Cost Management Chaoter 4 solutions
Chapter 4
3-17
1a. Sales ($68 per unit × 410,000 units) $27,880,000 Variable costs ($60 per unit × 410,000 units) 24,600,000 Contribution margin $ 3,280,000
1b. Contribution margin (from above) $3,280,000 Fixed costs 1,640,000 Operating income $1,640,000
2a. Sales (from above) $27,880,000 Variable costs ($54 per unit × 410,000 units) 22,140,000 Contribution margin $ 5,740,000
2b. Contribution margin $5,740,000 Fixed costs 5,330,000 Operating income $ 410,000
3 Operating income is expected to decrease by $1,230,000 ($1,640,000 − $410,000) if Ms. Schoenen’s proposal is accepted. The management would consider other factors before making the final decision. It is likely that product quality would improve as a result of using state of the art equipment. Due to increased automation, probably many workers will have to be laid off. Garrett’s management will have to consider the impact of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This will increase the company’s operating leverage and risk.
3-25
1a. Let Q denote the quantity of carpets sold Breakeven point under Option 1 $500Q $350Q = $5,000 $150Q = $5,000 Q = $5,000 $150 = 34 carpets (rounded up)
1b. Breakeven point under Option 2 $500Q $350Q (0.10 $500Q) = 0 100Q = 0 Q = 0
2. Operating income under Option 1 = $150Q $5,000 Operating income under Option 2 = $100Q
Find Q such that $150Q $5,000 = $100Q $50Q = $5,000 Q = $5,000 $50 = 100 carpets Revenues = $500 × 100 carpets = $50,000 For Q = 100 carpets, operating income under both Option 1 ($150 × 100 – $5,000) and Option 2 ($100 × 100) = $10,000
For Q > 100, say, 101 carpets, Option 1 gives operating income = ($150 101) $5,000 = $10,150 Option 2 gives operating income = $100 101 = $10,100 So Color Rugs will prefer Option 1.
3-17
1a. Sales ($68 per unit × 410,000 units) $27,880,000 Variable costs ($60 per unit × 410,000 units) 24,600,000 Contribution margin $ 3,280,000
1b. Contribution margin (from above) $3,280,000 Fixed costs 1,640,000 Operating income $1,640,000
2a. Sales (from above) $27,880,000 Variable costs ($54 per unit × 410,000 units) 22,140,000 Contribution margin $ 5,740,000
2b. Contribution margin $5,740,000 Fixed costs 5,330,000 Operating income $ 410,000
3 Operating income is expected to decrease by $1,230,000 ($1,640,000 − $410,000) if Ms. Schoenen’s proposal is accepted. The management would consider other factors before making the final decision. It is likely that product quality would improve as a result of using state of the art equipment. Due to increased automation, probably many workers will have to be laid off. Garrett’s management will have to consider the impact of such an action on employee morale. In addition, the proposal increases the company’s fixed costs dramatically. This will increase the company’s operating leverage and risk.
3-25
1a. Let Q denote the quantity of carpets sold Breakeven point under Option 1 $500Q $350Q = $5,000 $150Q = $5,000 Q = $5,000 $150 = 34 carpets (rounded up)
1b. Breakeven point under Option 2 $500Q $350Q (0.10 $500Q) = 0 100Q = 0 Q = 0
2. Operating income under Option 1 = $150Q $5,000 Operating income under Option 2 = $100Q
Find Q such that $150Q $5,000 = $100Q $50Q = $5,000 Q = $5,000 $50 = 100 carpets Revenues = $500 × 100 carpets = $50,000 For Q = 100 carpets, operating income under both Option 1 ($150 × 100 – $5,000) and Option 2 ($100 × 100) = $10,000
For Q > 100, say, 101 carpets, Option 1 gives operating income = ($150 101) $5,000 = $10,150 Option 2 gives operating income = $100 101 = $10,100 So Color Rugs will prefer Option 1.