If you no longer held the belief that the negative managerialscenarial theory was an accurate reflection of reality, what otherbeliefs would you need to change as a consequence?
The breakeven point is the point when the profit of the company isequal to $0. It is the point when sales equals fixed costs andvariable costs. There are two different methods that can be used tocalculate the breakeven point, the equation method and thecontribution margin method.
The equation method formula is as follows:
Sales = Variable Costs + Fixed Costs + $0
If you no longer held the belief that the negative managerialscenarial theory was an accurate reflection of reality, what otherbeliefs would you need to change as a consequence?
The breakeven point is the point when the profit of the company isequal to $0. It is the point when sales equals fixed costs andvariable costs. There are two different methods that can be used tocalculate the breakeven point, the equation method and thecontribution margin method.
The equation method formula is as follows:
Sales = Variable Costs + Fixed Costs + $0
Related questions
Need help with my case study for my managerial accouting class,any help will be greatly appreciated.
Part 1 15 points
Cingle Company LLC produces gadgets at one manufacturingfactory. Corporate headquarters are located at the same site.Historical cost information shows the average costs at thefollowing production levels .
Production in units | 3,000 | 3,750 | 4,500 |
Cost of goods manufactured | |||
Direct Materials | $ 198,000 | $ 247,500 | $297,000 |
Direct Labor | 126,000 | 157,500 | 189,000 |
Overhead | |||
Building depreciation-factory | 5,000 | 5,000 | 5,000 |
Equipmentlease | 4,500 | 4,500 | 4,500 |
Factorysupplies | 1,600 | 1,930 | 2,260 |
Indirect Labor | 5,500 | 5,500 | 5,500 |
Quality InspectionCosts | 13,360 | 14,200 | 15,040 |
Selling and Administrative Expenses | |||
Shipping | 45,500 | 51,875 | 58,250 |
Advertisingexpense | 50,000 | 50,000 | 50,000 |
Salaries andcommissions | 137,000 | 155,000 | 173,000 |
Insuranceexpense | 10,000 | 10,000 | 10,000 |
Total | $ 596,460 | $ 703,005 | $ 809,550 |
A. Identify each ofthe companyâs costs as being variable, fixed or mixed with respectto the number of units produced. Explain why you chose that costbehavior. [Hint: What happens to total cost if the cost behavior isfixed, is variable, is mixed? What happens to cost / unit if costbehavior is fixed, is variable, is mixed?] Show all computationsneeded to determine cost behavior.
NOTE: If the cost is mixed, please use thechart in part B to detail your explanation.
Use the chart below:
Cost | Fixed | Variable | Mixed | Explanation |
Direct Materials | X | The total cost increases but cost/unit ($66) remainsconstant. | ||
Direct Labor | ||||
Building depreciation-factory | ||||
Equipment lease | ||||
Factory supplies | ||||
Indirect Labor | ||||
Quality Inspection Costs | ||||
Shipping | ||||
Advertising expense | ||||
Salaries and commissions | ||||
Insurance expense |
B. Using the high-lowmethod, separate each mixed cost into variable and fixed elements.State the cost formula for each mixed cost. Show all your work andcomputations.
Use the chart below:
Mixed Cost (Name) | Cost Formula (Y = a + bx form) | Supporting Computations |
C. Determine the expectedtotal costs (identify each cost separately) at a production levelof 5,000 widgets. Show computations. You should arrive at a totalcost figure.
Use the chart below:
Cost | Supporting Computations | |
Direct Materials | ||
Direct Labor | ||
Building dep-factory portion | ||
Equipment lease | ||
Factory supplies | ||
Indirect Labor | ||
Quality Inspection Costs | ||
Shipping | ||
Advertising expense | ||
Salaries and commissions | ||
Insurance expense | ||
TOTAL COST |
D. State the costequation for the total costs of the entire company in the form Y =a + bx. Using alternative one or alternative two below, show howyou determined the cost equation. (Note: you should have oneequation such that someone could determine expected total cost forany activity level within the relevant range.)
