Orange Company's controller developed the following direct-costing income statement for Year 1:Orange Co. based its next year's budget on the assumption that fixed costs, unit sales, and the sales price would remain as they were in Year 1, but with net income being reduced to $300,000. By July of Year 2, the controller was able to predict that unit sales would increase over Year 1 levels by 10%. Based on the Year 2 budget and the new information, the predicted Year 2 net income would be
Answer(s): C
Projected net income is estimated total revenue minus estimated total costs. Given the original assumption that FC, unit sales, and sales price remain the same, and that net income will be reduced, the variable costs must increase. If the JulyYear2 prediction that unit sales will increase by 10% from 150,000 to 165,000 is based on the budgeted PC, sales price, and VC, predicted net income will increase from $300,000 to $420,000.
Moorhead Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of $1 .00 per machine hour. The sales manager has had a $160,000 increase in the budget allotment for adverbsing and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company's customers.Suppose the sales manager chooses to devote the entire $160,000 to increased advertising for XY-7, The minimum increase in sales units of XY-7 required to offset the increased advertising is
Answer(s): B
The contribution margin (CM) for XY-7 is $1 per unit ($4 sales price --$3 variable costs). Thus, 160,000 units of XY-7 will generate an additional $160,000 of CM, which is sufficient to cover the increase in adverting cost
Moorhead Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of $1 .00 per machine hour. The sales manager has had a $160,000 increase in the budget allotment for advertising and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company's customers.Suppose the sales manager chooses to devote the entire $160,000 to increased advertising for BD-4. The minimum increase in sales dollars of BD-4 required to offset the increased advertising would be
Sales dollars must increase sufficiently to cover the $160,600 increase in advertising. The unit contribution margin for BD-4 is $50 ($3 -- $2.50 variable costs), and the CMR is 1/6 (UCM $3 sales price). Dividing the $160,000 by 1/6 gives the sales dollars necessary to generate a CM of $960,000 ($160,000 ÷ 1/6 $960,000).
Moorhead Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of $1.00 per machine hour. The sales manager has had a $160,000 increase in the budget allotment for advertising and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company's customers.Suppose Moorhead has only 100,000 machine hours that can be made available to produce additional units of XY-7 and BD-4. If the potential increase in sales units for either product resulting from advertising is far in excess of this production capacily, which product should be advertised and what is the estimated increase in contribution margin earned?
Answer(s): D
The machine hours are a scarce resource that must be allocated to the product(s) in a proportion that maximizes the total CM. Given that potential additional sales of either product are in excess of production capacily, only the product with the greater CM per unit of scarce resource should be produced. XY-7 requires .75 hours; BD-4 requires .2 hours of machine time (given fixed manufacturing cost applied at $1 per machine hour of $.75 for XY-7 and $.20 for BD-4). XY-7 has a CM of $1.33 per machine hour ($1 UCM ÷ .75 hours)1 and BD-4 has a CM of $2.50 per machine hour ($.50 ÷ .2 hours). Thus1 only BD-4 should be produced1 yielding a CM of $250,000 (100,000 x $2.50). The key to the analysis is CM per unit of scarce resource.
Multi Frame Company has the following revenue and cost budgets for the two products it sells:The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, Multi Frame rounds to the nearest cent and unit.The total number of units Multi Frame needs to produce and sell to break even is
Answer(s): A
The calculation of the breakeven point is to divide the fixed costs by the contribution margin per unit. This determination is more complicated for a multi-product firm. If the same proportional product mix is maintained, one unit of plastic frames is sold for every three units of glass frames. Accordingly, a composite unit consists of four frames:one plastic and three glass. For plastic frames, the unit contribution margin is $5 ($10-- $2 --$3). For glass frames, the unit contribution margin is $7 ($15 --$3-- $5). Thus, the composite unit contribution margin is $26 ($5 + $7 + $7 + $7), and the breakeven point is 37,500 packages ($975,000 EC + $26). Because each composite unit contains four frames, the total units sold equal 150,000.
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