Question 1

The current selling price is $90 per unit and variable expenses are $60 per unit. Fixed expenses are $810,000 per year. The current sales volume is 30,000 units.

Required :

(a) What is the current annual operating income
(b) What is the current break-even point in units and dollar sales?
(c) Assume the company wants to generate an operating income equal to 10% of sales. How many units must be sold to meet this objective?
(d) Assume that the vice president of marketing believes that a 4% cut in the selling price accompanied by a $150,000 increase in advertising costs will cause sales volume to increase by 40%. Calculate the incremental income of this scenario.
(e) The vice president of marketing believes that his firm can increase sales by selling 10,000 units for each $3 reduction in selling price. What is the maximum profit that the firm could generate? What is the units sold, selling price and operating income at that level?
(f) What would be the break-even point(s) in units and in dollar sales using the selling price(s) you have determined in part (e)?

Question 2

Mistry Company manufactures a line of electric garden tools that are sold in general hardware stores. The sales forecast for the coming year for Mistry's three products:
weeders, hedge clippers, and leaf blowers for 20x8 is presented as follows:

                                                           Weeders       Hedge Clippers        Leaf Blowers
Unit sales                                            50,000               50,000                     100,000
Unit selling price                                    $28                    $36                          $48
Variable manufacturing cost per unit     $13                    $12                          $25
Variable selling cost per unit                  $5                      $4                            $6

For 20x8, Mistry's fixed factory overhead is budgeted at $2,000,000, and the company's fixed selling and administrative expenses are forecasted to be $600,000.

Required:

Assuming the sales mix remains as budgeted, determine how many units of each product Mistry Company must sell in order to break even in 20x8.

Question 3

The estimates made for Nixon Company, a one-product company, are as follows:
                                                                   Nixon Company
                                                         Projected Income Statement
                                                 For The Year Ended December 31, 1995

Sales revenue (100 units x $100 per unit)                                                          $10,000
Manufacturing cost of goods sold:
Direct materials                                                                           $1,400
Direct labour                                                                                1,500
Variable overhead                                                                       1,000
Fixed overhead                                                                              500                     4,400
Gross margin                                                                                                             5,600
Selling and administrative expenses:
Variable                                                                                        1,100
Fixed                                                                                             2,000                  3,100
Operating income                                                                                                  $ 2,500

Required:

a. How many units of the product must Nixon sell to break even?
b. What would be the operating income if projected unit sales increased by 25%?

Question 4

Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the
following schedule of budgeted monthly costs. This schedule was prepared based on an expected monthly production volume of 1,500 units.

Manufacturing costs

Variable cost per unit
   Direct materials                                                    $25
   Direct labour                                                          30
   Variable overhead                                                   5
Total fixed overhead                                        $60,000

Selling and administrative costs
Variable                                                       6% of sales
Fixed                                                                 $45,000

During August 20x5, the following activity was recorded:

Units produced                                                     1,500
Units sold                                                             1,200
Selling price per unit                                             $150

Required :

(a) Prepare an income statement for the month ended August 31, 20x5, under absorption costing.
(b) Prepare an income statement for the month ended August 31, 20x5, under variable costing.
(c) Reconcile the absorption costing and variable costing income figures for the month.