University of Houston, Downtown - ACNT 2302: ACNT 2302 CHAPTER 5 & CHAPTER 6 CVP HW2

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Problem 5-4A Mary Willis is the advertising manager for Bargain Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and i... ncreased display space that will add $24,000 in fixed costs to the $270,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Mary’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used. (Round answers to 0 decimal places, e.g. 1,225.) Compute the margin of safety ratio for current operations and after Mary’s changes are introduced. (Round answers to 0 decimal places, e.g. 15%.) Prepare a CVP income statement for current operations and after Mary’s changes are introduced. Exercise 6-14 The CVP income statements shown below are available for Armstrong Company and Contador Company. (a) Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.) (a) Contribution Margin ÷ Net Income = Degree of Operating Leverage Armstrong $260,000 ÷ $100,000 = 2.6 Contador $450,000 ÷ $100,000 = 4.5 (b) Exercise 6-16 An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto-Yams uses a mechanized system. CVP income statements for the two companies are shown below. Traditional Yams Auto-Yams Sales $400,000 $400,000 Variable costs 320,000 160,000 Contribution margin 80,000 240,000 Fixed costs 30,000 190,000 Net income $50,000 $50,000 The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company’s cost structure might have on its profitability. Calculate each company’s degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.) Determine the effect on each company’s net income if sales decrease by 15% and if sales increase by 10%. Do not prepare income statements. (Round answers to 2 decimal places, e.g. 10.52. If % change is negative, enter amount with either a negative sign or parenthesis, e.g. -10.52 or (10.52).) Exercise 5-11 Spencer Kars provides shuttle service between four hotels near a medical center and an international airport. Spencer Kars uses two 10-passenger vans to offer 12 round trips per day. A recent month’s activity in the form of a cost-volume-profit income statement is shown below. Fare revenues ( 1,500 fares) $ 36,000 Variable costs Fuel $ 5,040 Tolls and parking 3,100 Maintenance 860 9,000 Contribution margin 27,000 Fixed costs Salaries 15,700 Depreciation 1,300 Insurance 1,000 18,000 Net income $ 9,000 Calculate the break-even point in dollars. Calculate the break-even point in number of fares. (Round answer to 0 decimal places, e.g. 5,275.) Without calculations, determine the contribution margin at the break-even point. At the break-even point fixed costs and contribution margin are equal. Therefore, the contribution margin at the break-even point would be $ 18,000 . Brief Exercise 6-10 Faune Furniture Co. consists of two divisions, Bedroom Division and Dining Room Division. The results of operations for the most recent quarter are: (a) Determine the company’s sales mix. (Round answers to 2 decimal places, e.g. 0.15.) (b) Determine the company’s weighted-average contribution margin ratio. (Round answer to 2 decimal places, e.g. 0.15.) OR Brief Exercise 6-13 Sam’s Shingle Corporation is considering the purchase of a new automated shingle-cutting machine. The new machine will reduce variable labor costs but will increase depreciation expense. Contribution margin is expected to change from $200,000 to $240,000. Net income is expected to be the same at $40,000. Compute the degree of operating leverage before and after the purchase of the new equipment. (Round answers to 1 decimal place, e.g. 1.5.) Degree of operating leverage (old) = $200,000 ÷ $40,000 = 5 Degree of operating leverage (new) = $240,000 ÷ $40,000 = 6 If Sam’s sales change, the resulting change in net income will be 1.2 times (6 ÷ 5) higher with the new machine than under the old system. Brief Exercise 6-14 Presented below are variable costing income statements for Diggs Company and Doggs Company. They are in the same industry, with the same net incomes, but different cost structures. (a1) Compute the break-even point in dollars for each company. (Round answers to 0 decimal places, e.g. 1,250.) Do It! Review 6-4 Bergen Hospital is contemplating an investment in an automated surgical system. Its current process relies on the a number of skilled physicians. The new equipment would employ a computer robotic system operated by a technician. The company requested an analysis of the old technology versus the new technology. The accounting department has prepared the following CVP income statements for use in your analysis. (a) Compute the degree of operating leverage for the company under each scenario. (Round answers to 1 decimal place, e.g. 15.7.) [Show More]

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