ACC 406 Chapter Notes - Chapter 4: Earnings Before Interest And Taxes, Fixed Cost, Income Statement
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The Wildhorse Company sells sports decals that can be personalized with a playerâs name, a team name, and a jersey number for $7.00 each. Wildhorse buys the decals from a supplier for $2.60 each and spends an additional $0.70 in variable operating costs per decal. The results of last monthâs operations are as follows:
| Sales revenue | $14,000 | |
| Cost of goods sold | 5,200 | |
| Gross profit | 8,800 | |
| Operating expenses | 3,100 | |
| Operating income | $5,700 |
1. Calculate contribution margin per unit. (Round answer to 2 decimal places, e.g. 0.38.)
2. What is Wildhorseâs monthly breakeven point in units? In dollars? (Use your answer of breakeven units to calculate the breakeven point in dollars. Round Breakeven units and point in dollar to 0 decimal places, e.g. 25,000.)
3. What is Wildhorseâs margin of safety? (Round answers to 0 decimal places, e.g. 25,000.)
| Basic information | |||
| Exhibit 1 Hallstead Jewelers | |||
| Income Statements for YearsEnded January 31 (thousands of dollars) | |||
| 2003 | 2004 | 2006 | |
| Sales | $9,000,000 | $8,000,000 | $11,000,000 |
| Cost of goods sold | 4,050,000 | 3,600,000 | 4,950,000 |
| Gross margin | $4,950,000 | $4,400,000 | $6,050,000 |
| Expenses | |||
| Selling expense | |||
| Salaries | 2,021,000 | 2,081,000 | 4,085,000 |
| Commissions | 450,000 | 400,000 | 550,000 |
| Advertising | 254,000 | 250,000 | 257,000 |
| Administrative expenses | 418,000 | 425,000 | 535,000 |
| Rent | 420,000 | 420,000 | 840,000 |
| Depreciation | 84,000 | 84,000 | 142,000 |
| Miscellaneous expenses | 53,000 | 93,000 | 122,000 |
| Total expenses | $3,700,000 | $3,753,000 | $6,531,000 |
| Net income | $1,250,000 | $647,000 | $(481,000) |
| Exhibit 2 Hallstead JewelersOperating Statistics | |||
| 2003 | 2004 | 2006 | |
| Sales space (square feet) | 10,000 | 10,000 | 15,000 |
| Sales per square foot | $900 | $800 | $733 |
| Sales tickets | 5,000 | 5,000 | 7,000 |
| Average sales ticket | $1,800 | $1,600 | $1,571 |
Assumptions:
Sales price per ticket = $1,572
Variable cost per unit = $786 (cost of goods sold of $707 +Sales commissions of $79)
Complete the table below:
Alternative #1 | Per unit | Total | Per unit | Total |
# of sales tickets | 7000 | |||
Selling price per ticket | $1,572 | $11,000,000 | ||
Variable cost per ticket | $786 | $5,500,000 | ||
Contribution margin per ticket | $786 | $5,500,000 | ||
Total fixed costs | 5,981,000 | |||
Net income | $(481,000) | |||
Change in net income if accept alternative | ||||
Breakeven point in units | 7,610 | |||
Review of Question #4 requirements. Increase advertisingby $20,000, increase sales revenue (volume) by 2%.
For each question, answer yes or no for each piece ofinformation listed.
Information | For this alternative only, is there a change in this item thataffects calculation of net income? Yes or No | For this alternative only, is there a change in this item thateffects the calculation of the new breakeven point? Yes or No |
Selling price per unit | ||
Variable cost per unit | ||
Total fixed costs | ||
Net income | ||
Sales volume |
Complete the table below:
Alternative #3 | Per unit | Total | Per unit | Total |
# of sales tickets | 7000 | |||
Selling price per ticket | $1,572 | $11,000,000 | ||
Variable cost per ticket | $786 | $5,500,000 | ||
Contribution margin per ticket | $786 | $5,500,000 | ||
Total fixed costs | 5,981,000 | |||
Net income | $(481,000) | |||
Change in net income if accept alternative | ||||
Breakeven point in units | 7,610 | |||
Alternatives | Change in Net Income | New Breakeven point in units | Change in Breakeven point in units |
#1 Decrease SP, Increase sales volume | |||
#2 Eliminate sales commissions | Increases by $550,000 | 6,914 | Decreases by 696 |
#3 increase Fixed costs by $20,000 to get increase of 2% salesrevenue (volume) |
