1 Stratford Company distributes a lightweight lawn chair that sells for $30 per unit. Variable expenses are 40% of sales, and fixed expenses total $313,200 annually. 10 points Required: Answer the following independent questions: 1. What is the product's CM per unit? eBook Contribution margin per unit Print References 2. Use the CM per unit to determine the break-even point in units. Break-even point in units 3. The company estimates that sales will increase by $50,000 during the coming year due to increased demand. By how much should net operating income increase? Increase in operating income 1 4. Assume that the operating results for last year were as follows: 10 points eBook Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income $ 870,000 348,000 522,000 313,200 $ 208,800 Print References a. Compute the degree of operating leverage at the current level of sales. (Round your answer to 1 decimal place.) Degree of operating leverage b. The president expects sales to increase by 30% next year. By how much should net operating income increase? Increase in operating income 1 10 points 5-a. Refer to the original data. Assume that the company sold 31,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $80,000 increase in advertising expenditures, would increase annual unit sales by 40%. Prepare two contribution format income statements: one showing the results of last year's operations, and one showing what the results of operations would be if these changes were made. (Do not round intermediate calculations. Round "Per Unit" answers to 2 decimal places.) eBook Print References References Last Year Proposed Total Per Unit Total Per Unit Sales 2 Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below: 10 points eBook Sales (15,500 units) Less: Variable expenses Contribution margin Less: Fixed expenses Net operating loss $ 310,000 232,500 77,500 88,500 $ (11,000) Print References Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. (Do not round intermediate calculations. Round your "Break-even point in units" answer up to nearest whole number.) % Contribution margin ratio Break-even point in units Break-even point in dollars 2 2. The sales manager feels that an $15,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $105,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.) 10 points eBook Print References 3. Refer to the original data. The president is convinced that a 6% reduction in the selling price, combined with an increase of $25,000 in the monthly advertising budget, will double unit sales. Should the company make these changes? Yes No 2 4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.5 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $5,200? (Do not round intermediate calculations. Round your answer up to nearest whole number.) 10 points Unit sales to attain target profit units eBook Print References 5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $66,500 per month. a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round your "Contribution margin ratio" answer to 2 decimal places. Round your "Break-even point" answers up to nearest whole number.) % Contribution margin ratio Break-even point in units Break-even point in dollars 2 10 points b. Assume that the company expects to sell 20,000 units next month. Prepare two contribution format income statements: one assuming that operations are not automated, and one assuming that they are. (Do not round intermediate calculations. Round "Per Unit" and "Percentage" to 2 decimal places.) eBook Comparative Income Statements Not Automated Percentage Per Unit Total Automated Print Percentage Total Per Unit References (%) (%) Sales 2 (70) (10) Sales 10 points eBook Print References c. This part of the question is not part of your Connect assignment. d. What is the point of indifference between the two options? (Do not round intermediate calculations. Round your answer up to nearest whole number.) The point of indifference between the two options units 3 Klyne Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 27% of sales. The income statement for the year ending December 31, 2020, is as follows: 10 points $ 30,500,000 eBook KLYNE CORPORATION Income Statement For the Year Ending December 31, 2020 Sales Cost of goods sold Variable $16,470,000 Fixed 2,628,000 Gross margin Selling and marketing expenses Commissions 8,235,000 Fixed costs 2,770,000 Operating income Print 19,098,000 11,402,000 References References 11,005,000 397,000 $ Klyne is considering hiring its own sales staff to replace the network of agents. Klyne will pay its salespeople a commission of 15% and incur fixed costs of $2,089,000. Required: 1. Calculate Klyne Corporation's break-even point in sales dollars for the year 2020. (Round your answer to 2 decimal places.) Break-even point 3 2. Calculate Klyne Corporation's break-even point in sales dollars for the year 2020 if the company had hired its own sales force to replace the network of agents. (Round your answer to 2 decimal places.) 10 points Break-even point Skipped eBook Print 3. Calculate the degree of operating leverage at sales of $30,500,000, considering (a) Klyne uses sales agents and (b) Klyne employs its own staff. Describe the advantages and disadvantages of each alternative. (Round your answers to 2 decimal places.) References Degree of Operating Leverage Using sales agent Employing own sales staff 4. If Klyne increases the commission paid to its sales staff to 12%, keeping all other costs the same, how much revenue (in dollars) would Klyne have to generate to earn the same operating income it did in 2020? (Round your answer to 2 decimal places.) Revenue (in dollars) 4 The Central Valley Company is a manufacturing firm that produces and sells a single product. The company's revenues and expenses for the last four months are given below. 10 points Skipped Central Valley Company Comparative Income Statement March April 6,400 5,900 $ 768,000 $ 708,000 408,100 382,320 $ 359,900 $ 325, 680 May 7,350 $ 882,000 458,640 $ 423,360 June 8,800 $1,056,000 538,560 $ 517,440 eBook Sales in units Sales revenue Less: Cost of goods sold Gross margin Less: Operating expenses Shipping expense Advertising expense Salaries and commissions Insurance expense Amortization expense Total operating expenses Net income Print References $ 64,300 $ 53,200 $ 67,800 91,000 91,000 91,000 165,000 136,000 168,500 16,000 16,000 16,000 49,000 49,000 49,000 $ 385, 300 $ 345,200 $ 392,300 $ (25,400) $ (19,520) $ 31,060 $ 64,000 91,000 166,500 16,000 49,000 $ 386,500 $ 130,940 Required: 1. Management is concerned about the losses experienced during the spring and would like to know more about the cost behaviour. Develop a cost equation for each of the costs. (Do not round intermediate calculations. Round "Per Unit" answers to 2 decimal places.) per unit Cost of goods sold Shipping Salaries & commission per unit per unit 4 2. Assume that fixed costs are incurred uniformly throughout the year. Compute the annual break-even sales, and the profit if 82,000 units are sold during the year. (Round "Break-even sales" answer to nearest whole number.) 10 points Skipped units Break-even sales Annual profit (82,000 units) eBook Print References 3. Calculate the change in profit if the selling price were reduced by $11.50 each and annual sales were to increase by 7,800 units. 4 10 points Skipped eBook Print 4. Determine the change in profit if the company were to increase advertising by $114,000 and if this were to increase sales by 7,800 units. References