Tuesday, 31 July 2012

Tyrene Products manufactures recreational equipment. One of the company’s products, a

Problem 5-29 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO1, LO3, LO4, LO5, LO6, LO8]
Tyrene Products manufactures recreational equipment. One of the company’s products, a skateboard, sells for $37.50. The skateboards are manufactured in an antiquated plant that relies heavily on direct labor workers. Thus, variable costs are high, totaling $22.50 per skateboard of which 60% is direct labor cost.
    Over the past year the company sold 40,000 skateboards, with the following operating results:

  Sales (40,000 skateboards) $ 1,500,000  
  Variable expenses 900,000  


  Contribution margin 600,000  
  Fixed expenses 480,000  


  Net operating income $ 120,000  






Management is anxious to maintain and perhaps even improve its present level of income from the skateboards.

Required:
1a. Compute the CM ratio and the break-even point in skateboards. (Omit the "%" sign in your response.)

  Contribution margin 40 correct  %
  Unit sales to break even 32,000 correct  skateboards

1b.
Compute the degree of operating leverage at last year's level of sales.

  Degree of operating leverage 5 correct  

2.
Due to an increase in labor rates, the company estimates that variable costs will increase by $3 per skateboard next year. If this change takes place and the selling price per skateboard remains constant at $37.50, what will be the new CM ratio and the new break-even point in skateboards? (Omit the "%" sign in your response.)

  Contribution margin 32 correct  %
  Unit sales to break even 40,000 correct  skateboards

3.
Refer to the data in (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year?

  Number of skateboards 50,000 correct  

4.
Refer again to the data in (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labor costs? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Selling price $ 42.50 correct  

5.
Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would slash variable costs by 40%, but it would cause fixed costs to increase by 90%. If the new plant is built, what would be the company’s new CM ratio and new break-even point in skateboards? (Omit the "%" sign in your response.)

  Contribution margin 64 correct  %
  Unit sales to break even 38,000 correct  skateboards

6.
Refer to the data in (5) above.

a.
If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year?

  Number of skateboards n/r incorrect  

b-1.
Assume that the new plant is constructed and that next year the company manufactures and sells 40,000 skateboards (the same number as sold last year). Prepare a contribution format income statement. (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

Contribution Income Statement.
  Sales correct $ 1,500,000 correct  
  Variable expenses correct 540,000 correct  

  Contribution margin correct 960,000 correct  
  Fixed expenses correct 912,000 correct  

  Net operating income (loss) correct $ 48,000 correct  




b-2. Compute the degree of operating leverage

  Degree of operating leverage 20 correct