E4 - Com Airways, Inc., a small two-plane passenger airline, has asked for your assis-tance in some basic analysis of its operations. Both planes seat 10 passengers each, and they y commuters from Coms base airport to the major city in the state, Metropolis. Each month, 40 round-trip ights are made. Shown below is a recent months activity in the form of a cost-volume-prot income statement.

Fare revenues (400 passenger ights) $48,000 Variable costs Fuel $14,000 Snacks and drinks 800 Landing fees 2,000 Supplies and forms 1,200 18,000 Contribution margin 30,000 Fixed costs Depreciation 3,000 Salaries 15,000 Advertising 500 Airport hangar fees 1,750 20,250 Net income $ 9,750

(a) Calculate the break-even point in (1) dollars and (2) number of passenger ights. (b) Without calculations, determine the contribution margin at the break-even point. (c) If ticket prices were decreased by 10%, passenger ights would increase by 25%. However, total variable costs would increase by the same percentage as passenger ights. Should the ticket price decrease be adopted?

E5 - Carey Company had sales in 2016 of $1,560,000 on 60,000 units. Variable costs totaled $900,000, and xed costs totaled $500,000. A new raw material is available that will decrease the variable costs per unit by 20% (or $3). However, to process the new raw material, xed operating costs will increase by $100,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the num-ber of units sold.

Prepare a projected CVP income statement for 2017 (a) assuming the changes have not been made, and (b) assuming that changes are made as described.

E15 - Casas Modernas of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Rafael Jiminez, Casas owner, is considering replacing the draftsmen with a computerized draft-ing system. However, before making the change, Rafael would like to know the conse-quences of the change, since the volume of business varies signicantly from year to year. Shown below are CVP income statements for each alternative.

Manual Computerized System System

Sales $1,500,000 $1,500,000 Variable costs 1,200,000 600,000 Contribution margin 300,000 900,000 Fixed costs 100,000 700,000 Net income $ 200,000 $ 200,000

(a) Determine the degree of operating leverage for each alternative. (b) Which alternative would produce the higher net income if sales increased by $150,000? (c) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.