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• Alternative Production Procedures and Operating Leverage Assume Paper Mate is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method. The predicted manufacturing costs for each method are as follows:

	Capital Intensive	Labor Intensive
Direct materials per unit	$ 5.00	$ 8.00
Direct labor per unit	$ 5.00	$ 12.00
Variable manufacturing overhead per unit	$ 4.00	$ 2.00
Fixed manufacturing overhead per year	$ 2,440,000	$ 700,000

Paper Mate's market research department has recommended an introductory unit sales price of $40. The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold. (a) Determine the annual break-even point in units if Paper Mate uses the: 1. Capital-intensive manufacturing method. Answer in units 2. Labor-intensive manufacturing method. Answer in units (b) determine the annual unit volume at which Paper Mate is indifferent between the two manufacturing methods. Answer in units

Compute operating leverage for each alternative at a volume of 250,000 units. Round your answers two decimal places.

Capital-Intensive operating leverage

Answer

Labor-Intensive operating leverage

Answer

Contribution Income Statement and Operating Leverage Florida Berry Basket harvests early-season strawberries for shipment throughout the eastern United States in March. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the strawberries. The strawberries are sold in crates containing 100 individually packaged one-quart containers. Affixed to each one-quart container is the distinctive Florida Berry Basket logo inviting buyers to "Enjoy the berry best strawberries in the world!" The selling price is $110 per crate, variable costs are $90 per crate, and fixed costs are $272,000 per year. In the year 2008, Florida Berry Basket sold 49,000 crates. (a) Prepare a contribution income statement for the year ended December 31, 2008. HINT: Use a negative sign with both "costs" answers.

FLORIDA BERRY BASKET Income Statement For the Year Ended December 31, 2008
Sales	$Answer
Variable costs	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income	$Answer

(b) Determine the company's 2008 operating leverage. (Round your answer to two decimal places.)

Answer

(c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer to one decimal place.)

Answer % decrease

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $372,000 and reduce variable costs to $87.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answer to two decimal places.)

Answer

Cost-Volume-Profit Relations: Missing Data Following are data from 4 separate companies. Supply the missing data in each independent case

	Case A	Case B	Case C	Case D
Unit Sales	1,000	800	Answer	Answer
Sales revenue	$20,000	$Answer	$Answer	$60,000
Variable cost per unit	$10	$2	$14	$Answer
Contribution margin	$Answer	$800	$Answer	$Answer
Fixed Costs	$8,300	$Answer	$100,000	$Answer
Net income	$Answer	$600	$Answer	$Answer
Unit contribution margin	$Answer	$Answer	$Answer	$12
Break-even point (units)	Answer	Answer	4,000	2,000
Margin of safety (units)	Answer	Answer	200	1,000

Multiple-Level Break-Even Analysis Nielsen Associates provides marketing services for a number of small manufacturing firms. Nielsen receives a commission of 10 percent of sales. Operating costs are as follows:

Unit-level costs	$0.02 per sales dollar
Sales-level costs	$100 per sales order
Customer-level costs	$800 per customer per year
Facility-level costs	$60,000 per year

(a) Determine the minimum order size in sales dollars for Nielsen to break even on an order.

$Answer

(b) Assuming an average customer places four orders per year, determine the minimum annual sales required to break even on a customer. $Answer

(c) What is the average order size in (b)? $Answer

(d) Assuming Nielsen currently serves 100 customers, with each placing an average of four orders per year, determine the minimum annual sales required to break even. $Answer

(e) What is the average order size in (d)?

$Answer

(f) Explain the differences in the answers to (a), (c), and (e).

In multiple customer firms the break-even point decreases as the number of customer?s increases.

The most important costs to cover are unit level costs.

In the long-run the most important costs are facility level costs.

Even if individual orders have a positive contribution, some customers may be unprofitable.

