1.
Calculate the contribution margin ratio of touring model for A T S Company.
1.
Explanation of Solution
Contribution Margin: It is defined as the difference between the sales and the variable cost. In other words, contribution margin is the excess amount of sales revenue after deducting variable expenses.
The formula to calculate contribution margin is as follows:
Contribution Margin ratio: It is a ratio that measures the contribution margin generated by the company from the sales to make it avialable for paying the fixed cost and generate a profit. It is expressed as percentage of margin available from each dollar sales to pay fixed expenses and to provide profit.
The formula to calculate the contribution margin ratio is as follows:
Calculate the contribution margin ratio.
Working note:
Calculate the contribution margin.
2.
Calculate the sales volume (in units) to attain after- tax net income of $22,080.
2.
Explanation of Solution
Target Profit: It refers to the desired amount of profit that a company expects to achieve by the end of an accounting period after it reaches its break-even point. Thus, the company needs to compute the required sales to earn the target profit.
Calculate the sales volume (in units).
3.
Calculate the variable cost per unit of the touring model to change that have the same break-even point as mountaineering model.
3.
Explanation of Solution
Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations.
The formula to calculate the break-even point in sales units is as follows:
Variable cost: A variable cost is the cost that proportionately changes with the changes in the activity base such as units of production.
Calculate the break-even point (in units) for mountaineering model.
Working note:
Calculate the contribution per unit.
Let assume Y denotes the variable cost of the touring model and break-even point for the touring model is 10,500 units.
Therefore, the variable cost per unit will decrease by $2.97
4.
Calculate the new break-even point in units, if variable cost decreases by 10 percent and fixed cost increases by 10 percent.
4.
Explanation of Solution
Working note:
Calculate the contribution margin.
Calculate the variable cost.
5.
Calculate the break-even point (in units), if the management decided to produce both the products in equal proportions.
5.
Explanation of Solution
Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations.
The formula to calculate the break-even point in sales units for multiple products is as follows:
Calculate the break-even point (in units).
Working note:
Calculate the weighted-average unit contribution margin.
Calculate the unit contribution margin of mountaineering model.
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Chapter 7 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
- Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:arrow_forwardBrahma Industries sells vinyl replacement windows to home improvement retailers nationwide. The national sales manager believes that if they invest an additional $25,000 in advertising, they would increase sales volume by 10,000 units. Prepare a forecasted contribution margin income statement for Brahma if they incur the additional advertising costs, using this information:arrow_forwardNico Parts, Inc., produces electronic products with short life cycles (of less than two years). Development has to be rapid, and the profitability of the products is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that post-purchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was 130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be 120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, Cathy McCourt. The following conversation was recorded: BRIAN: Mark, as you know, we agreed that a profit of 15 per unit is needed for this new product. Also, as I look at the projected market share, 25 percent isnt acceptable. Total profits need to be increased. Cathy, what suggestions do you have? CATHY: Simple. Decrease the selling price to 125 and we expand our market share to 35 percent. To increase total profits, however, we need some cost reductions as well. BRIAN: Youre right. However, keep in mind that I do not want to earn a profit that is less than 15 per unit. MARK: Does that 15 per unit factor in preproduction costs? You know we have already spent 100,000 on developing this product. To lower costs will require more expenditure on development. BRIAN: Good point. No, the projected cost of 120 does not include the 100,000 we have already spent. I do want a design that will provide a 15-per-unit profit, including consideration of preproduction costs. CATHY: I might mention that post-purchase costs are important as well. The current design will impose about 10 per unit for using, maintaining, and disposing our product. Thats about the same as our competitors. If we can reduce that cost to about 5 per unit by designing a better product, we could probably capture about 50 percent of the market. I have just completed a marketing survey at Marks request and have found out that the current design has two features not valued by potential customers. These two features have a projected cost of 6 per unit. However, the price consumers are willing to pay for the product is the same with or without the features. Required: 1. Calculate the target cost associated with the initial 25 percent market share. Does the initial design meet this target? Now calculate the total life-cycle profit that the current (initial) design offers (including preproduction costs). 2. Assume that the two features that are apparently not valued by consumers will be eliminated. Also assume that the selling price is lowered to 125. a. Calculate the target cost for the 125 price and 35 percent market share. b. How much more cost reduction is needed? c. 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