employees
Computer system costs Number of departments Amount of computer time used
Indirect labor costs Direct labor hours Number of supervisors
Indirect materials Direct labor hours Direct material dollars
Factory rent Number of departments Square footage
Fringe benefits costs Number of departments Number of employees
Housekeeping costs Square footage Number of employees
Joint costs Number of joint products Sales value at split-off
Maintenance costs Machine hours Number of employees
Personnel department costs Number of employees Number of departments

Required:
For each cost listed, circle the cost allocation base that you believe would be more appropriate
for allocating the cost.

2. Parr Corporation makes three products, X, Y, and Z. Expected overhead costs for the
coming year include:

Depreciation on factory building $ 140,000

Factory utility costs 160,000
Supervisory salaries 250,000
Factory supplies 50,000
Total $ 600,000
 Parr uses direct labor hours as the cost driver to allocate overhead costs. Budgeted direct labor
hours for each product are:

Product X, 15,000 direct labor hours

Product Y, 10,000 direct labor hours
Product Z, 5,000 direct labor hours

Required:

1) Determine the amount of manufacturing overhead that should be allocated to each of the three
products.

2) Assume that each unit of Product X requires $40 in direct materials and three direct labor
hours at a rate of $15 per hour. Calculate the budgeted or expected cost of each unit of X.

3. Biden Department Store has four departments: men's, women's, children's, and electronics. The
following information is provided:

Men's Women's Children's Electronics

Floor space 10,000 sq. ft. 20,000 sq. ft. 8,000 sq. ft. 2,000 sq. ft.
Sales $35,000 $75,000 $20,000 $12,000

The company's accountant needs to allocate the store's annual rent of $160,000.

Required:

1) Compute the allocation rate that should be used to allocate the rent cost to the four
departments.

2) Compute the amount of rent that should be allocated to each of the four departments.

) Currently, the managers are paid a bonus based on sales. As you can see from the above table,
the women's department manager will receive the largest bonus. Do you believe this bonus plan
is fair to all four department managers? Why or why not?

4) The College of Business Administration needs to distribute $12,000 received from an

anonymous donor and earmarked for three business student organizations, Beta Alpha Psi (BAP),
Delta Sigma Pi (DSP), and Beta Gamma Sigma (BGS). Relevant information is provided below:

Possible Cost Driver BAP DSP BGS

Number of students 30 40 100
Budgeted expenses $ 5,500 $ 4,000 $ 500
Number of organizations 1 1 1

Assume that each organization wishes to obtain the highest funding possible.
Required:
1) Which cost driver will each organization recommend be used to distribute the funds?
2) Which cost driver would you recommend and why?
5) Morris Company makes one product, and it expects to incur a total of $600,000 in indirect
(overhead) costs during the current year. Production of the product for the year is expected to be:

Quarter
1 2 3 4
Estimated production in units 40,000 15,000 27,000 38,000

Required:

1) Calculate a predetermined overhead rate based on the number of units of product expected to
be made during the current year.
2) Assuming that direct materials and direct labor costs are $10 and $15, respectively, determine
the total cost per unit using the overhead rate you calculated in part (1).

6. Vance Electronics expects to make 100,000 Bluetooth speakers during the current year. Direct
materials cost per unit are estimated at $12, and direct labor cost is expected to be $4 per unit.
The total manufacturing overhead for the year is budgeted at $850,000.

Required:
1) Calculate the amount of overhead that should be allocated to each speaker during the year.
2) Assume that, during the month of October, Vance made and sold 8,000 speakers. What would
the cost of goods sold be for the month?
3) Assume that the company sells the speakers at cost plus 40% of cost. What would be the
selling price for each speaker?

7. The management accountant at Morrison, Inc. provided the following estimated costs for
producing 2,500 units of a specialty product manufactured by the firm:

Direct Materials $ 10,000

Direct Labor (1 hour per unit) 5,000
Unit-level support costs 10,000
Batch level support costs 5,000
Product-level support costs 3,000
Facility-level support costs 7,000

The company believes that direct labor hours are the most appropriate cost driver for assigning
overhead costs to its product.

Required:

1) Compute the predetermined overhead rate for this company.

2) Compute the specialty product's total estimated cost per unit.
3) Why do firms assign overhead costs using a predetermined overhead rate instead of assigning
actual costs?

