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1 Chapter CVP exercise Origin al Revenues Variable Costs Contribution Margin $1,4, $7,9, $2,5, $1,4, $7,625, $2,775, $1,4, $8,175, $2,225, $1,4, $7,9, $2,5, $1,4, $7,9, $2,5, $11,128, $8,453, $2,675, 6 $9,672, $7,347, $2,325, $11,544, 7 $8,769, $2,775, $1,4, 8 $7,584, $2,816, Budgeted Fixed Operating Costs Income $2,1, $4, $2,1, $675, $2,1, $125, $2,184, $316, $2,16, $484, $2,1, $575, $2,1, $225, $2,331, $444, $2,184, $632, 9. The number 2 yield the highest budgeted operating income because it has lowest variable cost while the revenue stays constant Contribution Margin per Unit (CMU) = (Selling Price Variable cost per unit) =$6 - $4 = $2 - Breakeven unit = Fix Cost / CMU = $18, / $2 = 9, unit - Breakeven revenue = breakeven unit * Selling Price = 9, * $6 = $54, We know that 8 units are sold therefore
2 $48, Revenue = 8 units * $6 $32, Total variable costs = 8*4 $16, Contribution margin $18, Fixed costs Operating income - (loss) $2, 3. If sales commissions are discontinued and fixed salaries are raised by a total of $15,5 Selling Price $6 Cost of Shoes $37 Sales commission $ Variable cost per unit $37 Salary increased by $15,5 Total Fix Cost $115,5 $195,5 Do the same procedure at question 1 we have - CMU = SP VCU = 6 37 = $23 - Breakeven Unit = FC/ CMU = $195, / $23= 8,478 units - Breakeven Revenues = Breakeven unit * Selling Price = 8,478 * $6 = $58, 4. Selling Price $6 Cost of Shoes $37 Manager commission $2 Sales commission $3 Variable cost per unit $42 $18, Total Fix Cost The same procedure we have followings CMU = $6 - $42 = $ Breakeven unit = FC / CMU = 18, / 18 = 1, units - Breakeven Revenues = 1, units * Selling Price = 1, *6 = $6,
3 Breakeven point in units = = 9, units Store manager receives commission of $2 on (12-9= 3 units). CMU beyond breakeven point of 3 units = $18 ($6 $4 $2) per unit. Operating income = 3 units * $18 CMU = $54, 3.39 When sales volume is above 1, pairs, the higher-fixed-salaries plan results in lower costs and higher operating incomes than the salary-plus-commission plan. Therefore, with an expected volume of 1, pairs, the higher-fixed-salaries-only plan should be chosen. But it is likely that sales volume itself is determined by the nature of the compensation plan. The salary-plus-commission plan provides a greater motivation to the salespeople because compensation plan often define the sale volume. Therefore, the salary-plus-commission plan should be chosen to generate a higher volume of sales than the fixed-salary plan. Let N = Target number of units CMU = $23 - For the salary-only plan, $6N $37N $195,5 (from requirement 3 question 39) = $69, Hence N = (69,+1955)/23 = 11,5 units - For the salary-plus-commission plan, $6N $37N $18, = $ 69, $23N = $249, N= $249, / 23 = 1,826 M 1,826 units The decision regarding the salary plan depends heavily on predictions of demand. For instance, the salary plan offers the same operating income at 58, units as the commission plan offers at 58,667 units. 3. Revenues 9,5 units $6) + (1,5 pairs $5) $645, Cost of shoes, 11, units $37 47, Commissions = Revenues 5% = $645,.5 32,25 Contribution margin = Revenue variable cost 25,75 Fixed costs 195,5 Operating income $ 1,
4 Total units of standard: 187,5 units Total units of deluxe: 62,5 units Hence the ratio between both type of unit is: 187,5/62,5 = 3 Therefore, CM of the mixed plan sale = 3*$1 + 1* $2 = $5 Breakeven point in sale mixed plan = $2,25,/ $5 = 45, bundles Breakeven point in sale mixed plan Standard Carrier: 45,5 bundle * 3 units per bundle = 135, units Deluxe Carrier: 45, * 1 unit per bundle = 45, units Total breakeven units: 135, + 45, = 18, units a. CMU for Standard = $28 $18 = $1; CMU for Deluxe= $5 $3 = $2 If only Standard carriers were sold, the breakeven point would be: $2,25, / $1 = 225, units. b. If only Deluxe carriers were sold, the breakeven point would be: $2,25, $2 = 112,5 units 3. 2, units of standard 5, units of deluxe So operating income = CM of standard + CM of deluxe = 2,($1) + 5,($2) $2,25, = $2,, + $1,, $2,25, = $75, The ratio between standard and deluxe unit sold = 2,/5,= 4 Do the same procedure at requirement 1 we have followings: Contribution margin of the bundle = 4 *$1 + 1 * $2 = $4 + $2 = $6 Breakeven point in bundles = $2, 25, / $6 = 37,5 bundles Breakeven point in units is: Standard carrier: 37,5 bundles 4 units per bundle 15, units Deluxe carrier: 37,5 bundles 1 units per bundle 37,5 units Total number of units to breakeven 87,5 units The major lesson of this problem is that changes in the sales mix change breakeven points and operating incomes
5 3.47 Ticket sales ($24 *525 $12,6 Variable cost of dinner ($12 *525 $6,3 Variable invitations and paperwork ($1 * 525) 525 $6,825 Contribution margin $5,775 Fixed cost of dinner $9, Fixed cost of invitations and paperwork $1,97 5 $1,975 Operating profit (loss) ($5,2) - $6,3/525 attendees = $12/attendee (variable cost of dinner for each attendee) - $525/525 attendees = $1/attendee (variable invitations and paperwork for each attendee) Ticket sales ($24*1,5 Variable cost of dinner ($12* 1,5 $12,6 Variable invitations and paperwork ($1 * 1,5) 1,5 $25,2 $13,6 5 $11,5 Contribution margin 5 $9, Fixed cost of dinner Fixed cost of invitations and paperwork $1,97 5 $1,9 75 Operating profit (loss) $575
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