Alternative Production Procedures and Operating Leverage Assume Paper Mate is planning to introduce a new executive pen that can be manufactured using either a capitalintensive method or a laborintensive method. The predicted manufacturing costs for each method are as follows: Capital Intensive Labor Intensive Direct materials per unit $ 5.00 $ 8.00 Direct labor per unit $ 5.00 $ 12.00 Variable manufacturing overhead per unit $ 4.00 $ 2.00 $ 2,440,000 $ 700,000 Fixed manufacturing overhead per year Paper Mate's market research department has recommended an introductory unit sales price of $40. The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold. (a) Determine the annual breakeven point in units if Paper Mate uses the: 1. Capitalintensive manufacturing method. Answer units 2. Labor-intensive manufacturing method. Answer units (b) determine the annual unit volume at which Paper Mate is indifferent between the two manufacturing methods. Answer units Compute operating leverage for each alternative at a volume of 250,000 units. Round your answers two decimal places. CapitalIntensive operating leverage Answer Labor-Intensive operating leverage Answer Contribution Income Statement and Operating Leverage Florida Berry Basket harvests earlyseason strawberries for shipment throughout the eastern United States in March. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the strawberries. The strawberries are sold in crates containing 100 individually packaged onequart containers. Affixed to each onequart container is the distinctive Florida Berry Basket logo inviting buyers to "Enjoy the berry best strawberries in the world!" The selling price is $110 per crate, variable costs are $90 per crate, and fixed costs are $272,000 per year. In the year 2008, Florida Berry Basket sold 49,000 crates. (a) Prepare a contribution income statement for the year ended December 31, 2008. HINT: Use a negative sign with both "costs" answers. FLORIDA BERRY BASKET Income Statement For the Year Ended December 31, 2008 $Answer Sales Answer Variable costs Contribution margin Answer FLORIDA BERRY BASKET Income Statement For the Year Ended December 31, 2008 Answer Fixed costs $Answer Net income (b) Determine the company's 2008 operating leverage. (Round your answer to two decimal places.) Answer (c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer to one decimal place.) Answer % decrease (d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $372,000 and reduce variable costs to $87.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answer to two decimal places.) Answer CostVolumeProfit Relations: Missing Data Following are data from 4 separate companies. Supply the missing data in each independent case Case A Unit Sales Case B 1,000 Sales revenue Unit contribution margin Break-even point (units) Margin of safety (units) $Answer $Answer 0 $Answer $600 0 $Answer $Answer 0 Answer $Answer $14 $60,000 Answer $Answer 0 $Answer $Answer 0 0 $100,000 $Answer $Answer 0 $Answer 0 0 $Answer 0 0 $12 0 0 Answer 0 0 $800 0 $8,300 Answer 0 $2 $Answer Case D Answer 0 $10 Fixed Costs Net income 800 $20,000 Variable cost per unit Contribution margin Case C 4,000 2,000 0 200 1,000 Answer 0 MultipleLevel BreakEven Analysis Nielsen Associates provides marketing services for a number of small manufacturing firms. Nielsen receives a commission of 10 percent of sales. Operating costs are as follows: Unit-level costs $0.02 per sales dollar Sales-level costs $100 per sales order Customer-level costs $800 per customer per year Facility-level costs $60,000 per year (a) Determine the minimum order size in sales dollars for Nielsen to break even on an order. $Answer 0 (b) Assuming an average customer places four orders per year, determine the minimum annual sales required to break even on a customer. $Answer 0 (c) What is the average order size in (b)? $Answer 0 (d) Assuming Nielsen currently serves 100 customers, with each placing an average of four orders per year, determine the minimum annual sales required to break even. $Answer 0 (e) What is the average order size in (d)? $Answer 0 (f) Explain the differences in the answers to (a), (c), and (e). In multiple customer firms the breakeven point decreases as the number of customer's increases. The most important costs to cover are unit level costs. In the longrun the most important costs are facility level costs. Even if individual orders have a positive contribution, some customers may be unprofitable