ACCT 3224 Lecture Notes - Lecture 8: Earnings Before Interest And Taxes
Get access
Related Documents
Related Questions
The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
3. Calculate the break-even point in units and dollars ofrevenue.
4. Calculate the margin of safety:
In units
In sales dollars
As a percentage
5. Calculate the degree of operating leverage.
6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.
7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.
8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.
Requirement 1 | ||||
Units | Price | Totals | ||
Sales | X | $ | $ | |
Variable Costs | X | $ | $ | |
Fixed Costs | $ | |||
Net Income | $ | |||
Requirement 2 | ||||
Contribution Margin per Unitin Dollars = Selling Price â Variable Costs | ||||
Selling Price | Variable Costs | Contribution Margin per Unit | ||
Contribution Margin Ratio =Contribution Margin/Selling Price | ||||
Contribution Margin | Selling Price | Contribution Margin Ratio | ||
Requirement 3 | ||||
Break-Even Point = Fixed Costs/ Contribution Margin | ||||
Fixed Costs | Contribution Margin | Break-Even Point in Units (Rounded) | ||
Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales | ||||
Break-Even Point in Units | Selling Price per Unit | Break-Even Point in Sales (Rounded) | ||
Requirement 4A | ||||
Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales | ||||
Current Unit Sales | Break-Even Point in Sales | Margin of Safety in Units | ||
Requirement 4B | ||||
Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars | ||||
Current Sales in Dollars | Break-Even Point in Dollars | Margin of Safety in Dollars | ||
Requirement 4C | ||||
Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales | ||||
Margin of Safety in Units | Current Unit Sales | Margin of Safety Percentage | ||
Requirement 5 | ||||
Degree of Operating Leverage =Contribution Margin / Operating Income | ||||
Contribution Margin | Operating Income | Operating Leverage | ||
Requirement 6 | ||||
Units | $ Per Unit | Totals | ||
Sales | X | $ | $ | |
Variable Costs | X | $ | $ | |
Fixed Costs | $ | |||
Net Income | $ | |||
Operating Leverage | Times % Increase | Increase would be XX% | ||
Prior Income | $ | From Part 1 | ||
Increase | $ | Prior Income X XX% Above | ||
Total | $ | |||
Requirement 7 | ||||
Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin | ||||
Fixed Costs + Target Income | Divided by Contribution Margin | # of Units (Rounded) | ||
Fixed Costs | $ | |||
Target Income | $ | |||
Total | $ | $ | X | |
# of Units Above X $ Per Unit | ||||
Proof | Revenue | XX,XXX X $XX.XX | $ | |
Variable Costs | XX,XXX X $X.XX | $ | ||
Contribution Margin | $ | |||
Fixed Costs | $ | |||
Net Income | $ | |||
Requirement 8 | ||||
Sales Mix | ||||
Current | Specialty | Total | ||
Expected Sales Units | X | X | ||
Revenue = Sales X Price | $ | $ | $ | |
Variable Costs X Units | $ | $ | $ | |
Contribution Margin | $ | $ | $ | |
Fixed Costs | $ | $ | $ | |
Operating Income | $ | |||
Prior Net Income FromRequirement 1 | $ | |||
Additional Operating Income | (Operating Income Above Less Prior Income) | $ | ||
Decision With Explanation |
Phoenix Companyâs 2017 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units.
PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | $ | 3,150,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of goods sold | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Direct materials | $ | 945,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Direct labor | 225,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Machinery repairs (variable cost) | 45,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DepreciationâPlant equipment (straight-line) | 300,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities ($45,000 is variable) | 195,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Plant management salaries | 200,000 | 1,910,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 1,240,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Selling expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Packaging | 90,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shipping | 105,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales salary (fixed annual amount) | 235,000 | 430,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Advertising expense | 125,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Salaries | 230,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Entertainment expense | 85,000 | 440,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income from operations | $ | 370,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
The companyâs business conditions are improving. One possible result is a sales volume of 18,000 units. The company president is confident that this volume is within the relevant range of existing capacity. How much would operating income increase over the 2017 budgeted amount of $370,000 if this level is reached without increasing capacity?
|
An unfavorable change in business is remotely possible; in this case, production and sales volume for 2017 could fall to 12,000 units. How much income (or loss) from operations would occur if sales volume falls to this level? (Enter any loss with minus sign.)
|
A company produces memory enhancement kits for fax machines. Saleshave been very erratic, with some months showing a profit and somemonths showing a loss. The company's contribution format incomestatement for the most recent month is given below: |
Sales (12,600 units at $40 per unit) | $ | 504,000 |
Variable expenses | 252,000 | |
Contribution margin | 252,000 | |
Fixed expenses | 282,000 | |
Net operating loss | $ | (30,000) |
| | |
Required: | |
1. | Compute the company's CM ratio and its break-even point in bothunits and dollars. |
CM ratio | % |
Break-even point in units | |
Break-even point in dollars | $ |
2. | The sales manager feels that an $6,700 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in a $81,000 increase in monthly sales. Ifthe sales manager is right, what will the revised net operatingincome or loss? (Use the incremental approach in preparing youranswer.) |
(Click to select)Net operating lossNet operating incomeis | $ |
3. | Refer to the original data. The president is convinced that a 10%reduction in the selling price, combined with an increase of$37,000 in the monthly advertising budget, will double unit sales.What will the new contribution format income statement look like ifthese changes are adopted? |
Contribution Income Statement | |
(Click to select)Net operating income (loss)SalesFixedexpensesContribution marginVariable expenses | $ |
(Click to select)Contribution marginSalesVariableexpensesNet operating income (loss)Fixed expenses | |
(Click to select)Net operating income (loss)VariableexpensesContribution marginSalesFixed expenses | |
(Click to select)Variable expensesContributionmarginNet operating income (loss)Fixed expensesSales | |
(Click to select)SalesVariable expensesNet operatingincome (loss)Fixed expensesContribution margin | $ |
| |
4. | Refer to the original data. The company |