3-18
Sunny Spot Travel Agency specializes in flights between
Toronto and Jamaica. It books passengers on Canadian
Air. Sunny Spot’s fixed costs are $23,500 per month.
Canadian Air charges passengers $1,500 per round-trip
ticket.
Calculate the number of tickets Sunny Spot must sell
each month to (a) break even and (b) make a target
operating income of $17,000 per month in each of the
following independent cases.
1. Sunny Spot’s variable costs are $43 per ticket. Canadian
Air pays Sunny Spot 6% commission on ticket price.
2. Sunny Spot’s variable costs are $40 per ticket. Canadian
Air pays Sunny Spot 6% commission on ticket price.
3. Sunny Spot’s variable costs are $40 per ticket. Canadian
Air pays $60 fixed commission per ticket to Sunny Spot.
Comment on the results.
4. Sunny Spot’s variable costs are $40 per ticket. It receives
$60 commission per ticket from Canadian Air. It charges its
customers a delivery fee of $5 per ticket. Comment on the
results.
Solution
1
1. a
SP = 6% × $1,500 = $90 per ticket
VCU = $43 per ticket
CMU = $90 – $43 = $47 per ticket
FC = $23,500 a month
Fixed costs (FC)
Breakeven number of
= Contribution margin
units (Q)
per unit (CMU)
$23,500
=
$47 per ticket
= 500 tickets
1. b
FC+TOI
Q =
CMU
$23,500 + $17,000
Q =
$47 per ticket
= 862 tickets
2. a
SP = $90 per ticket
VCU = $40 per ticket
CMU = $90 – $40 = $50 per ticket
2
FC = $23,500 a month
FC
Q =
CMU
$23,500
Q =
$50 per ticket
= 470 tickets
2.b
FC+TOP
Q =
CMU
$23,500 + $17,000
Q =
$50 per ticket
= 810 tickets
3.a
SP = $60 per ticket
VCU = $40 per ticket
CMU = $60 – $40 = $20 per ticket
FC = $23,500 a month
FC
Q =
CMU
$23,500
Q =
$20 per ticket
= 1,175 tickets
3.b
FC+TOP
Q =
CMU
$23,500 + $17,000
Q = 3
$20 per ticket
= 2,025 tickets
4.a
SP = $65 ($60 + $5) per ticket
VCU = $40 per ticket
CMU = $65 – $40 = $25 per ticket
FC = $23,500 a month
FC
Q =
CMU
$23,500
Q =
$25per ticket
= 940 tickets
4.b
FC+TOP
Q =
CMU
$23,500 + $17,000
Q =
$25 per ticket
= 1,620 tickets
3-23
Tuff Kids Jeans Co. sells blue jeans wholesale to major
retailers across the country. Each pair of jeans has a
4
selling price of $30 with $21 in variable costs of goods
sold. The company has fixed manufacturing costs of
$1,200,000 and fixed marketing costs of $300,000.
Sales commissions are paid to the wholesale sales reps
at 5% of revenues. The company has an income tax
rate of 25%.
Required:
1. How many jeans must Tuff Kids sell in order to
break even?
2. How many jeans must the company sell in order
to reach:
a. a target operating income of $450,000?
b. a net income of $450,000?
3. How many jeans would TuffKids have to sell to
earn the net income in part 2b if (consider each
requirement independently).
a. The contribution margin per unit increases by
10%
b. The selling price is increased to $32.50
c. The company outsources manufacturing to an
overseas company increasing variable costs
per unit by $2.00 and saving 60% of fixed
manufacturing costs.
Solution
1. CMU = $30−$21−(0.05 × $30) = $7.50
5
FC $1,500,000
Q = CMU = $7.50 per pair
= 200,000 pairs
Note: No income taxes are paid at the breakeven point because operating
income is $0.
FC + TOI $1,500,000 $450,000
2a. Q = CMU = $7.50 per pair
$1,950,000
= $7.50 per pair
= 260,000 pairs
2b. Target operating income =
Target net income $450, 000 $450, 000
1 tax rate (1 0.25) 0.75 $600,000
Quantity of output units
required to be sold =
Fixed costs + Target operating income $1, 500, 000 $600, 000
Contribution margin per unit $7.50
= 280,000 pairs
3a. Contribution margin per unit increases by 10%
Contribution margin per unit = $7.50 × 1.10 = $8.25
Quantity of output units
required to be sold =
Fixed costs + Target operating income $1, 500, 000 $600, 000
Contribution margin per unit $8.25
= 254,545 pairs (rounded)
3b.
Increasing the selling price to $32.50
Contribution margin per unit =
$32.50 − $21 − (0.05 × $32.50) = $9.875
6
Quantity of output units
required to be sold =
Fixed costs + Target operating income $1, 500, 000 $600, 000
Contribution margin per unit $9.875
= 212,658 pairs (rounded)
3c.
Increase variable costs by $2.50 per unit and decrease fixed
manufacturing costs by 50%.
Contribution margin per unit = $30 – $23 ($21 + $2) – (0.05 × $30) = $5.50
Fixed manufacturing costs = (1 – 0.6) × $1,200,000 = $480,000
Fixed marketing costs = $300,000
Total fixed costs = $480,000 + $300,000 = $780,000
Quantity of output units Fixed costs + Target operating income $780, 000 $600, 000
required to be sold = Contribution margin per unit $5.50
= 250,909 pairs (rounded)
