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Accounting for Managers Homework Set 2.

2
Cost-Volume-Profit and Segment Profitability Analysis
1. Candice Corporation has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:

The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured. Required: a. Calculate the break-even point in units if Candice Corporation uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. b. Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods. c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. d. What is your recommendation to management concerning which manufacturing method should be used?

2. The following monthly data in contribution format are available for the MN Company and its only product, Product SD:

The company produced and sold 300 units during the month and had no beginning or ending inventories. Required: a. Without resorting to calculations, what is the total contribution margin at the break-even point? b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SD. This change would reduce variable expenses by $18 per unit. The company's sales manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made? c. Assume that MN Company is currently selling 300 units of Product SD per month. Management wants to increase sales and feels this can be done by cutting the selling price by $22 per unit and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50 percent. Should these changes be made? d. Assume that MN Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SD thus resulting in an increase in monthly sales of 12%. Should these changes be made?

3. Iron Decor manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates:

Required: Compute the following items: a. Unit contribution margin. b. Contribution margin ratio. c. Break-even in dollar sales. d. Margin of safety percentage. e. If the sales volume increases by 20% with no change in total fixed expenses, what will be the change in net operating income? f. If the per unit variable production costs increase by 15%, and if fixed selling and administrative expenses increase by 12%, what will be the new break-even point in dollar sales?

4. Parkins Company produces and sells a single product. The company's income statement for the most recent month is given below:

There are no beginning or ending inventories. Required: a. Compute the company's monthly break-even point in units of product. b. What would the company's monthly net operating income be if sales increased by 25% and there is no change in total fixed expenses? c. What dollar sales must the company achieve in order to earn a net operating income of $50,000 per month? d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

5. Data concerning Maline Corporation's single product appear below:

Fixed expenses are $55,000 per month. The company is currently selling 1,000 units per month. Required: The marketing manager would like to cut the selling price by $6 and increase the advertising budget by $2,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

6. Guagliano Corporation produces and sells a single product whose selling price is $110.00 per unit and whose variable expense is $29.70 per unit. The company's monthly fixed expense is $345,290. Required: a. Assume the company's monthly target profit is $16,060. Determine the unit sales to attain that target profit. Show your work! b. Assume the company's monthly target profit is $40,150. Determine the dollar sales to attain that target profit. Show your work!

7. Mitzel Corporation has provided its contribution format income statement for May.

Required: a. Compute the degree of operating leverage to two decimal places. b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from an 18% increase in sales.

8. Gilde Industries is a division of a major corporation. Last year the division had total sales of $23,380,000, net operating income of $2,828,980, and average operating assets of $7,000,000. The company's minimum required rate of return is 12%. Required: a. What is the division's margin? b. What is the division's turnover? c. What is the division's return on investment (ROI)?

9. Ferris Wares is a division of a major corporation. The following data are for the latest year of operations:

Required: a. What is the division's return on investment (ROI)? b. What is the division's residual income?

10. Financial data for Windsor, Inc. for last year appear below:

The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another company. Required: a. Compute the company's margin, turnover, and return on investment for last year. b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What was the company's residual income last year?

11. Fausnaught Corporation has two major business segments--Retail and Wholesale. In October, the Retail business segment had sales revenues of $730,000, variable expenses of $409,000, and traceable fixed expenses of $117,000. During the same month, the Wholesale business segment had sales revenues of $400,000, variable expenses of $220,000, and traceable fixed expenses of $48,000. Common fixed expenses totaled $218,000 and were allocated as follows: $122,000 to the Retail business segment and $96,000 to the Wholesale business segment. Required: Prepare a segmented income statement in the contribution format for the company. Omit percentages, show only dollar amount.

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