Q1) The following income statements reveal different cost structures for two competing companies.

Income Statements
	Company Name
	Blue	Green
Number of Customers (a)	400	400
Sales Revenue (a X $ 1,000)	400,000	400,000
Variable Cost (a X 800)	-	(160,000)
Contribution Margin	200,000	40,000
Fixed Costs	(160,000)	-
Net Income	40,000	40,000

Required: (15 points)

a) Recalculate Blues income statement, assuming that it serves 400 customers when it lures 200 customers away from Green by lowering the sales price to $ 800 per unit.

b) Recalculate Greens income statement, assuming that it serves 400 customers when it lures 200 customers away from Blue by lowering the sales price to $ 800 per unit.

c) Explain why the price-cutting strategy increased Blue companys profits but caused break-even point for Green Company.

d) If Blue lowers the price to $ 800, how many customers Blue must lure away from Green to maintain $40,000 profit.

e) If Green lowers the price to $ 800, how many customers Green must lure away from Green to maintain $40,000 profit.

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Q2) The income statement for Sweet Dreams Company is divided by its two product lines, blankets and pillows, as follows:

	Blankets	Pillows	Total
Sales revenue	$620,000	$300,000	$920,000
Variable expenses	465,000	240,000	705,000
Contribution margin	155,000	60,000	215,000
Fixed expenses	76,000	76,000	152,000
Operating income (loss)	$79,000	$(16,000)	$63,000

Required: (12 points)

a) If Sweet Dreams can eliminate fixed costs of $50,000 by dropping the pillow line, should it be dropped? Explain

b) If Sweet Dreams can eliminate fixed costs of $50,000 and increase the sale of blankets by 3,000 units at a selling price of $20 per unit and a contribution margin of $5 per unit, should it be dropped? Explain

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Q3). Lovell Companys digital watch line has not reported a profit for several years; should it be dropped? (10 points)

Segment Income Statement Digital Watches

Sales $ 440,000

(-) Variable Expenses

Variable manufacturing costs 120,000

Variable shipping costs 25,000

Commissions 75,000 (220,000)

Contribution Margin 220,000

(-) Fixed Expenses

General factory overhead 60,000

Salary of line manager 90,000

Depreciation of equipment 50,000

Advertising direct 100,000

Depreciation factory space 70,000

Gen. administrative expenses 30,000 (400,000)

Net loss (180,000)

Investigation has revealed that the following would not be affected if the digital watch line is dropped:

-Fixed general factory overhead

-General administrative expenses.

-Depreciation factory space

They would be reallocated to other product lines if the digital watch line is dropped:

Current disposal value of the equipment used to manufacture digital watches is $ 40,000.

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Q4) Flos Florist was started when it acquired $25,000 cash from its owners. During its first year of operations, the company paid $12,500 for flowers and $3,400 for vases and other materials used in making flower arrangements. Flo paid her production employees $5,000 and paid various overhead costs totaling $3,100. General, selling, and administrative expenses amounted to $1,500. What was Flos average gross margin per unit assuming she produced 2,000 units, but sold only 1,800 units at an average selling price of $25.00 per unit