3-22

1a. Sales ($68 per unit × 410,000 units) 27,880,000.00

Variable costs ($60 per unit × 410,000 units)24,600,000.00
Contribution margin 3,280,000.00

1b. Contribution margin (from above) 3,280,000.00

Fixed costs 1,640,000.00
Operating income 1,640,000.00

2a. Sales (from above) 27,880,000.00

Variable costs ($54 per unit × 410,000 units)22,140,000.00
Contribution margin 5,740,000.00

2b. Contribution margin $5,740,000

Fixed costs 5,330,000.00
Operating income 410,000.00

3. Operating income is expected to decrease by $1,230,000 ($1,640,000 − $410,000) if Ms. Schoenen’s proposal
is accepted. Other factors shoud be considered such as:
-> product quality would improve as a result of using state of the art equipment
-> increased automation would probably result to many workers will have to be laid off
-> impact on employee morale should be considered
-> proposal increases the company’s fixed costs dramatically.

3-23

1a. SP = 6% × $1,500 = $90 per ticket

VCU = $43 per ticket
CMU = $90 – $43 = $47 per ticket
FC = $23,500 a month

Q= FC = 23,500.00 = 500
CMU 47 per ticket tickets

1b. Q = FC + TOI = 23,500 + 10,000 = 713

CMU 47 per ticket tickets

2a. SP = 6% × $1,500 = $90 per ticket

VCU = $40 per ticket
= $40 per ticket
CMU = $90 – $40 = $50 per ticket
FC = $23,500 a month

Q= FC = 23,500.00 = 470
CMU 50 per ticket tickets

2b. Q = FC + TOI = 23,500 + 10,000 = 670

CMU 50 per ticket tickets

3a. SP = $60 per ticket

VCU = $40 per ticket
CMU = $60 – $40 = $20 per ticket
FC = $23,500 a month

Q= FC = 23,500.00 = 1,175
CMU 20 per ticket tickets

3b. Q = FC + TOI = 23,500 + 10,000 = 1,675

CMU 20 per ticket tickets
-> The reduced commission sizably increases the breakeven point and the number of tickets required to yield a
target operating income of $10,000:

6% Commission Fixed
(Requirement 2) Commission of $60
Breakeven point 470 1,175
Attain Operating Income of 10,000 670 1,675

4a. The $5 delivery fee can be treated as either an extra source of revenue (as done below) or as a cost offset. Either approach
increases CMU $5:
SP = $65 ($60 + $5) per ticket
VCU = $40 per ticket
CMU = $65 – $40 = $25 per ticket
FC = $23,500 a month

Q= FC = 23,500.00 = 940
CMU 25 per ticket tickets

4b. Q = FC + TOI = 23,500 + 10,000 = 1,340

CMU 25 per ticket tickets

The $5 delivery fee results in a higher contribution margin, which reduces both the breakeven point and the tickets sold to attain
operating income of $10,000.

3-27
Target Revenues = Fixed Costs + Target Operating Income OR
Contribution Margin Percentage

Target Net Income 117,600

Target Revenues = Fixed Costs + (1- Tax Rate) = 430,500 + (1-0.36)
Contribution Margin Percentage 0.6

= 1,022,916.67

To Check:
Variable Cost Percentage = 3.50/8.75 = 40%

Revenues $1,023,750
Variable costs (at 40%) 409,500
Contribution margin 614,250
Fixed costs 430,500
Operating income 183,750
Income taxes (at 36%) 66,150
Net income $ 117,600

2a. Customers needed to break even:

Contribution margin per customer = $8.75 – $3.50 = $5.25
Breakeven number of customers = Fixed costs ¸ Contribution margin per customer
= $430,500 / $5.25 per customer
= 82,000 customers

2b. Customers needed to earn net income of $117,600:

=Total revenues/ Sales check per customer
$1,023,750 / $8.75 = 117,000 customers

3. Op Inc = Number of customers*Selling price per customer – Number of customers*Variable cost per customer – Fixed costs
= 170,000 * $8.75 – 170,000 * $3.50 – $430,500 = $462,000

Net income = Operating income × (1 – Tax rate) = $462,000 × 0.64 = $295,680

3-28
1. CMU = $50−$35−(0.10 × $50) = $10
Q= FC = 2,500,000.00 = 250,000
CMU 10 per ticket tickets
Note: No income taxes are paid at the breakeven point because operating income is $0.

2a. Q = FC + TOI = 2,500,000 + 420,000 = 292,000

CMU 10 per ticket tickets

2b. Target Operating Income = Target Net Income= 420,000 = 525,000.00

1 - Tax Rate (1-0.2)
Quantity of = Fixed Costs + Target Operating Income = 2,500,000 + 525,000
Output Units Contribution Margin per Unit 10
Required to be sold
= 302,500 pairs

3a. Contribution margin per unit increases by 10%

Contribution margin per unit = $10 × 1.10 = $11
Quantity of = Fixed Costs + Target Operating Income = 2,500,000 + 525,000
Output Units Contribution Margin per Unit 11
Required to be sold
= 275,000 pairs
-> The net income target in units decreases from 302,500 pairs in requirement 2b to 275,000 pairs.

3b. Increasing the selling price to $51.50

Contribution margin per unit = $51.50 − $35 − (0.10 × $51.50) = $11.35
Quantity of = Fixed Costs + Target Operating Income = 2,500,000 + 525,000
Output Units Contribution Margin per Unit 11.35
Required to be sold
= 266,520 pairs
-> The net income target in units decreases from 302,500 pairs in requirement 2b to 266,520 pairs.
3c. Increase variable costs by $2 per unit and decrease fixed manufacturing costs by 70%.
Contribution margin per unit = $50 – $37 ($35 + $2) – (0.10 × $50) = $8
Fixed manufacturing costs = (1 – 0.7) × $2,250,000 = $675,000
Fixed marketing costs = $250,000
Total fixed costs = $675,000 + $250,000 = $925,000
Quantity of = Fixed Costs + Target Operating Income = 925,000 + 525,000
Output Units Contribution Margin per Unit 8
Required to be sold
= 181,250 pairs
-> The net income target in units decreases from 302,500 pairs in requirement 2b to 181,250 pairs.
3-29
1. Breakeven Point Revenues = Fixed Costs = 660,000
Contribution Margin Percentage 1,100,000
= 60%
2. Contribution Margin Percentage = Selling Price - Variable Cost per Unit
Selling Price
0.60 = SP - 16
SP
0.60 SP = SP - 16
0.40 SP = 16
SP = 40
3. Breakeven sales in units = Revenues ÷ Selling price = $1,100,000 ÷ $40 = 27,500 units
Margin of safety in units = Sales in units – Breakeven sales in units
= 75,000 – 27,500 = 47,500 units
Revenues, 75,000 units * $40 $3,000,000
Breakeven revenues 1,100,000
Margin of safety $1,900,000
4. The risk of making a loss is low. Sales would need to decrease by 47,500 units ÷ 75,000 units = 63.33% before
Morrison Corp. will make a loss. The most likely reasons for this risk to increase is greater competition, weakness
in the economy, or bad management.