Homework Assignment
Exercise (1)
Chilton, Inc. sold 11,000 units last year for $20 each. Variable costs per unit were $4 for direct
materials, $1.50 for direct labor, and $2.50 for variable overhead. Fixed costs were $60,000 in
manufacturing overhead and $40,000 in nonmanufacturing costs.
a. What is the total contribution margin?
b. What is the unit contribution margin?
c. What is the contribution margin ratio?
d. If sales increase by 2,000 units, by how much will profits increase?
Answer:
a &b. VC/ unit = 4+1.5+ 2.5= 8
CM/unit = 20 – 8 = 12
TCM= 12x 11000 = 132000
CM Ratio= 12/20 = 0.6
c. Profits will increase by 2000 x 12 = 24000
Exercise (2)
The manager of Arbor, Inc. is considering raising its current price of $50 per unit by 10%. If she
does so, she estimates that demand will decrease by 30,000 units per month. Arbor currently sells
100,000 units per month, each of which costs $35 in variable costs. Fixed costs are $1,200,000.
a. What is the current profit? 50 x100,000
b. What is the current break-even point in units?
c. If the manager raises the price, what will profit be?
d. If the manager raises the price, what will be the new break-even point in units?
e. Assume the manager does not know how much demand will drop if the price increases. By
how much would demand have to drop before the manager would not want to implement the
price increase?
Answer:
a. $300,000 = ($50 × 100,000) - ($35 × 100,000) - $1,200,000
b. 80,000 = $1,200,000/($50 - $35)
c. $200,000 = [($50 × 1.10) × 70,000] - ($35 × 70,000) - $1,200,000
d. 60,000 = $1,200,000/($55 - $35)
e. 25,000 = 100,000 - [($1,200,000 + $300,000)/($55 - $35)]
Exercise (3)
Island Enterprises has presented the following information for the past eight months
operations:
Month Units Total Cost
April 4,000 $ 17,000
May 3,200 $ 14,900
June 1,400 $ 11,100
July 2,800 $ 13,200
August 3,500 $ 16,000
September 4,200 $ 17,400
October 3,900 $ 16,500
November 3,400 $ 15,700
a. Using the high-low method, calculate the fixed cost per month and variable cost per unit.
b. What would total costs be for a month with 3,000 units produced?
Answer:
a. VC/unit = (17400 – 11100)/ (4200 -1400) = 6300 /2800 = $2.25 / unit
TFC = 11100 - 1400 x 2.25= 7950
b. TC (3000) = 7950 + (2.25 x 1400) = 14250
Exercise Four:
Graham Corp. sells two products. Product A sells for $200 per unit and has unit variable costs of
$150. Product B sells for $50 per unit and has unit variable costs of $20. Currently, Graham sells
three units of Product B for every two units of Product A sold. Graham has fixed costs of
$760,000. How many units would Graham have to sell to earn a profit of $57,000?
Answer:
The weighted average unit contribution margin is [($200 - $150) × 2/5] + [($50 - $20) × 3/5] =
$38. Target units are ($760,000 + $57,000)/$38 = 21,500 units: 21,500 × 2/5 = 8,600 of product
A, and 21,500 × 3/5 = 12,900 of product B.
Exercise Five:
Benjamin Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for
its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products
follows:
A B C
Projected sales in dollars….. $192,000 $192,000 $64,000
Selling price per unit………. $40 $30 $40
Contribution margin ratio…... 30% 35% 35%
a. Calculate the company's break-even point in composite units and sales dollars.
b. Calculate the number of units of each individual product to be sold at the break-even
point
Answer
Answer:
3 units of A at $40 each $120
4 units of B at $30 each 120
1 unit of C at $40 each 40
Selling price of a composite unit $280
Contribution margin of A ($120 * 30%)…….. $36
Contribution margin of B ($120 * 35%)…….. 42
Contribution margin of C ($40 * 35%)…….. 14
Contribution margin of composite unit…….. $92
(a)
Break-even point in composite units = $69,000/$92 = 750 composite units
Break-even point in sales dollars = 750 * $280 = $210,000
(b) At break-even point: 750 * 3 = 2,250 units of A
750 * 4 = 3,000 units of B
750 * 1 = 750 units of C
