PROBLEM 8-5 Various CVP Questions: Break-Even Point; Cost Structure; Target Sales [LO1 - CC2, 3; LO2 - CC5, 6, 7] Tyrene Products manufactures recreational equipment. The operating results for the most recent year for one of its products, a skateboard, are presented below. CHECK FIGURES (2) Break-even: 40,000 skateboards (6) 43,000 skateboards Sales Variable expenses Contribution margin Fixed expenses Net operating income $1,500,000 900,000 600,000 480,000 $ 120,000 Management is anxious to maintain and perhaps even improve its present level of income from the skateboards. Required: 1. The company's break-even point for the most recent year was 32,000 units. Compute the (a) CM per skateboard, (b) selling price and variable expenses per skateboard, (c) number of skateboards sold in the most recent year, and (d) degree of operating leverage at the level of sales that you computed in Requirement (1c). 2. Due to an increase in labour rates, the company estimates that variable expenses will increase by $3 per skateboard next year. If this change takes place and the selling price per skateboard remains constant, what will be the new CM ratio and the new break-even point in skateboards? 3. Refer to the data in Requirement (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as in the most recent year? 4. Refer again to the data in Requirement (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labour costs? 5. Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would result in the contribution margin per unit increasing by 60%, but it would cause fixed costs to increase by 90%. If the new plant is built, what would be the company's new CM ratio and new break-even point in skateboards? 6. Refer to the data in Requirement (5) above. a. If the new plant is built, how many skateboards will have to be sold next year to earn the same net operating income, $120,000, as last year? b. Assume that the new plant is constructed and that next year the company manufactures and sells the same number of skateboards as sold in the most recent year. Prepare a contribution format income statement, and compute the degree of operating leverage. c. If you were a member of top management, would you have been in favour of constructing the new plant? Explain
