Due to erratic sales of its sole

Question 1

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Sales (13,000 units × $20 per unit)

$

260,000

Variable expenses

130,000

Contribution margin

130,000

Fixed expenses

145,000

Net operating loss

$

(15,000

)

Required:

1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales.

2. The president believes that a $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income?

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by 0.60 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,300?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $50,000 each month.

a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales.

b. Assume that the company expects to sell 20,500 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.)

c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,500)?

Question 2

The Shirt Works sells a large variety of tee shirts and sweatshirts. Steve Hooper, the owner, is thinking of expanding his sales by hiring high school students, on a commission basis, to sell sweatshirts bearing the name and mascot of the local high school.

These sweatshirts would have to be ordered from the manufacturer six weeks in advance, and they could not be returned because of the unique printing required. The sweatshirts would cost Hooper $24.00 each with a minimum order of 320 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 50.

Since Hooper’s plan would not require any additional facilities, the only costs associated with the project would be the costs of the sweatshirts and the costs of the sales commissions. The selling price of the sweatshirts would be $48.00 each. Hooper would pay the students a commission of $5.00 for each shirt sold.

Required:

1. What level of unit sales and dollar sales is needed to attain a target profit of $14,250?

2. Assume that Hooper places an initial order for 320 sweatshirts. What is his break-even point in unit sales and dollar sales? (Round your intermediate calculations and final answers to the nearest whole number.)

Question 4

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:

Manufacturing:

Direct materials

$

22

Direct labor

$

14

Variable manufacturing overhead

$

5

Variable selling and administrative

$

3

Fixed costs per year:

Fixed manufacturing overhead

$

270,000

Fixed selling and administrative expenses

$

210,000

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $52 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Question 5

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

Year 1

Year 2

Sales (@ $62 per unit)

$

1,240,000

$

1,860,000

Cost of goods sold (@ $35 per unit)

700,000

1,050,000

Gross margin

540,000

810,000

Selling and administrative expenses*

315,000

345,000

Net operating income

$

\225,000\

$

465,000

* $3 per unit variable; $255,000 fixed each year.

The company’s $35 unit product cost is computed as follows:

Direct materials

$

7

Direct labor

13

Variable manufacturing overhead

3

Fixed manufacturing overhead ($300,000 ÷ 25,000 units)

12

Absorption costing unit product cost

$

35

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operations are:

Year 1

Year 2

Units produced

25,000

25,000

Units sold

20,000

30,000

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.