Leeture$/$Tutorial Questions

Question $1$

Gordon's Steel Parts produces parts for the automobile industry. The company has monthly fixed

costs of $$640,000$ and a contribution margin of $80\%$ of revenues.

Requirements:

i$)$ Compute Gordon's monthly breakeven sales in dollars. Use the contribution margin ratio

approach.

ii$)$ Use the contribution margin income statements to compute Gordon's monthly operating

income or operating loss if revenues are $$500,000$ and if they are $$1,000,000.$

iii$)$ Do the results in requirement $($ii$)$ make sense given the breakeven sales computed in

requirement $($i$)?$ Explain.

Question $2$

Baker Company sells one product. Management estimates that the company will sell $6,0$oo units of

the product each year. The relevant information about the product line of Baker Company for the year

ended December $31,2014$ appears below:

There was no inventory in stock at the beginning or end of the year.

Required:

i$)$ What was the selling price per unit?

ii$)$ Prepare a contribution margin statement for Baker Company.

iii$)$ What is the contribution to sales ratio?

iv$)$ Use the contribution margin approach to compute Baker Company's breakeven point in

dollars.

v$)$ Given the expected sales of $6,0$oo units, graph Baker Company's CVP relationships, clearly

showing the breakeven point in units and in sales dollars; the margin of safety in units and

dollars; operating profit area and operating loss area. $[$use a scale of $2cm$ to represent

$1,000$ units on the $x-$axis and $2cm$ to represent $$100,000$ on the $y-$axis$].$

vi$)$ Baker Company's profit objective for the month is to earn a target operating income of

$$90,000.$ Use the income statement equation approach to compute the number of units

that must be sold to achieve this goal?

vii$)$ If Baker Company's fixed expenses could be decreased by $$18,000,$ what would be the new

break$-$even sales in units and dollar sales?

viii$)$ Assume that direct material costs per unit decreased by $$5,$ but expected unit sales of

$6,000$ units would decrease by $10\%$ despite an increase in total fixed costs of $$85,800.$

What must Baker's new selling price per unit be in order to meet the target operating

income of $$90,000?$