Cost Management Chaoter 4 solutions

Topics: Variable cost, Contribution margin, Costs Pages: 11 (1707 words) Published: September 23, 2014
Chapter 4

3-17

1a.Sales ($68 per unit × 410,000 units)$27,880,000
Variable costs ($60 per unit × 410,000 units) 24,600,000
Contribution margin$ 3,280,000

1b.Contribution margin (from above)$3,280,000
Fixed costs 1,640,000
Operating income$1,640,000

2a.Sales (from above)$27,880,000
Variable costs ($54 per unit × 410,000 units) 22,140,000
Contribution margin$ 5,740,000

2b.Contribution margin$5,740,000
Fixed costs 5,330,000
Operating income$ 410,000

3 Operating income is expected to decrease by $1,230,000 ($1,640,000 − $410,000) if Ms. Schoenen’s proposal is accepted.
The management would consider other factors before making the final decision. It is likely that product quality would improve as a result of using state of the art equipment. Due to increased automation, probably many workers will have to be laid off. Garrett’s management will have to consider the impact of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This will increase the company’s operating leverage and risk.

3-25

1a.Let Q denote the quantity of carpets sold

Breakeven point under Option 1
$500Q  $350Q =$5,000
$150Q=$5,000
Q=$5,000  $150 = 34 carpets (rounded up)

1b.Breakeven point under Option 2
$500Q  $350Q  (0.10  $500Q) = 0
100Q=0
Q=0

2.Operating income under Option 1 = $150Q  $5,000
Operating income under Option 2 = $100Q

Find Q such that $150Q  $5,000 = $100Q
$50Q = $5,000
Q = $5,000  $50 = 100 carpets
Revenues = $500 × 100 carpets = $50,000
For Q = 100 carpets, operating income under both Option 1 ($150 × 100 – $5,000) and Option 2 ($100 × 100) = $10,000

For Q > 100, say, 101 carpets,
Option 1 gives operating income =($150  101)  $5,000=$10,150
Option 2 gives operating income=$100  101=$10,100
So Color Rugs will prefer Option 1.

For Q < 100, say, 99 carpets,
Option 1 gives operating income =($150  99)  $5,000=$9,850
Option 2 gives operating income=$100  99=$9,900
So Color Rugs will prefer Option 2.

3.Degree of operating leverage =

Under Option 1, contribution margin per unit = $500 – $350, so Degree of operating leverage = = 1.5
Under Option 2, contribution margin per unit = $500 – $350 – 0.10  $500, so Degree of operating leverage = = 1.0

4.The calculations in requirement 3 indicate that when sales are 100 units, a percentage change in sales and contribution margin will result in 1.5 times that percentage change in operating income for Option 1, but the same percentage change in operating income for Option 2. The degree of operating leverage at a given level of sales helps managers calculate the effect of fluctuations in sales on operating incomes.

3-31

1.

Mirabella Cosmetics
Operating Income Statement, June 2011
Units sold

10,000

Revenues

$100,000

Variable costs

 

Variable manufacturing costs
$ 55,000
 

Variable marketing costs
5,000
 

Total variable costs

60,000

Contribution margin

40,000

Fixed costs

 

Fixed manufacturing costs
$ 20,000
 

Fixed marketing & administration costs
10,000
 

Total fixed costs

30,000

Operating income

$ 10,000

2.Contribution margin per unit =
Breakeven quantity =
Selling price =
Breakeven revenues = 7,500 units $10 per unit = $75,000

Alternatively,
Contribution margin percentage =

Breakeven revenues =  
 
2 Margin of safety (in units)= Units sold – Breakeven quantity
= 10,000 units – 7,500 units = 2,500 units
 
4.Units sold  8,000
Revenues (Units sold Selling price = 8,000 $10) $80,000
Contribution margin (Revenues CM percentage = $80,000 40%) $32,000 Fixed costs 30,000
Operating income2,000...
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