Problem 5-31 Changes in Fixed and Variable Costs; Break-Even and Target Profit Analysis [LO4, LO5, LO6]
Novelties,
Inc., produces and sells highly faddish products directed toward the
preteen market. A new product has come onto the market that the company
is anxious to produce and sell. Enough capacity exists in the company’s
plant to produce 30,000 units each month. Variable expenses to
manufacture and sell one unit would be $1.60, and fixed expenses would
total $40,000 per month.
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The
Marketing Department predicts that demand for the product will exceed
the 30,000 units that the company is able to produce. Additional
production capacity can be rented from another company at a fixed
expense of $2,000 per month. Variable expenses in the rented facility
would total $1.75 per unit, due to somewhat less efficient operations
than in the main plant. The product would sell for $2.50 per unit.
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| 1. |
Compute the monthly break-even point for the new product in units and in total dollar sales. (Omit the "$" sign in your response.)
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| Break-even point in unit sales | 50,000  units |
| Break-even point in dollar sales | $ 125,000 |
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| 2. | How many units must be sold each month to make a monthly profit of $9,000? |
| Total units to be sold | n/r  units |
| 3. |
If
the sales manager receives a bonus of 15 cents for each unit sold in
excess of the break-even point, how many units must be sold each month
to earn a return of 25% on the monthly investment in fixed expenses?
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| Total units to be sold | n/r units |
The Edelweiss Hotel in Vail, Colorado, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.
ReplyDeleteMonth Occupancy-
Days Electrical
Costs
January 2,604 $6,257
February 2,856 $6,550
March 3,534 $7,986
April 1,440 $4,022
May 540 $2,289
June 1,116 $3,591
July 3,162 $7,264
August 3,608 $8,111
September 1,260 $3,707
October 186 $1,712
November 1,080 $3,321
December 2,046 $5,196
Required:
1.
Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. (Round the "Variable cost per occupancy-day" to 2 decimal places and the "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your response.)
Fixed cost $ per month
Variable cost $ per occupancy-day
2.
What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
Seasonal factors like winter or summer.
Systematic factors like guests, switching off fans and lights.
Number of days present in a month.
Fixed salary paid to hotel receptionist.
Income taxes paid on hotel income.
Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant's full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:
ReplyDeleteDirect materials used (wood and glass) $ 430,000
Administrative office salaries $ 110,000
Factory supervision $ 70,000
Sales commissions $ 60,000
Depreciation, factory building $ 105,000
Depreciation, administrative office equipment $ 2,000
Indirect materials, factory $ 18,000
Factory labor (cutting and assembly) $ 90,000
Advertising $ 100,000
Insurance, factory $ 6,000
Administrative office supplies (billing) $ 4,000
Property taxes, factory $ 20,000
Utilities, factory $ 45,000
Required:
1.
Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
Cost Behavior
Selling or Administrative
Product Cost
Cost Item Variable Fixed Cost Direct Indirect
Direct materials used (wood, glass) $ $ $ $ $
Administrative office salaries
Factory supervision
Sales commissions
Depreciation, factory building
Depreciation, admin. office equipment
Indirect materials, factory
Factory labor (cutting and assembly)
Advertising
Insurance, factory
Administrative office supplies (billing)
Property taxes, factory
Utilities, factory
Total costs $ $ $ $ $
2.
Compute the average product cost per bookcase. (Omit the "$" sign in your response.)
Average product cost $ per bookcase
3.
Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcase to increase, decrease, or remain unchanged?
Decrease
Increase
Remain unchanged
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