Novelties, Inc., produces and sells highly faddish products directed toward the preteen market.

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.

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.

Required:

1.	Compute the monthly break-even point for the new product in units and in total dollar sales. (Omit the "$" sign in your response.)

Break-even point in unit sales	50,000  units
Break-even point in dollar sales	$ 125,000

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?

Total units to be sold

n/r  units

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	%
Unit sales to break even	32,000	skateboards

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

Degree of operating leverage

5

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	%
Unit sales to break even	40,000	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

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

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	%
Unit sales to break even	38,000	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

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	$ 1,500,000
Variable expenses	540,000
Contribution margin	960,000
Fixed expenses	912,000
Net operating income (loss)	$ 48,000

b-2.	Compute the degree of operating leverage

Degree of operating leverage

20

Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable

Problem 5-21 Basic CVP Analysis [LO1, LO3, LO4, LO6, LO8]

Stratford Company distributes a lightweight lawn chair that sells for $15 per unit. Variable expenses are $6 per unit, and fixed expenses total $180,000 annually.

Required:
1.	What is the product's CM ratio? (Omit the "%" sign in your response.)

CM ratio

60  %

2.	Use the CM ratio to determine the break-even point in sales dollars. (Omit the "$" sign in your response.)

Break-even point in sales dollars

$ 300,000

3.	The company estimates that sales will increase by $45,000 during the coming year due to increased demand. By how much should net operating income increase? (Omit the "$" sign in your response.)

Net operating income increases by

$ 27,000

4.	Assume that the operating results for last year were as follows:

Sales	$	360,000
Variable expenses		144,000
Contribution margin		216,000
Fixed expenses		180,000
Net operating income	$	36,000

a.	Compute the degree of operating leverage at the current level of sales.

Degree of operating leverage

6

b.	The president expects sales to increase by 15% next year. By how much should net operating income increase? (Omit the "$" sign in your response.)

Net operating income increases by

$ 32,400

5.	Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $70,000 increase in advertising expenditures, would increase annual unit sales by 50%.

a.

Prepare two contribution format income statements, one showing the results of last year’s operations and one showing what the results of operations would be if these changes were made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places. Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

Last Year 28,000 units

Proposed     42,000  units

	Total	Per Unit	Total	Per Unit
Sales	$ 420,000	$ 15.00	$ 567,000	$ 13.50
Variable expenses	168,000	6.00	252,000	6.00
Contribution margin	252,000	$ 9.00	315,000	$ 9.00
Fixed expenses	180,000		250,000
Net operating income (loss)	$ 72,000		$ 65,000

b.	Would you recommend that the company do as the sales manager suggests?
	No

6.

Refer to the original data. Assume again that the company sold 28,000 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $2 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. (Omit the "$" sign in your response.)

The amount by which advertising can be increased is

$ 140,000