TUTORIAL MANAGEMENT ACCOUNTING - WEEK 2

Chapter 3: Cost-Volume-Profit Analysis

PROBLEM 1

United sells car batteries to service stations for an average of $40 each. The variable cost of each battery is
$20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the company total
$8,000.

Required:

● What is the breakeven point in batteries?

● What is the margin of safety, assuming sales total $60,000?

● What is the breakeven level in batteries, assuming variable costs increase by 20%?

● What is the breakeven level in batteries, assuming the selling price goes up by 10%,

fixed manufacturing costs decline by 10%, and other fixed costs decline by $200?

PROBLEM 2

Jacobs produces its leather bag, the Camera Bag that sells for $75 each. Operating income for 2022 is as
follows:

Sales revenue ($75 per unit) $300,000

Variable cost ($30 per unit) $120,000

Contribution margin $180,000

Fixed cost $ 80,000

Operating income $100,000

Jacobs would like to increase its profitability over the next year by at least 20%. To do so, the company is
considering the following options:

1. Replace a portion of its variable labor with an automated machining process. This would result in
a 25% decrease in variable cost per unit but a 20% increase in fixed costs. Sales would remain the
same.
 2. Spend $32,000 on a new advertising campaign, which would increase sales by 15%.
3. Increase both selling price by $15 per unit and variable costs by $10 per unit by using a higher-
quality leather material in the production of its bags. The higher-priced bag would cause demand
to drop by approximately 20%.
4. Add a second manufacturing facility that would double Jacobs’s fixed costs but would increase
sales by 60%.
5. Evaluate each of the alternatives considered by Jacobs. Do any of the options meet or exceed
Jacobs’s targeted increase in operating income of 20%? What should Jacobs do?

PROBLEM 3

Charlie sells only boba and tea. Charlie estimates that every time it sells one tea, it also sells two cups of
boba. The budgeted cost information for Charlie’s products in 2023 follows:

Boba Tea
Selling price $4.50 $.3.75
Product ingredient $0.50 $0.50
Packaging $0.25 $1.25
Fixed cost:
Rent & equipment $7,000
Marketing & advertising $2,500

1. How many cups of boba and tea must Charlie sell in order to break even assuming the sales mix
of two cups of boba to one cup of tea, given previously? Also, calculate the breakeven revenue!
2. How many units of each product does Charlie need to sell to earn operating income before tax of
$228.000 with the given previous sales mix?
3. How many units of each product does Charlie need to sell to earn an after-tax net income of
$228.000 with the given previous sales mix? (Assumption: the tax rate is 25%)
4. Assume that Charlie decides to add the sale of Toast to its product mix. The selling price for
Toast is $4.00 and related variable costs are $0.25. Assuming a sales mix of three cups of boba to
two cups of tea to one Toast, how many units of each product does Charlie need to sell in order to
break even? Also, calculate the breakeven revenue!
HOMEWORK

Rodeo manufactures and sells diesel engines for use in small farming equipment. For its 2022 budget,
Rodeo estimates the following:

Selling Price $4,000

Variable cost per engine $1,000

Annual fixed cost $4.500.000

Net Income $1.500.000

Income Tax Rate 20%

The first quarter income statement, as of March 31, reported that sales were not meeting expectations.
During the first quarter, only 300 units had been sold at the current price of $4.000. The income statement
showed that variable and fixed costs were as planned, which meant that the 2023 annual net income
projection would not be met unless management took action. A management committee was formed and
presented the following mutually exclusive alternatives to the president:

a) Reduce the selling price by 15%. The sales organization forecasts that at this significantly reduced
price, 2.200 units can be sold during the remainder of the year. Total fixed costs and variable costs
per unit will stay as budgeted.
b) Lower variable cost per unit by $150 through the use of less-expensive direct materials. The selling
price will also be reduced by $250, and sales of 1.800 units are expected for the remainder of the
year.
c) Reduce fixed costs by 15% and lower the selling price by 10%. Variable cost per unit will be
unchanged. Sales of 1.900 units are expected for the remainder of the year.

Required:

1. If no changes are made to the selling price or cost structure, determine the number of units that
Rodeo must sell (a) to break even and (b) to achieve its net income objective.
2. Determine which alternative Rodeo should select to achieve its net income objective. Show your
calculations.