CHAPTER 3 COSTVOLUMEPROFIT ANALYSIS 3-21 CVP computations. Fill in the blanks for each of the following independent cases. Variable Fixed Total Operating Contribution Contribution Revenues Costs Costs Costs Income Margin Margin % a. $ 600 $ 800 $ 1,600 b. $ 2,500 $ 200 $ 900 c. $ 500 $ 300 $ 500 d. $ 1,200 $ 200 25.00% 3-22 CVP computations. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2017. Variable cost per unit is $60, and total fixed costs are $1,640,000. Required: 1. Calculate: (a) Contribution margin and (b) Operating income. 2. Garretts current manufacturing process is labor intensive. Kate Schoenen, Garretts production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $5,330,000. The variable costs are expected to decrease to $54 per unit. Garrett expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenens proposal affect your answers to (a) and (b) in requirement 1? 3. Should Garrett accept Schoenens proposal? Explain. 3-25 CVP exercises. The Doral Company manufactures and sells pens. Currently 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit. Consider each case separately: Required: 1. a. What is the current annual operating income? b. What is the present breakeven point in revenues? Compute the new operating income for each of the following changes: 2. A $0.04 per unit increase in variable costs 3. A 10% increase in fixed costs and a 10% increase in units sold 4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per unit, and a 40% increase in units sold Compute the new breakeven point in units for each of the following: 5. A 10% increase in fixed costs 6. A 10% increase in selling price and a $20,000 increase in fixed costs 3-26 CVP analysis, income taxes. Westover Motors is a small car dealership. On average, it sells a car for $32,000, which it purchases from the manufacturer for $28,000. Each month, Westover Motors pays $53,700 in rent and utilities and $69,000 for salespeoples salaries. In addition to their salaries, salespeople are paid a commission of $400 for each car they sell. Westover Motors also spends $10,500 each month for local advertisements. Its tax rate is 40%. Required: 1. How many cars must Westover Motors sell each month to break even? 2. Westover Motors has a target monthly net income of $69,120. a) What is its target monthly operating income? b) How many cars must be sold each month to reach the target monthly net income of $69,120? i. HINT: use your TOI, add it to FC, and then divide by the CMu 3-28 CVP analysis, sensitivity analysis. Perfect Fit Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $50 with $35 in variable costs of goods sold. The company has fixed manufacturing costs of $2,250,000 and fixed marketing costs of $250,000. Sales commissions are paid to the wholesale sales reps at 10% of revenues. The company has an income tax rate of 20%. Required: 1. How many jeans must Perfect Fit sell in order to break even? 2. How many jeans must the company sell in order to reach: a) Target operating income of $420,000? b) Net income of $420,000? 3. How many jeans would Perfect Fit have to sell to earn the net income in requirement 2b if: (Consider each requirement independently.) a) The contribution margin per unit increases by 10%. b) The selling price is increased to $51.50. c) The company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 70% of fixed manufacturing costs. 3-53 Ethics, CVP analysis. Megaphone Corporation produces a molded plastic casing, M&M101, for many cell phones currently on the market. Summary data from its 2017 income statement are as follows: Joshua Kirby, Megaphones president, is very concerned about Megaphone Corporations poor profitability. He asks Leroy Gibbs, production manager, and Tony DiNunzo, controller, to see if there are ways to reduce costs. After 2 weeks, Leroy returns with a proposal to reduce variable costs to 55% of revenues by reducing the costs Megaphone currently incurs for safe disposal of wasted plastic. Tony is concerned that this would expose the company to potential environmental liabilities. He tells Leroy, We would need to estimate some of these potential environmental costs and include them in our analysis. You cant do that, Leroy replies. We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they turn out to be. The market is very tough, and we are in danger of shutting down the company and costing all of us our jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing. Required: 1. Calculate Megaphone Corporations breakeven revenues for 2017. 2. Calculate Megaphone Corporations breakeven revenues if variable costs are 55% of revenues. 3. Calculate Megaphone Corporations operating income for 2017 if variable costs had been 55% of revenues. 4. Given Leroy Gibbss comments, what should Tony DiNunzo do?