Cost Accounting (14th Edition)

ASSIGNMENT MATERIAL 93
1. What is the projected net income for 2011?
2. What is the breakeven point in units for 2011?
3. Mr. Ro has set the revenue target for 2012 at a level of $550,000 (or 22,000 bowls). He believes an additional
marketing cost of $11,250 for advertising in 2012, with all other costs remaining constant, will be
necessary to attain the revenue target. What is the net income for 2012 if the additional $11,250 is spent
and the revenue target is met?
4. What is the breakeven point in revenues for 2012 if the additional $11,250 is spent for advertising?
5. If the additional $11,250 is spent, what are the required 2012 revenues for 2012 net income to equal 2011
net income?
6. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2012 net income
of $60,000 is desired?
Required
3-37 CVP, sensitivity analysis. The Brown Shoe Company produces its famous shoe, the Divine Loafer
that sells for $60 per pair. Operating income for 2011 is as follows:
Sales revenue ($60 per pair) $300,000
Variable cost ($25 per pair) ƒ125,000
Contribution margin 175,000
Fixed cost ƒ100,000
Operating income
$ƒ75,000
Brown Shoe Company would like to increase its profitability over the next year by at least 25%. To do so, the
company is considering the following options:
1. Replace a portion of its variable labor with an automated machining process. This would result in a
20% decrease in variable cost per unit, but a 15% increase in fixed costs. Sales would remain the same.
2. Spend $30,000 on a new advertising campaign, which would increase sales by 20%.
3. Increase both selling price by $10 per unit and variable costs by $7 per unit by using a higher quality
leather material in the production of its shoes. The higher priced shoe would cause demand to drop by
approximately 10%.
4. Add a second manufacturing facility which would double Brown’s fixed costs, but would increase
sales by 60%.
Evaluate each of the alternatives considered by Brown Shoes. Do any of the options meet or exceed
Brown’s targeted increase in income of 25%? What should Brown do?
3-38 CVP analysis, shoe stores. The WalkRite Shoe Company operates a chain of shoe stores that sell
10 different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as
a pair of shoes. Each store has a store manager who is paid a fixed salary. Individual salespeople receive a
fixed salary and a sales commission. WalkRite is considering opening another store that is expected to have
the revenue and cost relationships shown here:
Required
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Unit Variable Data (per pair of shoes)
Annual Fixed Costs
Selling price $30.00 Rent $ 60,000
Cost of shoes $19.50 Salaries 200,000
Sales commission 1.50 Advertising 80,000
Variable cost per unit $21.00 Other fixed costs 20,000
Total fixed costs $360,000
Consider each question independently:
1. What is the annual breakeven point in (a) units sold and (b) revenues?
2. If 35,000 units are sold, what will be the store’s operating income (loss)?
3. If sales commissions are discontinued and fixed salaries are raised by a total of $81,000, what would be
the annual breakeven point in (a) units sold and (b) revenues?
4. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission of
$0.30 per unit sold, what would be the annual breakeven point in (a) units sold and (b) revenues?
5. Refer to the original data. If, in addition to his fixed salary, the store manager is paid a commission
of $0.30 per unit in excess of the breakeven point, what would be the store’s operating income if
50,000 units were sold?
Required