Cost Accounting



AIM 2302

CVP PROBLEMS

1. CVP computations. Fill in the blanks for each of the following independent cases

|Case |Revenues |Variable Costs |Fixed Costs |Total Costs |Operating Income |Contribution Margin |

| | | | | | |Percentage |

|a. |$______ |$500 |$_______ |$ 800 |$1,200 |_______ |

|b. |2,000 |______ |300 |________ |200 |_________ |

|c. |1,000 |700 |______ |1,000 |_______ |_________ |

|d. |1,500 |______ |300 |_______ |_______ |40% |

2. CVP computations. Patel Manufacturing sold 180,000 units of its product for $25 per unit in 2003. Variable cost per unit is $20 and total fixed costs are $800,000.

Required:

a. Calculate contribution margin and operating income.

b. Patel’s current manufacturing process is labor intensive. Patel’s production manager has proposed investing in a new machine, which will increase total fixed costs to $2,500,000 and decrease variable costs to $10 per unit. Patel expects to maintain the same sales volume and selling price next year. If they purchase the machine, what will contribution margin and operating income be?

c. Should Patel invest in the new machine? Explain.

3. CVP analysis, changing revenues and costs. Sunshine Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Canadian Air. Sunshine’s fixed costs are $22,000 per month. Canadian Air charges passengers $1,000 per round-trip ticket.

Required:

Calculate the number of tickets Sunshine must sell each month to (1) break even and (2) make a target operating income of $10,000 per month in each of the following independent cases:

a. Sunshine’s variable costs are $35 per tickets. Canadian Air pays Sunshine 8% commission on ticket price.

b. Sunshine’s variable costs are $29 per ticket. Canadian Air pays Sunshine 8% commission on ticket price.

c. Sunshine’s variable costs are $29 per ticket. Canadian Air pays $48 fixed commission per ticket to Sunshine.

d. Sunshine’s variable costs are $29 per ticket. It receives $48 commission per ticket from Canadian Air. It charges its customers a delivery fee of $5 per ticket.

4. CVP exercises. The Super Donut owns and operates six doughnut outlets in and around Kansas City. You are given the following corporate budget data for next year.

|Revenues |$10,000,000 |

|Fixed costs |1,700,000 |

|Variable costs |8,200,000 |

Variable costs change with respect to the number of doughnuts sold.

Compute the budgeted operating income for each of the following deviations from the original budget data. (Consider each case independently)

a. A 10% increase in contribution margin, holding revenues constant

b. A 10% decrease in contribution margin, holding revenues constant

c. A 5% increase in fixed costs

d. A 5% decrease in fixed costs

e. An 8% increase in units sold

f. An 8% decrease in units sold

g. A 10% increase in fixed costs and a 10% increase in units sold

h. A 5% increase in fixed costs and a 5% decrease in variable costs

5. CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit. Consider each case separately:

1a. What is the present operating income for a year?

1b. What is the present breakeven point in revenues?

Compute the new operating income for each of the following changes:

2. A $0.04 per unit increase in variable costs

3. A 10% increase in fixed costs and a 10% increase in units sold

4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per units, and a 40% increase in units sold.

Compute the new breakeven point in units for each of the following changes:

5. A 10% increase in fixed costs

6. A 10% increase in selling price and a $20,000 increase in fixed costs

6. Athletic scholarships, CVP analysis. Midwest University has an annual budget of $5,000,000 for athletic scholarships. Each athletic scholarship is for $20,000 per year. Fixed operating costs of the athletic scholarship program are $600,000, and variable operating costs are $2,000 per scholarship offered.

a. Determine the number of athletic scholarships Midwest University can offer each year.

b. Suppose the total budget for next year is reduced by 22%. Fixed costs are to remain the same. Calculate the number of athletic scholarships that Midwest can offer next year.

c. As in requirement 2, assume a budget reduction of 22% and the same fixed costs. If Midwest wanted to offer the same number of athletic scholarships as it did in requirement 1, calculate the amount that will be paid to each student who receives a scholarship.

7. CVP analysis, service firm. Wildlife Escapes generates average revenue of $4,000 per person on its five-day package tours to wildlife parks in Kenya. The variable costs per person are:

|Airfare |$1,500 |

|Hotel accommodations | 1,000 |

|Meals | 300 |

|Ground transportation | 600 |

|Park tickets and other costs | 200 |

|Total |$3,600 |

Annual fixed costs total $480,000.

a. Calculate the number of package tours that must be sold to break even.

b. Calculate the revenue needed to earn a target operating income of $100,000

c. If fixed costs increase by $24,000, what decrease in variable costs must be achieved to maintain the breakeven point calculated in requirement 1?

8. CVP, target income, service firm. Teddy Bear Daycare provides daycare for children Mondays through Fridays.

Monthly variable costs per child:

|Lunch and snacks | $100 |

|Educational supplies | 75 |

|Other supplies | 25 |

|Total | $200 |

Monthly fixed costs are comprised of:

|Rent |$2,000 |

|Utilities | 300 |

|Insurance | 300 |

|Salaries | 2,500 |

|Miscellaneous | 500 |

|Total |$5,600 |

Teddy Bear charges each parent $600 per child.

a. Calculate the breakeven point.

b. Teddy Bear’s target operating income is $10,400 per months. Compute the number of children that must be enrolled to achieve the target operating income.

c. Teddy Bear lost its lease and had to move to another building. Monthly rent for the new building is $4,000. How much should Teddy Bear increase fees per child to meet the target operating income of $10,400 per month, assuming the same number of children as in Requirement b.?

9. CVP analysis. Galaxy Disk’s projected operating income for 2003 is $200,000, based on a sales volume of 200,000 units. Galaxy sells disks for $16 each. Variable costs consist of the $10 purchase price and a $2 shipping and handling cost. Galaxy’s annual fixed costs are $600,000.

a. Calculate Galaxy’s breakeven point in units

b. Calculate the company’s operating income in 2003 if there is a 10% increase in projected unit sales.

c. For 2004, management expects that the unit purchase price of the disks will increase by 30%. Calculate the sales revenue Galaxy must generate in 2004 to maintain the current year’s operating income if the selling price remains unchanged.

10. Breakeven analysis for a hospital. Mariposa Medical Institute operates a 100-bed hospital and offers a number of specialized medical services. The hospital charges $100 per patient day. Based on past cost data, Mariposa has estimated its flexible costs at $45.70 per patient day. Capacity-related costs are $91,000 per month. The hospital’s administrator has estimated that the hospital will average 2,300 patient days per month. How much will the hospital need to charge per patient day to break even at this level of activity?

11. Suppose the fixed expenses of a travel agency increase. What will happen to its break-even point, measured in number of clients served? Why?

12. Chesapeake Oyster Company has been able to decrease its variable expenses per pound of oysters harvested. How will this affect the firm’s break-even sales volume?

13. What will happen to a company’s break-even point if the sales price and unit variable cost of its only product increase by the same dollar amount?

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