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Chapter 20: Q20-15RQ (page 1119)
What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.
Answer
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Scotty’s Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty’s purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty’s expects to sell one standard scooter for every three chrome scooters. Scotty’s monthly fixed costs are \(23,000.
Requirements
1. How many of each type of scooter must Scotty’s Scooters sell each month to break even?
2. How many of each type of scooter must Scotty’s Scooters sell each month to earn \)25,300?
3. Suppose Scotty’s expectation to sell one standard scooter for every three chrome scooters was incorrect and for every four scooters sold two are standard scooters and two are chrome scooters. Will the breakeven point of total scooters increase or decrease? Why? (Calculation not required.)
The Jacksonville Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design.
The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing.
The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer’s request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job.
For March 2018, the Jacksonville Shirt Company compiled the following data for the Cutting and Sewing Departments:
Department Item Amount Units
Cutting Beginning balance \( 0 0 shirts
Started in March 1,200 shirts
Direct materials added in March 1,920
Conversion costs 1,320
Completed and transferred to Sewing ??? 1,200 shirts
Ending balance 0 0 shirts
Sewing Beginning balance, transferred in, \)1,350;
conversion costs, \(650 \) 2,000 500 shirts
Transferred in from Cutting ??? ???
Conversion costs added in March 1,196
Completed and transferred to Finished Goods ??? 1,000 shirts
Ending balance, 60% complete ??? ???
For the same time period, the Jacksonville Shirt Company compiled the following data for the Custom Design Department:
Job Quantity Design Fee Printing Status
367 400 Yes 3 colors Complete
368 150 No 2 colors Complete
369 100 Yes 5 colors Complete
370 500 Yes 4 colors Complete
The Jacksonville Shirt Company has previously determined that creating and programming the design cost \(80 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is \)0.20 per color per shirt.
Requirements
1. Complete a production cost report for the Cutting Department and the Sewing Department. What is the cost of one basic shirt?
2. Determine the total cost and the average cost per shirt for jobs 367, 368, 369, and 370. If the company set the sales price at 200% of the total cost, determine the total sales price of each job.
3. In addition to the custom jobs, the Jacksonville Shirt Company sold 1,000 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 125% of the cost, determine the sales price per unit, total sales revenue, total cost of goods sold, and total gross profit for the basic shirts.
4. Calculate the total revenue, total cost of goods sold, and total gross profit for all sales, basic and custom.
5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of \(700 per month.
a. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even.
b. Determine the margin of safety in units and dollars.
c. Graph Jacksonville Shirt Company’s CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area.
d. Suppose the Jacksonville Shirt Company wants to earn an operating income of \)1,000 per month. Compute the required sales in units and dollars to achieve this profit goal.
6. The Jacksonville Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is \(2.25 and the company desires a net profit of 60%, what is the target cost? The company estimates the full product cost of the cloth bags will be \)0.80. Should the company manufacture the cloth bags? Why or why not?
What is cost stickiness? Why do managers need to be aware of cost stickiness?
A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario.
14. Variable costs increase by \)10 per unit.
15. Fixed costs decrease by $600.
16. Sales price increases by 10%.
Use the following information to complete Short Exercises S20-16 and S20-17.
Wild Waters Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. Wild Waters has the following ticket prices and variable costs for 2018:
Individual Family Sales price per ticket \( 50 \) 150 Variable cost per ticket 35 140
Wild Waters expects to sell one individual ticket for every four family tickets. Wild Waters’s total fixed costs are $27,500.
S20-17 Calculating breakeven point for two products
For 2019, Wild Waters expects a sales mix of four individual tickets for every one family ticket.
Requirements
1. Compute the new weighted-average contribution margin per ticket.
2. Calculate the total number of tickets Wild Waters must sell to break even.
3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.
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