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Chapter 20: Q5TI (page 1111)

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. Expected sales are 200 tables per month.

17. Calculate the margin of safety in units.

18. Determine the degree of operating leverage. Use expected sales.

19. The company begins manufacturing wood chairs to match the tables. Chairs sell for \)50 each and have variable costs of \(30. The new production process increases fixed costs to \)7,000 per month. The expected sales mix is one table for every four chairs. Calculate the breakeven point in units for each product.

Short Answer

Expert verified

17. Margin of safety in units = 100 Units

18. Degree of operating leverage = 0.01

19. Breakeven point of tables is 100 units and chairs is 350 units

Step by step solution

01

Calculation of margin of safety in units

Break-even Points = Total Fixed Cost/ Contribution Per Unit

=$6,000/$100-$40

=$6,000/$60

=100

Expected sales − Breakeven sales = Margin of safety in units

=200– 100

= 100 Units

02

Calculation of degree of operating leverage

Degree of operating leverage = Contribution margin/Operating income

=($100-$40)/$6,000

=$60/$6,000

=0.01

03

Calculation of breakeven point in units

Required sales in units (table) = Fixed costs / Contribution margin per unit

=$6,000/($100-$40)

= 100Units

Required sales in units (Chair) = Fixed costs / Contribution margin per unit

=$7,000/($50-$30)

= 350 Units

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Most popular questions from this chapter

What are the CVP assumptions?

What is a company’s cost structure? How can cost structure affect a company’s profits?

The budgets of four companies yield the following information:

Company

Blue Red Green Yellow

Net Sales Revenue \( 1,900,000 \) (d) \( 1,500,000 \) (j) Variable Costs (a) 47,250 1,050,000 256,200 Fixed Costs (b) 168,000 159,000 (k) Operating Income (Loss) 298,500 (e) (g) 97,800

Units Sold 190,000 9,000 (h) (l) Contribution Margin per Unit \( 3.00 \) (f) \( 75.00 \) 18.00

Contribution Margin Ratio (c) 80% (i) 30%

Requirements

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)

2. Which company has the lowest breakeven point in sales dollars?

3. What causes the low breakeven point?

Analyzing a cost-volume-profit graph

Nolan Rouse is considering starting a Web-based educational business, e-Prep MBA. He plans to offer a short-course review of accounting for students entering MBA programs. The materials would be available on a password-protected Web site; students would complete the course through self-study. Rouse would have to grade the course assignments, but most of the work would be in developing the course materials, setting up the site, and marketing. Unfortunately, Rouse’s hard drive crashed before he finished his financial analysis. However, he did recover the following partial CVP chart:

Requirements

1. Label each axis, the sales revenue line, the total costs line, the fixed costs line, the operating income area, and the breakeven point.

2. If Rouse attracts 300 students to take the course, will the venture be profitable? Explain your answer.

3. What are the breakeven sales in students and dollars?

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.

S20-16 Calculating breakeven point for two products

Using the Wild Waters Swim Park information presented, do the following tasks.

Requirements

1. Compute the 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.
See all solutions

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