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Assignment 5b

Question 1
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Multiple Product Planning with Taxes
In the year 2008, Wiggins Processing Company had the following contribution income
statement:
WIGGINS PROCESSING COMPANY
Contribution Income Statement
For the Year 2008
Sales

\$1,000,000

Variable costs
Cost of goods sold

\$460,00
0

(660,000)

Contribution margin

340,000

Fixed Costs

192,000

(272,000)

Before-tax profit

68,000

Income taxes (38%)

(25,840)

Assignment 5b

WIGGINS PROCESSING COMPANY
Contribution Income Statement
For the Year 2008

After-tax profit

\$42,160

HINT: Round the contribution margin ratio to two decimal places for your calculations below.
(a) Determine the annual break-even point in sales dollars.
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(b) Determine the annual margin of safety in sales dollars.
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(c) What is the break-even point in sales dollars if management makes a decision that increases
fixed costs by \$34,000?
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(d) With the current cost structure, including fixed costs of \$272,000, what dollar sales volume is
required to provide an after-tax net income of \$160,000?
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Assignment 5b

(e) Prepare an abbreviated contribution income statement to verify that the solution to part (d)
will provide the desired after-tax income.
WIGGINS PROCESSING COMPANY
Income Statement
For the Year 2008
Sales

0

0

Variable costs (66% of sales)

Contribution margin

Fixed costs

Net income before taxes

Income taxes (38%)

Net income after taxes

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0

0

0

0

0

Assignment 5b
Question 2
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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 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

\$6.00

Direct labor per unit

\$5.00

\$13.00

\$5.00

\$2.00

\$2,580,000.00

\$780,000.00

Paper Mate’s market research department has recommended an introductory unit sales price of \$31.
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.
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units
2. Labor­intensive manufacturing method.
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units
(b) Determine the annual unit volume at which Paper Mate is indifferent between the two
manufacturing methods.
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Assignment 5b
units
(c) Management wants to know more about the effect of each alternative on operating leverage.
1. Explain operating leverage and the relationship between operating leverage and the volatility of
earnings.
They are positively correlated, with increases in operating leverage accompanied by increases
in the volatility of earnings.
They have little or no correlation because they are unrelated.
They are negatively correlated, with increases in operating leverage accompanied by decreases
in the volatility of earnings.

2. Compute operating leverage for each alternative at a volume of 260,000 units. Round your

0

0

3. Which alternative has the higher operating leverage? Why?
The capital intensive method has a higher operating leverage because of the greater use of
fixed assets.
The labor intensive method has a higher operating leverage because of higher variable
conversion costs.
The labor intensive method has a higher operating leverage because of lower variable
The capital intensive method has a higher operating leverage because of the higher variable
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Assignment 5b
Question 3
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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 &quot;Enjoy the berry best strawberries in the world!&quot; The
selling price is \$100 per crate, variable costs are \$85 per crate, and fixed costs are \$275,000 per
year. In the year 2013, Florida Berry Basket sold 50,000 crates.
(a) Prepare a contribution income statement for the year ended December 31, 2013. HINT: Use a
negative sign with both &quot;costs&quot; answers.
Income Statement
For the Year Ended December 31, 2013
Sales

Variable costs

0

0

0

Contribution margin

0

Fixed costs

Net income

0

Assignment 5b

(b) Determine the company’s 2013 operating leverage. (Round your answer to two decimal places.)
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(c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer
to one decimal place.)
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% decrease
(d) Management is considering the purchase of several berry­picking machines. This will increase
annual fixed costs to \$375,000 and reduce variable costs to \$81.50 per crate. Calculate the effect of
this acquisition on operating leverage and explain any change. (Round your answers two decimal
places.)
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The acquisition of the berry­picking machines will decrease variable costs, thereby increasing
the contribution margin. It will also increase fixed costs, thereby increasing the difference between
the contribution margin and net income. The net effect would be an increase in operating leverage.
The acquisition of the berry­picking machines will increase variable costs, thereby increasing the
contribution margin. It will also increase fixed costs, thereby decreasing the difference between the
contribution margin and net income. The net effect would be an increase in operating leverage.
The acquisition of the berry­picking machines will increase variable costs, thereby increasing the
contribution margin. It will also decrease fixed costs, thereby decreasing the difference between the
contribution margin and net income. The net effect would be a decrease in operating leverage.
The acquisition of the berry­picking machines will reduce variable costs, thereby increasing the
contribution margin. It will also reduce fixed costs, thereby increasing the difference between the
contribution margin and net income. The net effect would be a decrease in operating leverage.
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Question 4

Assignment 5b
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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

\$20,000

Variable cost per unit

Contribution margin

Unit contribution margin

Break-even point (units)

Margin of safety (units)