8) Martin's is a store with three departments, Appliances, Tools, and Home Improvements. The
company expects to incur the following indirect costs related to its operations:

Store manager's salary Store supplies Electric bill Clerical staff salaries
Payroll taxes Office supplies Water bill Sewer bill
Medical insurance Vacation pay

Required:

1) Organize the indirect costs into three cost pools: Store Administration, Utilities, and Fringe
Benefit Costs, assuming that each department is a cost object.

2) Identify an appropriate cost driver for each cost pool.

9) Old Virginia Meat Processing Plant processes hogs to produce three joint products: bacon,
sausage, and pork chops. The company incurs common processing costs of $100,000 per batch.
Each batch yields 15,000 pounds of bacon, 18,000 pounds of sausage, and 7,000 pounds of pork
chops. Pork chops can be sold for $3.00 per pound. The bacon and sausage products are sold at
the split-off point for $3.25 per pound and $3.50 per pound, respectively.

Required:

1) Allocate Old Virginia's joint costs using pounds produced as the allocation base. (Do not
round intermediate calculations.)
2) Allocate Old Virginia's joint costs using the relative sales value at split-off method. (Do not
round intermediate calculations.)
3) Assume that the pork chops are processed further after the split-off point at an additional cost
of $4,000 and that joint costs are allocated based on pounds produced. What would be the total
cost assigned to pork chops?

10) Alvarez Company makes three joint products, products A, B, and C. For each batch, the
materials cost is $16,000, direct labor cost is $4,000, and manufacturing overhead is $10,000.
From each batch, the company makes 2,000 pounds of A, 1,200 pounds of B, and 800 pounds of
C.

Required:
1) What are the total joint costs for each batch of the products?
2) Allocate the joint costs to each of the three products.
3) Determine the cost per pound for product A.

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

1. Ballantine Company manufactures two products. Currently, the company uses a

traditional costing system assigning overhead based on direct labor hours. The Industrial
product is more complex to produce, requiring two hours of direct labor time per unit,
compared to one hour of direct labor time for the Consumer product. Given the
company's total overhead costs of $720,000 and production of 1,000 Industrials and 8,000
Consumers, this results in an overhead allocation rate of $72 per direct labor hour. The
following unit data are provided:

Industrial Consumer
Selling price $ 1,440.00 $ 720.00
Direct material (500.00 ) (250.00 )
Direct labor (400.00 ) (200.00 )
Overhead (144.00 ) (72.00 )
Gross profit $ 396.00 $ 198.00

Because the Industrial product is twice as profitable as the Consumer model, the sales manager
wants to reduce or eliminate production of the Consumer product and devote as much capacity as
possible to the Industrial product.

You are worried that the current cost accounting system may be providing inaccurate results and
would like to implement an ABC system. Assume that the company's overhead costs were traced
to four major activities. The amount of overhead costs traceable to each activity for the current
year is provided below:

Cost Drive Data

Overhead
Activity Cost Driver Costs Industrial Consumer Total
Mat'1 No. of Purchase
$ 60,000 100 500 600
handling Orders
Setup No.of setups 288,000 500 250 750
Assembly No. of machine hrs. 225,000 7,000 3,000 10,000
No. of maintenance
Maintenance 147,000 440 295 735
requests
Total $ 720,000

Required:

1) Compute the four activity rates that will be used to assign overhead to the products under
activity-based costing:

Activity Application Rate

Mat'1 handling
Setup
Assembly
Maintenance

2) Compute the amount of overhead cost which should be assigned to Industrials and Consumers
under activity-based costing. Also compute the overhead cost per unit for each product.

Activity 1,000 Industrials 8,000 Consumers

Mat'1 handling
Setup
Assembly
Maintenance
Total Overhead Cost
Overhead cost per unit
3) Compute the total cost to manufacture one unit of each product if activity-based costing is
used.

Industrials Consumers
Direct materials $ 500.00 $ 250.00
Direct labor 400.00 200.00
Overhead
Total cost per unit

4) Respond to the sales manager's recommendation that capacity be diverted from Consumers to
Industrials.

2. Perez Company manufactures two products. Making Product A requires 6,000 hours of
labor, and Product B requires 4,000 hours of labor. Perez undertakes an automation
program that reduces the consumption of labor required by Product A to only 3,000 hours
of labor. Product B is not affected by the automation process. Overhead cost prior to the
automation totaled $30,000. After automation, overhead cost amounted to $56,000. Perez
uses direct labor hours as a companywide allocation base before and after the automation.

Required:

1) Compute the amount of overhead costs allocated to both products before automation.

2) Compute the amount of overhead costs allocated to both products after automation.

3) Are direct labors hours a good choice for allocation after the automation? Why or why not?