Application Problems Week 4
Page 209: Brief Exercises 5-1, 5-2, 5-4
BE5-1 Monthly production costs in Dilts Company for two levels of production are as
Cost 2,000 Units4,000 Units
Indirect labor $10,000 $20,000
Supervisory salaries 5,000 5,000
Maintenance 4,000 6,000
Indicate which costs are variable, fixed, and mixed, and give the reason for each answer.
BE5-2 For Lodes Company, the relevant range of production is 40–80% of capacity. At 40% of capacity, a variable cost is $4,000 and a fixed cost is $6,000. Diagram the behavior of each cost within the relevant range assuming the behavior is linear.
BE5-4 Bruno Company accumulates the following data concerning a mixed cost, using miles as the activity level.
Miles Total Miles Total
Driven Cost Driven Cost
January 8,000 $14,150 March 8,500 $15,000
February 7,500 13,500 April 8,200 14,490
Compute the variable- and fixed-cost elements using the high-low method.
Pages 260-261: Exercises 6-2, 6-5, 6-7
E6-2 In the month of June, Jose Hebert’s Beauty Salon gave 4,000 haircuts, shampoos, and permanents at an average price of $30. During the month, fixed costs were $16,800 and variable costs were 75% of sales.
(a) Determine the contribution margin in dollars, per unit and as a ratio.
(b) Using the contribution margin technique, compute the break-even point in dollars and in units.
(c) Compute the margin of safety in dollars and as a ratio.
E6-5 Carey Company had sales in 2016 of $1,560,000 on 60,000 units. Variable costs totaled $900,000, and fixed costs totaled $500,000.
A new raw material is available that will decrease the variable costs per unit by 20% (or $3). However, to process the new raw material, fixed operating costs will increase by $100,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold.
Prepare a projected CVP income statement for 2017 (a) assuming the changes have not been made, and (b) assuming that changes are made as described.
E6-7 PDQ Repairs has 200 auto-maintenance service outlets nationwide. It performs primarily two lines of service: oil changes and brake repair. Oil change–related services represent 70% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 40% contribution margin ratio. The company’s fixed costs are $15,600,000 (that is, $78,000 per service outlet).
(a) Calculate the dollar amount of each type of service that the company must provide in order to break even.
(b) The company has a desired net income of $52,000 per service outlet. What is the dollar amount of each type of service that must be performed by each service outlet to meet its target net income per outlet?