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Chapter 20: Q20-22RQ (page 1120)
What is cost stickiness? Why do managers need to be aware of cost stickiness?
Answer
Variable cost and contribution margin have an inverse connection.
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What are the CVP assumptions?
What is cost-volume-profit analysis?
Calculating breakeven sales and sales to earn a target profit;preparing a contribution margin income statement
Famous Productions performs London shows. The average show sells 1,000 ticketsat \(60 per ticket. There are 175 shows a year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of60, each earning a net average of \)320 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)459,200.
Requirements
1. Compute revenue and variable costs for each show.
2. Use the equation approach to compute the number of shows Famous Productionsmust perform each year to break even.
3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $4,264,000. Is this profit goal realistic? Giveyour reasoning.
4. Prepare Famous Productions’s contribution margin income statement for 175shows performed in 2018. Report only two categories of costs: variable andfixed.
Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay \(10.00 for a large bowl ofnoodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at \(9,000.
Requirements
1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.
2. Mu believes most locations could generate \)61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.
Question: This problem continues the Piedmont Computer Company situation from Chapter 19. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is \(750 and the weighed-average variable cost per unit is \)450. The company does not expect the sales mix to vary for the next year. Average fixed costs per month are \(156,000.
Requirements
1. What is the number of units that must be sold each month to reach the breakeven point?
2. If the company currently sells 945 units per month, what is the margin of safety in units and dollars?
3. If Piedmont Computer Company desires to make a profit of \)15,000 per month, how many units must be sold?
4. Piedmont Computer Company thinks it can restructure some costs so that fixed costs will be reduced to \(90,000 per month, but the weighted-average variable cost per unit will increase to \)525 per unit. What is the new breakeven point in units? Does this increase or decrease the margin of safety? Why or why not?
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