Company â Wide Cost equation:
Use the chart below (Alternative one) which shows the fixed costportion and the variable rate for each cost itemor use the high- low method (Alternative two) fordetermining the cost equation. You need to choose only onealternative.
Alternative one: (use the information and chartfrom part A and the information from part B. Input the $ amounts inappropriate columns and total the columns of the chart. Using thechart information, state the cost equation in the Y = a + bxform.)
Fixed Cost | Variable Rate ($/unit) | |
Direct Materials | ||
Direct Labor | ||
Building dep-factory portion | ||
Equipment lease | ||
Factory supplies | ||
Indirect Labor | ||
Quality Inspection Costs | ||
Shipping | ||
Advertising expense | ||
Salaries and commissions | ||
Insurance expense | ||
TOTAL COST |
Alternativetwo: High-low method and supporting, labeledcomputations.
Part Two 20 points
Goggle Company manufactures a special virtual reality gogglethat can be used underwater. The companyâs contribution formatincome statement for last year is below:
Total | Per Unit | % of Sales | |
Sales (10,000 units) | $750,000 | $75 | 100% |
Variable Expenses | 450,000 | 45 | ? |
Contribution Margin | 300,000 | $30 | ? |
Fixed Expenses | 170,000 | ||
Net Operating Income | $130,000 |
Goggle Company is ready to take off and expand its market share.Management has asked for several items to be analyzed in order tomake good decisions.
Calculate the companyâs contribution margin ratio and thevariable expense ratio.
Compute the companyâs break-even point in both units and insales dollars. You may use either the equation method or theformula method.
Management is predicting a 20% increase in sales next year,staying within the relevant range for the company. How much willthe companyâs net operating income increase?
Refer to the original data. Assume that management would like toearn a profit of at least $55,000. How many units will have to besold to meet this target profit?
Refer to the original data. Compute the company's margin ofsafety in both dollar and percentage form.
Compute the company's degree of operating leverage at thepresent level of sales.
Assume that through a more intense effort by the sales staff,the company's sales increase by 8% next year. By what percentagewould you expect net operating income to increase? Use the degreeof operating leverage to obtain your answer.
Verify your answer to (b) by preparing a new contribution formatincome statement showing an 8% increase in sales.
In an effort to increase sales and profits, management isconsidering the use of a higher quality virtual reality system thanthe current system. The new system would increase variable costs by$15 per unit, but management could eliminate one quality inspectorwho is paid a salary of $30,000 per year. Management believes theycan increase the selling price by $30 per unit.
Assuming that changes are made as described above, prepare aprojected contribution format income statement for next year. Showdata on a total, per unit, and percentage basis.
Compute the company's new break-even point in both units anddollars of sales. Use the formula method.
Would you recommend that the changes be made? Why or whynot?
LOOKING FOR SOLUTION TO PART 2,3,4
Section I: Cost-Volume-Profit Analysis
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. All CVP calculations shouldbe completed in the Hampshire Company Spreadsheet. Note:The CVP analysis satisfies Part A of Section I.
Compute net income before tax.
Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
Calculate the break-even point in units and dollars of revenue.Note: This is a required part of the CVP analysis andsatisfies Part C of Section I.
Calculate the margin of safety:
In units
In sales dollars
As a percentage
Calculate the degree of operating leverage.
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.
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.
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.
Additionally, complete Parts B and D of Section I as outlined inthe Final Project Guidelines and Rubric document.
Section II: Inventory Management
The information below represents the beginning and endinginventory amounts along with the production and sales for the monthin umbrella units.
Beginning Inventory: 0 Umbrellas
Production: 80,000 Umbrellas
Sales: 60,000 Umbrellas
Ending Inventory: 20,000Umbrellas
Using the information provided above and the costs and salesinformation provided in Section I, complete the following in theHampshire Company Spreadsheet in order to assist you in respondingto all components of Section II:
Prepare a variable costing income statement.
Prepare an absorption costing income statement.
Additionally, complete Parts A through E of Section II asoutlined in the Final Project Guidelines and Rubric document.
