Selected Exercises in preparation of Question 3 on BA

6601 (Section 9) Compressive Exam

Question 1
The Atkins Company manufactures and sells one product. The sales price, $30 per unit, remains constant regardless of
volume. Last years sales were 15,000 units and operating profits (Profit before tax) were $200,000. Fixed costs depend
on production levels, as the following table showed. Variable cost per unit are 40 percent higher for level 2 (day and
night shift) than for level 1 (day shift only). This is because additional labour costs result primarily from higher wages
required to employ workers for the night shift.

Annual production range (in units)

Annual total fixed costs

Level 1 (Day shift)

0 - 20,000

$ 100,000

Level 2 (Day and night shifts)

20,001 - 36,000 (Max capacity)

$ 164,000

Atkins expects last years cost structure and selling price not to change in this year. The company is able to sells all unit it
produces.
Required :
1. Compute the contribution margin per unit for last year for day and night shift.
2. Compute the break-even points in units for last year for each of the two production level.
3. Compute the volume in units that will maximise operating profits.

Question 2
The leaded Bottoms Company manufactures kewpie dolls for carnivals and sells them for $2 per kewpie. The variable
costs of manufacturing and selling are $1.00 and $0.25 per kewpie, respectively. The fixed costs are based upon the
following ranges of activity.
Range of Activity
0 - 40,000 kewpies

Fixed costs
$ 35,000

40,001 - 75,000 kewpies

50,000

75,001 - 125,000 kewpies (maximum capacity)

70,000

During this year Leaded Bottoms produced and sold 45,000 kewpies.
Required :
1.

Determine the net income for Lead Bottoms for this year.

2.

How many additional units (above the 45,000) would Leaded Bottoms need to sell in order to
break- even if the additional units will be sold for only $1.90 ?

3.

How many additional units (above the 45,000) would Leaded Bottoms need to sell in order to
generate a profit of $6,000 if the additional units will be sold for only $1.90 ?

4.

What is the maximum profit that could be earned by Leaded Bottom [disregard (2) and (3)]?

5.

Leaded Bottoms wants to produce and sell 85,000 units but does not want to incur any
additional fixed costs. The company production supervisor decided to pay double time for
labour in order to produce the 10,000 kewpies above the second range of activity. If the labour
costs are three-fourths of the variable manufacturing costs, determine the profit that the
company should earn.

6.

For the next year , it is proposed to add another product line (product Y) whose selling
price
would be $ 3 per unit with a variable cost ratio of 60 percent. Total fixed costs for production of
both product X and Y are not subjected to step fixed cost scheme but it is collectively
estimated at $100,000. The sales mix of X : Y would be 7 : 3. The company is subjected to an
income tax level of 30 percent. At what level of sales (in dollar) next year would the company
achieve target profit after tax amount of $14,000 ?

Question 3
Bell Bang Company furnishes the following income statement :
Bell Bang Company
Income Statement
For the first half of the year ended 30 June 20xx
Sales

$ 200,000

Less : Cost of goods sold :

Direct materials

30,000

Direct labor

35,000

Factory overhead (of which $22,000 is fixed expense)

37,000

Gross profit

102,000
98,000

Less : Operating expense :

Salaries expense

13,000

Commission expense

20,000

Depreciation expense

5,000

Advertising expense

10,000

48,000

Income before tax

50,000

Less : Income tax expense

20,000

Net income

30,000

Required :

Answer which following questions independently

1. Reconstruct the above income statement into contribution margin income statement.
2. For the first half of the year ended 30 June 20xx, compute :
2.1 Contribution margin ratio
2.2 Break-even point in dollars.
2.3 Margin of safety ratio
3. Compute the expected sales volume for the second half of the year ended 31 December 20xx if Bell
Bang had projected a loss of $10,000 for the second half of the year, assuming that sale price and fixed
expenses remain unchanged.
4. How much additional sales from (3) would Bell Bang need to make in order to break-even if the
variable cost of the additional sales is decreased by 20%.

5. How much sales should Bell Bang make for the whole year ending 31 December to generate a net
profit after tax of $120,000?
6. If the sales commission in next year are discontinued in exchange for additional annual salaries of
$25,000. How much sales would have to make for the next whole year to generate a net profit after tax
of $120,000.

Question 4
Mayberry owns and operates a BEAUTIFUL CUT company, a small salon. The only service that is offered is haircuts at a
price of $8 a clip. Tip is also another source of the company which average about 15% of the price. The number of
hairdressers (in addition to Mayberry) that Mayberry employs depends on the number of estimated haircuts for the
year. As long as Mayberry expects fewer than 4,000 cuts in a year, he will operate the shop by himself. In case he
estimated the number of haircuts will exceed 4,000 cuts, he will hire additional hairdressers (employees) to meet
following yearly demands :

Number of additional employees

Expected number of haircuts for year

4,001 - 8,000

8,001 - 15,000

All hairdressers including Mayberry shares all work equally. For example, if the numbers of haircuts is 12,000 cuts,
Mayberry will hire 2 additional employees and thereby each hairdresser (including Mayberry) will work for 12,000 3 =
4,000 haircuts.
The compensations that Mayberry pay to his individual employee are as follows :

1)

Salary amount of $5,000 per year,

2)

Commission at the rate of 25% of the price. Payment of commission is made to the
employees for his or her services provided to customers.

