RODY NOGRALES is considering opening a Rody Oil Change Center. He estimates that the following costs will be incurred during his first year of operations: Rent $6,000, Depreciation on equipment $7,000, Wages $16,400, Motor oil $1.80 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Rody Corporation a franchise fee of $1.40 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows:

Number of Oil Changes Utility Costs

4,000 $ 6,000

6,000 $ 7,300

9,000 $ 9,600

12,000 $12,600

19,000 $15,000

Mr. NOGRALES anticipates that he can provide the oil change service with a filter at $20.00 each.

Instructions

(a) Using the high-low method, determine variable costs per unit and total fixed costs.

(b) Determine the break-even point in number of oil changes and sales dollars.

(c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn net income of $20,000, assuming fixed costs are $32,000 and the contribution margin per unit is $8.

Problem 2

Boy Dela Pena operates a bed and breakfast hotel in a resort area in the Risky Mountains. Depreciation on the hotel is $60,000 per year. Boy employs a maintenance person at an annual salary of $32,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $8.00 per person per night and the cost of food which is $4.00 per person per night.

Instructions

(a) Determine the number of rentals and the sales revenue Boy needs to break even using the contribution margin technique.

(b) If the current level of rentals is 3,000, by what percentage can rentals decrease before Boy has to worry about having a net loss?

(c) Boy is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3.00 for food costs per person per night. Boy feels she can increase the room rate to $65 per person per night. Determine the number of rentals and the sales revenue Boy needs to break even if the changes are made.

Problem 3.

The income statement for BENGUET Company for 2008 appears below.

BENGUET COMPANY

Income Statement

For the Year Ended December 31, 2008

Sales (40,000 units)....................................................................................... $1,000,000

Variable expenses......................................................................................... 700,000

Contribution margin....................................................................................... 300,000

Fixed expenses.............................................................................................. 330,000

Net income (loss)........................................................................................... $ (30,000)

Instructions

Answer the following independent questions and show computations using the contribution margin technique to support your answers:

1. What was the company's break-even point in sales dollars in 2008?

2. How many additional units would the company have had to sell in 2009 in order to earn net income of $30,000?

3. If the company is able to reduce variable costs by $2.50 per unit in 2009 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $35,000?

Problem 4.

MIller Company estimates that variable costs will be 60% of sales and fixed costs will total $1,920,000. The selling price of the product is $10, and 600,000 units will be sold.

Instructions

Using the mathematical equation,

(a) Compute the break-even point in units and dollars.

(b) Compute the margin of safety in dollars and as a ratio.

(c) Compute net income.