ADMS 1500 Lecture Notes  Lecture 7: Contribution Margin, Fixed Cost, Variable Cost
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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 perunit 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 costvolumeprofit (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 breakeven 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 beforetax 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  
BreakEven Point = Fixed Costs/ Contribution Margin  
Fixed Costs  Contribution Margin  BreakEven Point in Units (Rounded)  
BreakEven Point in Units XSelling Price per Unit = BreakEven Point Sales  
BreakEven Point in Units  Selling Price per Unit  BreakEven Point in Sales (Rounded)  
Requirement 4A  
Margin of Safety in Units =Current Unit Sales â BreakEven Point in Unit Sales  
Current Unit Sales  BreakEven Point in Sales  Margin of Safety in Units  
Requirement 4B  
Margin of Safety in Dollars =Current Sales in Dollars â BreakEven Point Sales in Dollars  
Current Sales in Dollars  BreakEven 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 
If variable costs per unit increased because of an increase in hourly wage rates, the breakeven point would:
 
 
 

5 Jeanlouis, Inc., manufactures and sells two products: ProductD0 and Product D5. The company has an activitybased costing systemwith the following activity cost pools, activity measures, andexpected activity:
Estimated  Expected Activity  
 Activity Measures 




Laborrelated  DLHs  $313,743  3,600  3,300  6,900 
Production orders  orders  70,264  300  500  800 
General factory  MHs  253,555  4,300  4,200  8,500 
$637,562 
The total overhead applied to Product D5 under activitybasedcosting is closest to:
$319,252
$125,286
$304,920
$273,240
6 Ofarrell Corporation, a company that produces and sells asingle product, has provided its contribution format incomestatement for March. 
Sales (6,800 units)  $401,200 
Variable expenses  265,200 
Contribution margin  136,000 
Fixed expenses  103,500 
Net operating income  $32,500 
If the company sells 6,700 units, its net operating incomeshould be closest to: 
$31,979
$28,000
$30,500
$32,500
7
Dybala Corporation's produces and sells a single product. Dataconcerning that product appear below: 
Per Unit  Percent of Sales  
Selling price  $170  100% 
Variable expenses  85  50% 
Contribution margin  $ 85  50% 
The company is currently selling 5,400 units per month. Fixedexpenses are $402,200 per month. The marketing manager believesthat a $6,400 increase in the monthly advertising budget wouldresult in a 150 unit increase in monthly sales. What should be theoverall effect on the company's monthly net operating income ofthis change? 
Decrease of $6,400
Increase of $6,350
Decrease of $6,350
Increase of $12,750
8 Data concerning Wang Corporation's single product appearbelow: (Do not round your intermediatecalculations.) 
Selling price per unit  $  210.00 
Variable expense per unit  $  73.50 
Fixed expense per month  $  138,450 
The breakeven in monthly dollar sales is closest to:
$213,000
$287,550
$138,450
$426,000