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Unit 4 Exercise Question 1: In 2016, the 4 x 4 Shop is a large retailer of pickup trucks. An income statement for the company's Seat Liner Department for the most recent quarter is presented below: The 4x4 Shop Income Statement - Seat Liner Department For the First Quarter of 2016 Sales $700,000 Less: Cost of goods sold 250,000 Gross margin 450,000 Less: Operating expenses: $195,000 145,000 340,000 $110,000 Selling expenses Administrative expenses Net income The liners sell, on average, for $350 each. The department's variable selling expenses are $35 per liner sold. The remaining selling expenses are fixed. The administrative expenses are 25% variable and 75% fixed. The company purchases its liners from a supplier at a cost of $125 per liner. Required: 1. Prepare an income statement for the quarter, using the contribution approach. Question 2: ABC Company's total overhead costs at various levels of activity are presented below: Machine Hours Total Overhead Costs March 60,000 $216,800 April 50,000 194,000 May 70,000 239,600 June 80,000 262,400 Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At the 50,000machinehour level of activity, these costs are presented below: Utilities (V) $54,000 Supervisory salaries (F) 62,000 Maintenance (M) 78,000 Total overhead costs $194,000 Legend: V=Variable, F=Fixed, M=Mixed The company wants to break down the maintenance cost into its basic variable and fixed cost elements. Required: 1. Estimate the maintenance cost for June. 2. Use the highlow method to estimate the cost formula for maintenance cost. 3. Estimate the total overhead cost at an activity level of 55,000 machine hours, using the separate estimates you obtained for its components. Question 3: The following is Arkadia Corporation's contribution format income statement for last month: Sales $1,200,000 Less: Variable expenses 800,000 Contribution margin 400,000 Less: Fixed expenses 300,000 Operating income $100,000 The company has no beginning or ending inventories and produced and sold 20,000 units during the month. Required: 1. What is the company's contribution margin ratio? 2. What is the company's breakeven in units? 3. If sales increase by 100 units, by how much should operating income increase? 4. How many units would the company have to sell to attain target operating income of $125,000? 5. What is the company's margin of safety in dollars? 6. What is the company's degree of operating leverage? 7. If the tax rate is 30%, how many units must be sold to attain an after tax profit of $84,000? Question 4: Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. (Hint: One way to find the missing amounts would be to prepare a contributionformat income statement for each case, enter the known data, and then compute the missing items.) 1. Assume that only one product is being sold in each of the following four case situations: Case Units Sold Variable Expenses Sales Contribution Margin Per Unit Fixed Expenses Operating Income (Loss) 1 9,000 $270,000 $162,000 A $90,000 B 2 C $350,000 D $15 $170,000 $40,000 3 20,000 E $280,000 $16 F $35,000 4 5,000 $160,000 G H $82,000 ($12,000) 2. Assume that more than one product is being sold in each of the following four case situations: Case Sales Variable Expenses Ave Contribution Margin % Fixed Expenses Operating Income (Loss) 1 $450,000 A 40% B $65,000 2 $200,000 $130,000 C $60,000 D 3 E F 80% $470,000 $90,000 4 $300,000 $90,000 G H ($15,000)