Contribution Margin

Willie Company sells 30,000 units at $49 per unit. Variable costs are $30.38 per unit, and fixed costs are $301,600.

Determine (a) the contribution margin ratio, (b) the unit contribution margin, and (c) income from operations.

a. Contribution margin ratio (Enter as a whole number.) $__________		%
b. Unit contribution margin (Round to the nearest cent.) $__________		per unit
c. Income from operations $___________

Break-Even Point

Nicolas Enterprises sells a product for $78 per unit. The variable cost is $37 per unit, while fixed costs are $618,608.

Determine (a) the break-even point in sales units and (b) the break-even point if the selling price were increased to $83 per unit.

a. Break-even point in sales units
b. Break-even point if the selling price were increased to $83 per unit

Classify Costs

Following is a list of various costs incurred in producing replacement automobile parts. With respect to the production and sale of these auto parts, classify each cost as either variable costs, fixed costs, or mixed costs.

1. Oil used in manufacturing equipment
2. Plastic
3. Property taxes, $165,000 per year on factory building and equipment
4. Salary of plant manager
5. Cost of labor for hourly workers
6. Packaging
7. Factory cleaning costs, $6,000 per month
8. Metal
9. Rent on warehouse, $10,000 per month plus $25 per square foot of storage used
10. Property insurance premiums, $3,600 per month plus $0.01 for each dollar of property over $1,200,000
11. Straight-line depreciation on the production equipment
12. Hourly wages of machine operators
13. Electricity costs, $0.20 per kilowatt-hour
14. Computer chip (purchased from a vendor)
15. Pension cost, $1.00 per employee hour on the job

Determine the amount of sales (units) that would be necessary under

Break-Even Sales Under Present and Proposed Conditions

Darby Company, operating at full capacity, sold 110,700 units at a price of $105 per unit during the current year. Its income statement for the current year is as follows:

Sales			$11,623,500
Cost of goods sold			5,740,000
Gross profit			$5,883,500
Expenses:
Selling expenses	$2,870,000
Administrative expenses	2,870,000
Total expenses			5,740,000
Income from operations			$143,500

The division of costs between fixed and variable is as follows:

	Variable		Fixed
Cost of goods sold	70%		30%
Selling expenses	75%		25%
Administrative expenses	50%		50%

Management is considering a plant expansion program that will permit an increase of $1,050,000 in yearly sales. The expansion will increase fixed costs by $105,000, but will not affect the relationship between sales and variable costs.

Required:

1. Determine the total variable costs and the total fixed costs for the current year. Enter the final answers rounded to the nearest dollar.

Total variable costs	$
Total fixed costs	$

2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year. Enter the final answers rounded to two decimal places.

Unit variable cost	$
Unit contribution margin	$

3. Compute the break-even sales (units) for the current year. Enter the final answers rounded to the nearest whole number. units

4. Compute the break-even sales (units) under the proposed program for the following year. Enter the final answers rounded to the nearest whole number. units

5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $143,500 of income from operations that was earned in the current year. Enter the final answers rounded to the nearest whole number. units

6. Determine the maximum income from operations possible with the expanded plant. Enter the final answer rounded to the nearest dollar. $

7. If the proposal is accepted and sales remain at the current level, what will the income or loss from operations be for the following year? Enter the final answer rounded to the nearest dollar. $

8. Based on the data given, would you recommend accepting the proposal?

a. In favor of the proposal because of the reduction in break-even point.

b. In favor of the proposal because of the possibility of increasing income from operations.

c. In favor of the proposal because of the increase in break-even point.

d. Reject the proposal because if future sales remain at the current level, the income from operations will increase.

e. Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.

Choose the correct answer.