CHAPTER 1: Management Accounting Defined, Described, and Compared to Financial Accounting

MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES

By Dennis Caplan, University at Albany (State University of New York)

CHAPTER 5:� Exercises and Problems:

5-1: Sara, Sarah, Shara and Associates want to earn a total contribution margin of $10,000 on sales of 1,000 units. Their sales price is $15 per unit, and their fixed costs are $5,000. What variable cost per unit is necessary to achieve their goal?

5-2: George and Gracie both make the same product, and sell it for the same sales price. Gracie has a higher variable cost per unit than George. George has higher fixed costs than Gracie. Who has the higher breakeven point, in terms of number of units sold?

(A) �� Gracie has a higher breakeven point than George.

(B) �� George has a higher breakeven point than Gracie.

(D) �� Impossible to ascertain, from the information given.

5-3: The Virginia Company has fixed costs of $100,000 per month, and variable costs of $30 per unit of output. The sales price is $50 per unit of output. How many units would the company have to sell per month, to generate profits of $30,000 per month?

5-4: The Charleston Company has fixed costs of $20,000 per month, and variable costs of $15 per unit of output. The company would like to earn profits of $4,000 per month. At a sales volume of 12,000 units per month, what sales price per unit would the company have to charge in order to achieve its targeted monthly profit?

5-5: The Delaware Company has fixed costs of $100,000 per year and variable costs of $10 per unit of output. The Pennsylvania Company has fixed costs of $120,000 per year and variable costs of $9 per unit of output. The sales price per unit is the same for both companies. Identify a sales price at which both companies will have the same break-even point in terms of number of units sold.

5-6: The Biloxi Company has the following cost structure: fixed costs of $70,000 per month and variable costs of $50 per unit. The Birmingham Company has the following cost structure: fixed costs of $60,000 per month and variable costs of $60 per unit. Both companies make the same product, which sells for $100 per unit. There is a sales level at which these two companies earn the same profits. What is that sales level? Which company is more profitable as sales volume exceeds this sales level?

5-7: Company X and Company Y sell the same product for the same price. Company X has fixed costs of $100 and variable costs of $10 per unit. Company Y has fixed costs of $200 and variable costs of $8. What is the unit sales price at which these companies will have the same break-even point in terms of unit sales?

5-8: Eliza sells flowers in Covent Garden. Her fixed costs are $50 per day. Her average sales price is $4 per flower. She is currently selling 400 flowers per day. Her current variable cost is $3 per flower. Eliza anticipates that her daily sales will increase to 500 flowers per day. How much could her variable cost per flower increase for her to still earn the same daily profits as before?

5-9: The following information is available for the publisher of �Frank the Cow Dog� Children�s Books:

�� Variable cost:� $10.00 per book

�� Sales price:�� $15.00 per book

�� Fixed costs:�� $35,000 per year

These costs apply over a relevant range of the production of one book to the production of 40,000 books.

Required:

A) What is the contribution margin per unit?

B) What would operating income be at a sales level of 15,000 books?

C) What is the breakeven point in units?

D) Ignore the sales price of $15 per book. What would the sales price have to be for the publisher to earn operating income of $165,000 on sales of 25,000 books?

5-10: The Emerald Street Ice Cream Shop sells ice cream cones. The store�s cost structure is as follows: fixed costs per month are $2,000. Variable costs are $1.50 for a single scoop cone and $1.75 for a double scoop cone.

Required:

A) �� If Emerald Street only sells double scoop cones, and sells them for $4.25 per cone, what is the break-even point in units?

B) �� If Emerald Street only sells single scoop cones, and charges $3.50 per cone, how many ice cream cones would Emerald Street have to sell to make a profit of $3,000 per month?

C) �� Assume that Emerald Street wants to sell only double scoop cones, and believes it can sell 8,000 cones per month at $4.25 per cone. What would the variable cost per cone have to be for Emerald Street to make a profit of $8,000 per month?

D) �� Ignore Part (C) and refer to the original information. If Emerald Street only sells single scoop cones, and sells 5,000 cones per month for $3.60 per cone, what is the contribution margin per unit?

5-11: Teddy Bear Fudge Company makes two types of fudge: plain fudge and fudge with nuts. Following is information about the company�s cost structure when 1,000 pounds of fudge are produced. There is no direct labor.

��

Overhead

Plain Fudge

Fudge with Nuts

Per unit information:

Sales price per pound

Direct materials per pound

Sales commission per pound

Variable overhead

Fixed costs:

Fixed manufacturing overhead

Fixed non-manufacturing overhead

$500

$2,000

$300

$8.00

$2.00

$0.50

$8.00

$2.25

$0.50

Required: Assuming that variable overhead costs are linear in the quantity of production (i.e., pounds of fudge), and assuming that 50% of sales are plain fudge, and 50% of sales are fudge with nuts, calculate the breakeven point in pounds of fudge.�

��

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