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Question 5
Not complete

800

\$600
0

\$60,000
0

0

0

\$60,000

0

0

0

0

\$13

0

4,000

2,000

0

100

1,000

0

0

0

\$10

0

0

0

0

\$800

0

\$8,100

0

\$2

Case D

0

\$10

Fixed Costs

Net income

Case C

Assignment 5b
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High­Low Cost Estimation and Profit Planning
Comparative 2007 and 2008 income statements for Dakota Products Inc. follow:
DAKOTA PRODUCTS INC.
Comparative Income Statements
For Years Ending December 31, 2007 and 2008
2007

2008

5,000

8,000

Sales revenue

\$60,000

\$96,000

Expenses

(64,000)

(76,000)

Profit (loss)

\$(4,000)

\$20,000

Unit sales

(a) Determine the break­even point in units.
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units
(b) Determine the unit sales volume required to earn a profit of \$5,000.
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Question 6
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Assignment 5b
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CVP Analysis and Special Decisions
Sweet Grove Citrus Company buys a variety of citrus fruit from growers and then processes the fruit
into a product line of fresh fruit, juices, and fruit flavorings. The most recent year’s sales revenue was
\$4,200,000. Variable costs were 60 percent of sales and fixed costs totaled \$1,300,000. Sweet
Grove is evaluating two alternatives designed to enhance profitability.

One staff member has proposed that Sweet Grove purchase more automated processing
equipment. This strategy would increase fixed costs by \$200,000 but decrease variable costs to
54 percent of sales.

Another staff member has suggested that Sweet Grove rely more on outsourcing for fruit
processing. This would reduce fixed costs by \$200,000 but increase variable costs to 65 percent
of sales.

(a) What is the current break­even point in sales dollars?
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(b) Assuming an income tax rate of 36 percent, what dollar sales volume is currently required to
obtain an after­tax profit of \$700,000?
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(c) In the absence of income taxes, at what sales volume will both alternatives (automation and
outsourcing) provide the same profit?
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Assignment 5b
(d) Briefly describe one strength and one weakness of both the automation and the outsourcing
alternatives.
Automation has less risk and a lower break­even point. Outsourcing has higher profits if sales
increase.
Automation has higher profits if sales increase and a lower break­even point. Outsourcing has
less risk.
Automation has less risk. Outsourcing has higher profits if sales increase and a lower break­
even point.
Automation has higher profits if sales increase. Outsourcing has less risk and a lower break­
even point.
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Question 7
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Multiple Product Break­Even Analysis
Presented is information for Stafford Company’s three products.

Assignment 5b
A
Unit selling price

B

C

\$6 \$8 \$7
(4) (5) (3)

Unit variable costs

\$2 \$3 \$4
Unit contribution margin

With monthly fixed costs of \$112,500, the company sells two units of A for each unit of B and three
units of B for each unit of C.
Determine the unit sales of product A at the monthly break­even point.
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units
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Question 8
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Cost­Volume­Profit Relations: Missing Data
Following are data from 4 separate companies. Supply the missing data in each independent case.

Assignment 5b
Case 1

Case 2

Case 3

Case 4

Sales revenue

\$120,000

0

\$80,000

0

Contribution margin

Fixed costs

0

\$60,000

\$30,000

0

0

0

0

Net income

\$5,000

Question 9
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Points out of 6.00

0

0.40

0

0

0

0.20

0

Next

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Check

0.50

0

Contribution margin ratio

Margin of safety (dollars)

0

\$10,000

0

Variable cost ratio

Break-even point (dollars)

0

\$20,000

0

\$25,000

0

\$20,000

0

Assignment 5b
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Multiple­Level Break­Even Analysis
Jensen Associates provides marketing services for a number of small manufacturing firms.
Jensen receives a commission of 10 percent of sales. Operating costs are as follows:
Unit-level costs

\$ 0.04 per sales dollar

Sales-level costs

\$ 300 per sales order

Customer-level costs \$ 900 per customer per year
Facility-level costs

\$ 60,000 per year

(a) Determine the minimum order size in sales dollars for Jensen to break even on an order.
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(b) Assuming an average customer places four orders per year, determine the minimum annual
sales required to break even on a customer.
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(c) What is the average order size in (b)?
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(d) Assuming Jensen currently serves 100 customers, with each placing an average of four orders

Assignment 5b
per year, determine the minimum annual sales required to break even.
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(e) What is the average order size in (d)?
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(f) Explain the differences in the answers to (a), (c), and (e).
In the long­run the most important costs are facility level costs.

The most important costs to cover are unit level costs.

In multiple customer firms the break­even point decreases as the number of customers
increases.
Even if individual orders have a positive contribution, some customers may be unprofitable.

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Question 10
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Assignment 5b
Question text
Profitability Analysis
Assume a local Cost Cutters provides cuts, perms, and hairstyling services. Annual fixed costs are
\$120,000, and variable costs are 40 percent of sales revenue. Last year’s revenues totaled
\$250,000.
(a) Determine its break­even point in sales dollars.
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(b) Determine last year’s margin of safety in sales dollars.