Question

1) Night Shades Inc. (NSI) manufactures biotech sunglasses. The variable materials cost is $1.55 per unit, and the variable labor cost is $3.1 per unit.

a. What is the variable cost per unit?

b. Suppose the company incurs fixed costs of $750,000 during a year in which total production is 375,000 units. What are the total costs for the year?

c. If the selling price is $9.5 per unit, what is the NSI break-even on a cash basis?

d. If depreciation is $281,250 per year, what is the accounting break-even point?

2) Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly contribution format income statement follows: Department Total Hardware Linens Sales $ 4,350,000 $ 3,190,000 $ 1,160,000 Variable expenses 1,370,000 963,000 407,000 Contribution margin 2,980,000 2,227,000 753,000 Fixed expenses 2,300,000 1,460,000 840,000 Net operating income (loss) $ 680,000 $ 767,000 $ (87,000 ) A study indicates that $373,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 13% decrease in the sales of the Hardware Department. Required: What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Please answer both the questions

Answer 1

1) a. Variable cost per unit = Variable materials cost + Variable labor cost = $1.55 + $3.1 = $4.65 per unit

b. Total costs = Variable costs + Fixed costs

Total costs = (375,000 * $4.65) + $750,000

Total costs = $2,493,750

c. Cash break even = Fixed costs / (Selling price - Variable cost per unit)

Cash break even = $750,000 / ($9.5 - $4.65)

Cash break even = 154,639.18 units

d. Accounting breakeven = (Fixed costs + Depreciation) / (Selling price - Variable cost per unit)

Accounting breakeven = ($750,000 + $281,250) / ($9.5 - $4.65)

Accounting breakeven = 212,628.87 units

2)

Contribution margin lost if the Linens Department is dropped:
Lost from the Linens Department	$753,000
Lost from the Hardware Department (13% × $2,227,000)	$289,510
Total lost contribution margin	$1,042,510
Less fixed costs that can be avoided ($840,000 – $373,000)	$467,000
Decrease in profits for the company as a whole	$575,510