ACC 310F Chapter Notes - Chapter 2: Regression Analysis, Cost Accounting, Fixed Cost

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blackeagle417

7 Feb 2017

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Estimate the profit of short-term decision options. Revenue: assume tom and lynda expect to gain 30 new members from offering yoga, and the monthly revenue per member is . (30 new members = ,400 per month, or ,800 per year) Fixed costs: the yoga instructor"s annual salary of ,000 is a fixed cost that is attributable to the decision to offer the yoga class. In addition, tom and lynda plan to spend. Combining both, we can estimate the additional fixed costs connected with the yoga class at ,000 per year. Variable costs: the monthly variable cost per member is . Multiplying this variable cost per member by the 30 new members show that variable costs would increase by per month, or. Molly"s response indicates that she believes all of her costs are variable. That is, she appears to believe that it costs. . 50 per record regardless of the number of records sold.

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Case 9-6: Profit PlanningâChoice of CostStructure

The owner of a package delivery business is currently evaluatingthe choice between two different cost structures, based on how thedelivery personnel are paid. One option (hereafter, âAlternative#1â) has relatively higher short-term fixed costs, while the otheroption (hereafter, âAlternative #2â) has the reverseâthat is,relatively higher variable costs in its cost structure. (Forsimplicity in this example we hold the delivery cost per package,that is, the selling price per unit is constant. Selling price isindependent of the cost-structure choice.) The following tablecontains pertinent information for creating the CVP model for eachdecision alternative:

Decision Inputs (Data)	Cost Structure Alternative #1	Cost Structure Alternative #2
Delivery price (i.e., revenue) per package	$60	$60
Variable cost per package delivered	$48	$30
Contribution margin per unit	$12	$30
Fixed costs (per year)	$600,000	$3,000,000

Requirements

1. Assume that for the comingyear total fixed costs are expected to increase by 10% for each ofthe two alternatives. What is the new break-even point, in terms ofnumber of deliveries, for each decision alternative? By whatpercentage did the break-even point change for each case? How dothese figures compare to the percentage increase in budgeted fixedcosts?

2. Assume an average income-tax rate of 40%. What volume (numberof deliveries) would be needed to generate an after-taxprofit, Ï_A, of 5% of sales for each alternative?

raspberryskunk522

Decision Inputs (Data)	Cost Structure Alternative #1	Cost Structure Alternative #2
Delivery price (i.e., revenue) per package	$60	$60
Variable cost per package delivered	$48	$30
Contribution margin per unit	$12	$30
Fixed costs (per year)	$600,000	$3,000,000

(1) Assume that forthe coming year total fixed costs are expected to increase by 10%for each of the two alternatives. What is the new break-even point,in terms of number of deliveries, for each decision alternative? Bywhat percentage did the break-even point change for each case? Howdo these figures compare to the percentage increase in budgetedfixed costs?

(2) Assume an averageincome-tax rate of 40%. What volume (number of deliveries) would beneeded to generate an after-tax profit, ?_A, of 5%of sales for each alternative?

(3) Consider the original data in the problem. Construct a graphfor each of the two alternatives depicting pre-tax profit,?_B, as function of volume (number of deliveries peryear). Clearly label the profit equation for eachalternative.

(4) Based on the graphs prepared in (9), which decisionalternative do you think is the more profitable one for thisbusiness?

(5) Based on the original data and the graphs prepared above in(10), which decision alternative is more risky to thebusiness? Explain. (Hint: Think about, and define in your answer,the notion of

ceruleansnake410

As you know, we have been renting Building X for several yearsto the Smith Company for $30,000 per year. Their lease expires atthe end of the year. Instead of renewing the lease, I have beenthinking that we should use that part of our plant to manufacture anew product. The direct materials cost for the new product willtotal $80 per unit. To have a place to store finished units of theproduct, we will rent a small warehouse nearby. The rental costwill be $500 per month. In addition, we must rent equipment for usein producing the new product; the rental cost will be $4,000 permonth. We will hire workers to manufacture the new product, withthe direct labor cost amounting to $60 per unit. The space inBuilding X will continue to be depreciated on a straight-linebasis, as in prior years. This depreciation is $8,000 per year.Advertising costs for the new product will total $50,000 per year.I am going to hire a supervisor to oversee production; her salarywill be $3,500 per month. Electricity for operating the machineswill be $1 per unit. The cost of shipping the new product tocustomers will be $9 per unit. To provide funds to purchasematerials, meet payroll, and so forth, we will have to liquidatesome temporary investments. These investments are presentlyyielding a return of about $3,000 per year. I would like to sellthe new product for $200 per unit. The marketing department thinksthat at that price we should be able to sell 4,000 units everyyear. Please review the costs below and let me know if you thinkthe costs should be classified as a product cost, a period cost, oran opportunity cost (pick one). I also would like to know if thebehavior of the product cost or period cost is fixed or variable.Opportunity costs should not be classified as fixed or variable.(Hint: There are two opportunity costs in this problem. They arethe two items that are ârevenueâ in the list of costs.) Name ofCost Variable or Fixed Cost Product Cost Period Cost OpportunityCost Rental revenue (from Smith Co.) forgone, $30,000 per yearDirect materials cost, $80 per unit Rental cost of warehouse, $500per month Rental cost of equipment, $4,000 per month Direct laborcost, $60 per unit Depreciation of Building X, $8,000 per yearAdvertising cost, $50,000 per year Supervisorâs salary, $3,500 permonth Electricity for machines, $1 per unit Shipping cost, $9 perunit Revenue earned on investments, $3,000 per year Based on theinformation above, do you think we should manufacture the newproduct or should we continue to rent to Smith Company? In thespace below and on the next pages, please provide me with numbersto support your answer. Are there any costs that are not relevantin this decision? How many units do we need to sell in order toâbreak even?â Option 1: Continue to rent to Smith Company Rentalrevenue from Smith _______________ Investment revenue_______________ Total revenue _______________ Expenses:________________________ _______________ Net operating income_______________ Option 2: Manufacture the new product Henry HawkinsIndustries Contribution Format Income Statement: New Product Forthe Year Total Per Unit Sales (4,000 units) $800,000 $200 Variableexpenses: _____________________ _______________ ___________________________ _______________ ______ ____________________________________ ______ _____________________ _______________ ______Total variable expenses _______________ ______ Contribution margin_______________ ______ Fixed expenses: ____________________________________ _____________________ ____________________________________ _______________ ____________________________________ _____________________ _______________ Total fixedexpenses _______________ Net operating income _______________Questions: 1. Do you recommend Option 1 or Option 2? 2. Which costis not relevant to the decision? (Hint: which cost shows up in bothoptions.) 3. How many units of the new product do we need to sellin order to âbreak-even?â (Break-even is where the net operatingincome is zero.)

redsnake37

ACC 310F Chapter Notes - Chapter 2: Regression Analysis, Cost Accounting, Fixed Cost

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