EXERCISE 55 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume

Data for Herron Corporation are shown below:

Per unit

Per cent of sale

Selling price

75

100%

Variable expenses

45

60%

Contribution margin

30

40%

Fixed expenses are $75,000 per month and the company is selling 3,000 units per month.

Required:

1. The marketing manager believes that an $8,000 increase in the monthly advertising budget would increase monthly sales by $15,000. Should the advertising budget be increased?

2. Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $3 per unit. The marketing manager believes that the higher-quality product would increase sales by 15% per month. Should the higher-quality components be used?

EXERCISE 57 Compute the Break-Even Point [LO6]

Maxson Products distributes a single product, a woven basket whose selling price is $8 and whose variable cost is $6 per unit. The companys monthly fixed expense is $5,500.

Required:

1. Solve for the companys break-even point in unit sales using the equation method.

2. Solve for the companys break-even point in sales dollars using the equation method and the CM ratio.

3. Solve for the companys break-even point in unit sales using the formula method.

4. Solve for the companys break-even point in sales dollars using formula method and the CM ratio.