LO 3.1A company sells small motors as a component part to automobiles. The Model 101 motor sells for $850 and has per-unit variable costs of $400 associated with its production. The company has fixed expenses of $90,000 per month. In August, the company sold 425 of the Model 101 motors.
- Calculate the contribution margin per unit for the Model 101.
- Calculate the contribution margin ratio of the Model 101.
- Prepare a contribution margin income statement for the month of August.
LO 3.1A company manufactures and sells racing bicycles to specialty retailers. The Bomber model sells for $450 and has per-unit variable costs of $200 associated with its production. The company has fixed expenses of $40,000 per month. In May, the company sold 225 of the Bomber model bikes.
- Calculate the contribution margin per unit for the Bomber.
- Calculate the contribution margin ratio of the Bomber.
- Prepare a contribution margin income statement for the month of May.
LO 3.2Fill in the missing amounts for the four companies. Each case is independent of the others. Assume that only one product is being sold by each company.
LO 3.2Markham Farms reports the following contribution margin income statement for the month of August. The company has the opportunity to purchase new machinery that will reduce its variable cost per unit by $2 but will increase fixed costs by 15%. Prepare a projected contribution margin income statement for Markham Farms assuming it purchases the new equipment. Assume sales level remains unchanged.
LO 3.3Kylie’s Cookies is considering the purchase of a larger oven that will cost $2,200 and will increase her fixed costs by $59. What would happen if she purchased the new oven to realize the variable cost savings of $0.10 per cookie, and what would happen if she raised her price by just $0.20? She feels confident that such a small price increase will decrease the sales by only 25 units and may help her offset the increase in fixed costs. Given the following current prices how would the break-even in units and dollars change if she doesn’t increase the selling price and if she does increase the selling price? Complete the monthly contribution margin income statement for each of these cases.
LO 3.4Morris Industries manufactures and sells three products (AA, BB, and CC). The sales price and unit variable cost for the three products are as follows:
Their sales mix is reflected as a ratio of 5:3:2. Annual fixed costs shared by the three products are $258,000 per year.
- What are total variable costs for Morris with their current product mix?
- Calculate the number of units of each product that will need to be sold in order for Morris to break even.
- What is their break-even point in sales dollars?
- Using an income statement format, prove that this is the break-even point.
LO 3.4Manatoah Manufacturing produces 3 models of window air conditioners: model 101, model 201, and model 301. The sales price and variable costs for these three models are as follows:
The current product mix is 4:3:2. The three models share total fixed costs of $430,000.
- Calculate the sales price per composite unit.
- What is the contribution margin per composite unit?
- Calculate Manatoah’s break-even point in both dollars and units.
- Using an income statement format, prove that this is the break-even point.
LO 3.5Jakarta Company is a service firm with current service revenue of $400,000 and a 40% contribution margin. Its fixed costs are $80,000. Maldives Company has current sales of $6,610,000 and a 45% contribution margin. Its fixed costs are $1,800,000.
- What is the margin of safety for Jakarta and Maldives?
- Compare the margin of safety in dollars between the two companies. Which is stronger?
- Compare the margin of safety in percentage between the two companies. Now, which one is stronger?
- Compute the degree of operating leverage for both companies. Which company will benefit most from a 15% increase in sales? Explain why. Illustrate your findings in an Income Statement that is increased by 15%.