Mitzel Corporation

Topics: Contribution margin, Variable cost, Rate of return Pages: 22 (3986 words) Published: February 17, 2013
Accounting for Managers
Homework Set 2.2
Cost-Volume-Profit and Segment Profitability Analysis
1. Candice Corporation has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:


The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured.


a. Calculate the break-even point in units if Candice Corporation uses the:

1. capital-intensive manufacturing method.
2. labor-intensive manufacturing method.

b. Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.

c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:

1. capital-intensive manufacturing method.
2. labor-intensive manufacturing method.

d. What is your recommendation to management concerning which manufacturing method should be used? 



2. The following monthly data in contribution format are available for the MN Company and its only product, Product SD:


The company produced and sold 300 units during the month and had no beginning or ending inventories.


a. Without resorting to calculations, what is the total contribution margin at the break-even point?

b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?

c. Assume that MN Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made?

d. Assume that MN Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made? 



3. Iron Decor manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates:



Compute the following items:
a. Unit contribution margin.
b. Contribution margin ratio.
c. Break-even in dollar sales.
d. Margin of safety percentage.
e. If the sales volume increases by 20% with no change in total fixed expenses, what will be the change in net operating income? f. If the per unit variable production costs increase by 15%, and if fixed selling and administrative expenses increase by 12%, what will be the new break-even point in dollar sales? 



4. Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below:


There are no beginning or ending inventories.


a. Compute the company's monthly break-even point in units of product.

b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses?

c. What...
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