3)

Tip, which average about 15% of the price. Payment of tip is made to the employees for
his or her services provided to customers.

As being the owner of the company, Mayberry takes no salary, commission and tip for his work. The other costs of
operating the company are $6,000 per year and $2 per haircut.
Required :
1.

If the number of haircuts was less than 4,000, determine the number of haircuts that
enable the company to reach break-even point.

2.

If the number of haircuts is expected to increase to 9,000, what will be the profit (loss)
for the company (Mayberrys income)?

Question 5
Marston Corporation manufactures pharmaceutical products that are sold through a net work of independent sales
agents located in the United States and Canada. The agents are currently paid an 18% commission on sales. Marston
used this percentage in preparing the following budgeted income statement for the fiscal year ending 30 June 20xx :
(In thousands)
Sales

26,000

Cost of goods sold :

Variable
Fixed

11,700
2,870

Gross margin

14,570
11,430

Marketing & administrative expenses :

Sales commissions
Fixed marketing expenses
Fixed administrative expenses

4,680
750
1,850

7,280

Operating income

4,150

Interest expenses

650

Net income before taxes

3,500

Income taxes

1,400

Net income

2,100

Since preparing this budgeted income statement, Marston has learned that its agents are demanding an increase in the
commission rate to 23% for the upcoming year. As a result, Marstons president has decided to investigate the
possibility of hiring it own sales staff in place of the network of sales agents and has asked Tom Ross, Marstons
controller, to gather information on the cost associated with this alternative.
Ross estimates that Marston will have to hire eight salespeople to cover the current market area. The annual payroll
cost of each of these employees will average $80,000, including fringe benefit costs. Travel and entertainment cost are
expected to total $600,000 for the year, and the annual cost of sales manager and sales secretary will be $150,000.
In addition to their salary, the eight salespeople will each earn commissions at the rate of 10% on the first $2 million in
sales and 15% on all sales over $2 million. Ross expects that all eight salespeople will exceed the $2 million and that
sales will be at the level originally projected ($26,000,000). Ross believes that Marston should also increase its
marketing budget by $500,000.

Required :
1) Calculate Marston Corporations breakeven point in sales dollars for the fiscal year ending 30 June
20xx if the company hires its own sales force and increase its marketing costs.
2) If Marston Corporation continues to sell through its network of sales agent and pays the higher
commission rate, determine how many percent increase of dollar sales for the fiscal year ending 30 June
20xx would be to generate the same net income as projected in the budgeted income statement
presented above.

Solution to Cost Volume Profit Question

Question 1
1) Day shift
30(15,000) - 15,000VC - 100,000 = 200,000
VC = 10
CMU = P - VC = 30 - 10 = 20
Night shift
VC = 140% 10 = 14
CMU = 30 - 14 = 16
2) Break-even point of production level 1
S - (10/30)S - 100,000 = 0
S = 150,000
Q = 150,000/30 = 5,000
Break-even point of production level 2
Let X = number of units in excess of 20,000 units
30(20,000 + x) [(10)(20,000) + 14x] - 164,000 = 0
x = 19,000
Q + x = 20,000 + 19,000 = 39,000
3)
Q = 20,000

Q = 36,000

Sales

600,000

1,080,000

Total variable expenses

200,000

424,000

Total contribution margin

400,000

656,000

Total fixed expenses

100,000

164,000

Operating profits

300,000

492,000

The volume that will maximise operating profits = 36,000 units

Question 2
1) 2(45,000) - 1.25(45,000) - 50,000 = -16,250

2) Let x = additional units above 45,000 units

[(245,000) +( 1.90x)] [1.25(45,000 + x)] - 50,000 = 0
x = 25,000
Q + x = 45,000 + 25,000 = 70,000 70,000 units is valid for 50,000 fixed expenses
The additional units (above 45,000) would lead bottoms need to sell in order to break even is 25,000 units

3) Let x = additional units above 45,000 units

[(245,000) +( 1.90x)] [1.25(45,000 + x)] - 50,000 = 6,000
x = 34,231
Q + x = 45,000 + 34,231 = 79,231 79,231 units is invalid for 50,000 fixed expenses try at 70,000 fixed
Expenses [(245,000) + (1.90x)] [1.25(45,000 + x)] - 70,000 = 6,000
x = 65,000
Q = 45,000 + 65,000 = 110,000 110,000 units is valid for 70,000 fixed expenses
Therefore, the additional unit (above 45,000) would lead bottoms need to sell in order to generate profit of 6,000 are
65,000 units
4)
Q = 40,000