Section III: Benchmarking
The management of the Hampshire Company would like to implementbenchmarking. Standard costs have been established and arepresented below. You will want to complete a variance analysis toinclude efficiency and price variances for materials (cloth andhandle assemblies) and labor based on the following data:
Units Produced = 80,000
Units Sold = 60,000
Direct Materials Purchased and Used
Actual square yards of cloth purchased and used: 128,000
Actual price incurred per yard: $1.25
Actual handles purchased and used: 80,808
Actual price per handle/rib/stretcher assembly: $0.99
Direct Manufacturing Labor Used
Actual direct labor hours used: 15,748
Actual price per hour: $7.62
Direct labor costs: $120,000
Standard Rates
Standard labor hours per unit: 0.20
Standard labor price per hour: $7.50
Square yards material per unit: 1.50
Standard price per yard: $1.15
Handle/rib/stretcher assembly per unit: 1
Standard price per handle assembly: $1.05
Companies can use variance analysis and benchmarking to measureperformance within their own company and against competitors. Thiscan be done by setting standards/budgets and comparing a completedvariance analysis to results from prior periods or comparing themto competitorsâ results. Using the information provided above,complete the following calculations (steps 1 and 2) in theHampshire Company Spreadsheet. This will assist you in respondingto all components of Section III.
Calculate price variances for material and labor and denotewhether they are favorable or unfavorable.
Calculate efficiency variances for material and labor and denotewhether they are favorable or unfavorable.
In order to measure performance and make use of the varianceanalysis completed, management understands the need to compareresults with their competitors. Following the steps outlined below,you will research benchmarking and propose the most effectiveapproach for your company. Respond to Parts A through C of SectionIII as outlined in the Final Project Guidelines and Rubricdocument.
Section IV: Alternative Costing Method
Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor:$8.00
In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:
Stick | Collapsible | |
Units Sold | 60,000 | 3,000 |
Selling Price | $12.50 | $14.00 |
Direct Material Cost per Unit | $3 | $3.10 |
Direct Labor Cost per Hour | $7.50 | $8.00 |
Variable Manufacturing Overhead | $0.40 | $0.40 |
Variable Selling Costs | $1.10 | $1.10 |
Labor Hours per Unit | 0.2 | 0.2 |
Sales Orders | 120 | 1 |
Purchase Orders | 50 | 3 |
Production Runs | 45 | 6 |
Material Moves | 86 | 10 |
Machine Setups | 130 | 6 |
Machine Hours | 525 | 32 |
Inspections | 200 | 10 |
Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
Activity | Activity Cost | Activity Cost Driver |
Order Processing | $35,000 | Number of Sales Orders |
Purchasing | $36,000 | Number of Purchase Orders |
Material Handing | $28,000 | Material Moves |
Machine Setup | $14,000 | Machine Setups |
Production | $99,000 | Production Runs |
Assembly | $80,000 | Machine Hours |
Inspecting | $11,000 | Number of Inspections |
Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.
Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:
1.Calculate the allocation rates foreach cost driver using ABC.
2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.
3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.
Based on your calculations from steps 1â4, respond to Parts Athrough C in Section IV as outlined in the Final Project Guidelinesand Rubric document.
Section V: Memo to Management
The management of the Hampshire Company is very interested inmeasuring performance. They would like you to recommend a strategyto increase business performance. They are not sure whether theyshould focus on product differentiation or cost leadership.Research additional performance tools to include the balancedscorecard. During your research, consider what performancemeasurements you would use based on the four perspectives. Provideexamples.
In your recommendation, you will want to include the outcome ofyour previous quantitative analysis and research performed relatedto cost-volume-profit (CVP), variable and absorption costing,just-in-time (JIT), standard costs, variances, and benchmarking.You will want to review key points and make recommendations basedon your current research and prior analysis completed and researchperformed.
Your two- to three-page memo to management must be submitted asa Word document and must include your responses to Parts A throughC of Section V as outlined in the Final Project Guidelines andRubric document.
