Chapter 3

1. Sanchez & Ryan, Inc, sells a single product. This year, 20,000 units were sold resulting in $130,000 of sales revenue, $60,000 of variable costs, and $17,500 of fixed costs.

The contribution margin per unit is:

($130,000 / 20,000 units) - ($60,000 / 20,000 units) = $6.5 - $3 = $3.50

The break-even point in units for a year is:

$17,500/ $3.50 = 5,000 units

The number of units that must be sold annually to achieve $52,500 of profits is:

($17,500 + $52,500)/ $3.50 = 20,000 units

If sales increase by $19,500 in a year, profits will increase by:

$19,500/ $6.50 = 3,000 units X $3.50 = $10,500

Chapter 4

2. Fair Engineering Company manufactures part QE767 used in several of its engine models. Monthly production costs for 10,000 units are as follows:

Direct materials	$ 80,000
Direct labor	20,000
Variable support costs	50,000
Fixed support costs	40,000
Total costs	$190,000

It is estimated that 20% of the fixed support costs assigned to part QE767 will no longer be incurred if the company purchases the part from the outside supplier. Fair Engineering Company has the option of purchasing the part from an outside supplier at $16 per unit.

If Fair Engineering Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:

$80,000 + $20,000 + $50,000 + ($40,000 20%) = $158,000

If Fair Engineering Company purchases 10,000 QE767 parts from the outside supplier per month, then its monthly operating income will:

Avoidable costs $158,000 - ($16 10,000 units) = decrease of $2,000

The maximum price that Fair Engineering Company should be willing to pay the outside supplier for each unit of part QE767 is:

Avoidable costs $158,000 / 10,000 units = $15.80 per part

Chapter 4

Limited Resources

6. Doral Production Company has 200 labor-hours available. There is no limit on machine-hours. Doral can sell all of Y it wants, but it can only sell 30 units and 15 units of X and Z, respectively.

	Product X	Product Y	Product Z
Contribution margin per unit	$30	$20	$24
Labor-hours per unit	4	5	4
Machine-hours per unit	10	8	2

To maximize profits, how many units of each product should Doral produce?

Answer:

	Product X	Product Y	Product Z
Contribution margin per unit	$30	$20	$24
Labor-hours per unit	4	5	4
Contribution margin per hour	$7.50	$4.00	$6.00

Doral should use the limited labor hours first to produce Product X, then Z, then Y. With 200 available hours, Doral should produce:

CM/hr CM_

Product X 30 units x 4 hours 120 hours X $7.50 $ 900

Product Z 15 units x 4 hours 60 X 6.00 360

Product Y 4 units x 5 hours 20 X 4.00 80

Totals 200 hours $1,340