Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

home / study / business / accounting / questions and answers / case 9-6: profit planningchoice of cost structure ... Question: Case 9-6: Profit PlanningChoice

home / study / business / accounting / questions and answers / case 9-6: profit planningchoice of cost structure ... Question: Case 9-6: Profit PlanningChoice of Cost Structu... Case 9-6: Profit PlanningChoice of Cost Structure The owner of a package delivery business is currently evaluating the choice between two different cost structures, based on how the delivery personnel are paid. One option (hereafter, Alternative #1) has relatively higher short-term fixed costs, while the other option (hereafter, Alternative #2) has the reversethat is, relatively higher variable costs in its cost structure. (For simplicity in this example we hold the delivery cost per package, that is, the selling price per unit is constant. Selling price is independent of the cost-structure choice.) The following table contains pertinent information for creating the CVP model for each decision alternative: Decision Inputs (Data) Cost Structure Alternative #1 Cost Structure Alternative #2 Delivery price (i.e., revenue) per package $60 $60 Variable cost per package delivered $48 $30 Contribution margin per unit $12 $30 Fixed costs (per year) $600,000 $3,000,000

the CVP model for each decision alternative:

Decision Inputs (Data)

Cost Structure Alternative #1

Cost Structure Alternative #2

Delivery price (i.e., revenue) per package

$60

$60

Variable cost per package delivered

$48

$30

Contribution margin per unit

$12

$30

Fixed costs (per year)

$600,000

$3,000,000

5. How many deliveries (per month or per year) would have to be made under Alternative #1 to generate a pre-tax profit, B, equal to 15% of sales revenue? 6. How many deliveries would have to be made under Alternative #2 to generate an after-tax profit, A, of $100,0000 per year, assuming a tax rate of, say, 45%? 7. Assume that for the coming year total fixed costs are expected to increase by 10% for each of the two alternatives. What is the new break-even point, in terms of number of deliveries, for each decision alternative? By what percentage did the break-even point change for each case? How do these figures compare to the percentage increase in budgeted fixed costs? 8. Assume an average income-tax rate of 40%. What volume (number of deliveries) would be needed to generate an after-tax profit, A, of 5% of sales for each alternative?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Financial Accounting

Authors: Carl S. Warren, James M. Reeve, Jonathan E. Duchac

12th edition

1305041399, 1285078586, 978-1-133-9524, 9781133952428, 978-1305041394, 9781285078588, 1-133-95241-0, 978-1133952411

More Books

Students also viewed these Accounting questions

Question

Why does sin 2x + cos2x =1 ?

Answered: 1 week ago

Question

What are DNA and RNA and what is the difference between them?

Answered: 1 week ago

Question

Why do living creatures die? Can it be proved that they are reborn?

Answered: 1 week ago