Q = 75,000

Q = 125,000

Sales

80,000

150,000

250,000

Total variable expenses

50,000

93,750

156,250

Total contribution margin

30,000

56,250

93,750

Total fixed expenses

35,000

50,000

70,000

Operating profits

(5,000)

6,250

23,750

5)
Sales (85,000@2)

170,000

Total variable expenses [(75,000@1.25 + 10,000@[1.25+(1*3/4)]

113,750

Total contribution margin

56,250

Total fixed expenses

50,000

Operating profits

6,250

6)
Product X P = 2, VC per unit = 1.25
Product Y P = 3, VC per unit = 3*60% = 1.8
TFC for both products = 100,000
Sales mix X : Y = 7 : 3
Tax rate = 30%

Let Q = the number of composite units sold (X and Y in bundle)

[[(2 1.25)(7/10) + (3 1.8)(3/10)]Q 100,000](1 0.3) = 14,000
Q = 135,594 units
units of product X sold = 135,594(7/10) = 94,916 sales in dollar = (94,916)(2) =

189,832

unit of product Y sold = 135,594(3/10) = 40,678 sales in dollar = (40,678)(3) =

122,034

Total sales

311,866

Question 3
1)
Bell Bang Company
Income Statement
For the first half of the year ended 30 June 20xx
Sales

200,000

Less : Variable expenses :

Direct materials

30,000

Direct labor

35,000

Variable overhead

15,000

Commission expense

20,000

Total contribution margin

100,000
100,000

Less : Fixed expenses :

Fixed overhead

22,000

Salaries expense

13,000

Depreciation expense

5,000

Advertising expense

10,000

50,000

Income before tax

50,000

Less : Income tax 40%

20,000

Net income

30,000

2) Contribution margin ratio = 100,000 / 200,000 = 0.50

Break-even point in dollar : S - 0.50S - 50,000 = 0
S = 100,000
Margin of safety ratio = (200,000 - 100,000) / 200,000 = 0.50

3) S - 0.50S - 50,000 = -10,000

S = 80,000

4) Let x = additional sales

(80,000 + x) - (40,000 + 0.40x) - 50,000 = 0
x = 16,667

5) Tax rate = 20,000 / 50,000 = 0.4

[S - 0.50S - (50,0002)] (1-0.40) = 120,000
S = 600,000

6) [S - 0.40S - 125,000] (1-0.40) = 120,000

S = 541,667

Question 4
1)

S [2/(8 + (8*0.15)]S - 6,000 = 0

S = 7,666.67
Q = 7666.67 / (8 + (8*0.15)) = 834

2)
Hair cut revenue (9,000@8)

72,000

Tip [3,000@(8*0.15)]

3,600

Total revenue

75,600

Variable expenses :
Commission (6,000@2)

12,000

Other operating expense (9,000@2)

18,000

Total contribution margin

30,000
45,600

Fixed expenses :
Salaries (2@5,000)
Other operating expense
Operating profits

10,000
6,000

16,000
29,600

Question 5
Current situation : Sales = 26,000,000
: Total variable expenses = 11,700,000 + 4,680,000 = 16,380,000
: Total fixed expense

= 2,870,000 + 750,000 + 1,850,000 + 650,000 = 6,120,000

: Tax rate = 1,400,000 / 3,500,000 = 0.40

New situation ( Increasing commission) : Sales = 26,000,000
: Total variable expense = 11,700,000 + [(23%/18%)*4,680,000]
= 17,680,000
: Total fixed expense = 2,870,000 + 750,000 + 1,850,000 + 650,000
= 6,120,000
: Tax rate = 0.40 (unchanged)
New situation : (Arranging own sale force)

Sales = 26,000,000
Variable expense :
Sales dollar

Variable cost ratio (based on sales at 2,600,000)

0 - 2,000,000

[11,700,000 + (26,000,000*10%)]/ 26,000,000 = 0.55

2,000,000 and over

[11,700,000 + (26,000,000*15%)]/ 26,000,000 = 0.60

Total fixed expense = 2,870,000 + (750,000 + 500,000) + 1,850,000 + 650,000 + 640,000 + 600,000 + 150,000
= 8,010,000

1)

Let S = Sales dollars above $ 2,000,000

(2,000,000 + S) [0.55(2,000,000) + 0.6S] - 8,010,000 = 0
S = 17,775,000
Total sales at breakeven point = 2,000,000 + 17,775,000 = 19,775,000

2)

S (17,680,000 / 26,000,000)S - 6,120,000 = 3,500,000

S = 30,062,500
Therefore sales have to increase by (30,062,500 26,000,000)/26,000,000 = 15.625%