CHAPTER 5

QUESTION 1

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	110		100%
Variable expenses		77		70%
Contribution margin	$	33		30%

Fixed expenses are $82,000 per month and the company is selling 3,500 units per month.

1-a.	The marketing manager argues that a $8,700 increase in the monthly advertising budget would increase monthly sales by $18,500. Calculate the increase or decrease in net operating income.

1-b.

Should the advertising budget be increased?

	Yes
	No

QUESTION 2

2-a.	Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change in total contribution margin.

2-b.

Should the higher-quality components be used?

	Yes
	No

QUESTION 3

Miller Companys most recent contribution format income statement is shown below:

	Total	Per Unit
Sales (37,000 units)	$370,000	$10.00
Variable expenses	259,000	7.00
Contribution margin	111,000	$3.00
Fixed expenses	49,000
Net operating income	$ 62,000

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently): (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.)

1.	The number of units sold increases by 15%.
2.	The selling price decreases by $1.50 per unit, and the number of units sold increases by 18%.
3.	The selling price increases by $1.50 per unit, fixed expenses increase by $6,000, and the number of units sold decreases by 7%.
4.	The selling price increases by 20%, variable expenses increase by 10 cents per unit, and the number of units sold decreases by 7%.

QUESTION 4

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $180,000 per year.

Required:
Answer the following independent questions:
1.	What is the product's CM ratio?

2.	Use the CM ratio to determine the break-even point in dollar sales.

3.	Due to an increase in demand, the company estimates that sales will increase by $56,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed expenses do not change?

4.	Assume that the operating results for last year were:

Sales	$	3,000,000
Variable expenses		1,500,000
Contribution margin		1,500,000
Fixed expenses		180,000
Net operating income	$	1,320,000

a.	Compute the degree of operating leverage at the current level of sales. (Round your answer to 2 decimal places.)

b.	The president expects sales to increase by 17% next year. By what percentage should net operating income increase? (Round intermediate calculations and final answer to 2 decimal places.)

5.	Refer to the original data. Assume that the company sold 39,000 units last year. The sales manager is convinced that a 14% reduction in the selling price, combined with a $75,000 increase in advertising, would increase annual unit sales by 50%.

a.	Prepare two contribution format income statements, one showing the results of last years operations and one showing the results of operations if these changes are made. (Do not round intermediate calculations. Round your "Per unit" answers to 2 decimal places.)

b.

Would you recommend that the company do as the sales manager suggests?

	Yes
	No

6.

Refer to the original data. Assume again that the company sold 39,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.50 per unit. He thinks that this move, combined with some increase in advertising, would double annual unit sales. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

CHAPTER 6

QUESTION 1

Ida Sidha Karya Company is a family-owned company located in the village of Gianyar on the island of Bali in Indonesia. The company produces a handcrafted Balinese musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $695. Selected data for the companys operations last year follow:

Units in beginning inventory		0
Units produced		24,000
Units sold		22,000
Units in ending inventory		2,000
Variable costs per unit:
Direct materials		$ 150
Direct labor		$ 340
Variable manufacturing overhead		$ 54
Variable selling and administrative		$ 25
Fixed costs:
Fixed manufacturing overhead		$ 750,000
Fixed selling and administrative		$ 970,000

Required:

1.	Assume that the company uses absorption costing. Compute the unit product cost for one gamelan.

2.	Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

QUESTION 2

Lynch Company manufactures and sells a single product. The following costs were incurred during the companys first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials		$ 14
Direct labor		$ 8
Variable manufacturing overhead		$ 2
Variable selling and administrative		$ 2
Fixed costs per year:
Fixed manufacturing overhead	$ 250,000
Fixed selling and administrative	$ 160,000

During the year, the company produced 25,000 units and sold 21,000 units. The selling price of the companys product is $47 per unit.

Required:

1.	Assume that the company uses absorption costing:

a.	Compute the unit product cost.

b.	Prepare an income statement for the year.

2.	Assume that the company uses variable costing:

a.	Compute the unit product cost.

b.	Prepare an income statement for the year.

QUESTION 3

Vulcan Companys contribution format income statement for June is given below:

Vulcan Company Income Statement For the Month Ended June 30
Sales	$	900,000
Variable expenses		408,000
Contribution margin		492,000
Fixed expenses		480,000
Net operating income	$	12,000

Management is disappointed with the companys performance and is wondering what can be done to improve profits. By examining sales and cost records, you have determined the following:

a.	The company is divided into two sales territoriesNorthern and Southern. The Northern Territory recorded $400,000 in sales and $208,000 in variable expenses during June; the remaining sales and variable expenses were recorded in the Southern Territory. Fixed expenses of $180,000 and $145,000 are traceable to the Northern and Southern Territories, respectively. The rest of the fixed expenses are common to the two territories.
b.	The company is the exclusive distributor for two productsPaks and Tibs. Sales of Paks and Tibs totaled $160,000 and $240,000, respectively, in the Northern territory during June. Variable expenses are 28% of the selling price for Paks and 68% for Tibs. Cost records show that $78,400 of the Northern Territorys fixed expenses are traceable to Paks and $55,200 to Tibs, with the remainder common to the two products.

Required:

1a.	Prepare contribution format segmented income statements for the total company broken down between sales territories. (Round the percentage answers to one decimal place (i.e .1234 should be entered as 12.3))

1b.	Prepare contribution format segmented income statements for the Northern Territory broken down by product line. (Round the percentage answers to one decimal place (i.e .1234 should be entered as 12.3))