Question

1. Valentine Clothing operates two product lines: Pants and Shirts. The following information is available for your analysis of the Pants line: Total Variable expenses = $30,000, contribution margin ratio = 40%, traceable and controllable fixed expenses = $6,000 and segment margin = $5,000. Compute traceable NOT controllable fixed expenses.

2. Remember, Return on Investment (ROI) and Return on Assets (ROA) are equivalent. If ROA = 25%, turnover = 1.25 and income = $6,000, compute Total Sales.

3. Valentine has a practical capacity of 20,000 units. Practical capacity is used as the denominator volume for calculating per-unit costs. At the denominator level of volume, the company's variable expenses = $17.00 per unit and per unit fixed expenses = $11.70. Compute the average per-unit cost at a volume of 18,000 units.

4. Valentine's monthly practical capacity = 20,000 candles. Currently, current customers purchase 15,000 candles each month at a price of $40.00 per unit. The Louisiana Food Bank would like to purchase 4,000 candles at a 25% discount. For the current sales to exiting customers, total variable expenses = $255,000 and total fixed expenses = $144,000. With each candle sold, the Food Bank would like to insert a "pledge" card asking customers who buy a candle to donate directly to the Food Bank. The card and manually placing the card in each candle's box will increase variable expenses by $3.00 per unit. If Valentine accepts the special order, how much can they expect Net Income to increase?

5. Valentine's monthly practical capacity = 20,000 candles. Currently, current customers purchase 18,000 candles each month at a price of $40.00 per unit. The Louisiana Food Bank would like to purchase 8,000 candles at a 25% discount. For the current sales to exiting customers, total variable expenses = $306,000 and total fixed expenses = $144,000. With each candle sold, the Food Bank would like to insert a "pledge" card asking customers who buy a candle to donate directly to the Food Bank. The card and manually placing the card in each candle's box will increase variable expenses by $3.00 per unit. If Valentine accepts the special order, how much can they expect Net Income to increase (decrease)?

Answer 1

Solution

Valentine Clothing

Computation of traceable NOT controllable fixed expenses:

Traceable NOT controllable fixed expenses = $9,000

Computations:

Variable expenses = $30,000

Contribution margin = 40%

So, variable expenses ratio = 100 – 40 = 60%

Sales would be = variable expenses/60% = 30,000/60% = $50,000

Contribution margin = 50,000 x 40% = 20,000

Less: traceable fixed expenses = 6,000

Less: segment margin = 5,000

Traceable NOT controllable fixed expenses = $9,000

2. computation of total sales –

Total sales = $30,000

Computations:

ROA = ROI = 25%

Turnover 1.25

Income = $6,000

Turnover = sales/invested assets = 1.25

Margin = income/sales = 6,000/sales

ROI = margin x turnover

= (6,000/sales) x (sales/invested assets)                                     

ROI = 25%

25% = 6,000/invested assets

Invested assets = 6,000/25% = $24,000

Sales/invested assets = 1.25

Sales/24,000 = 1.25

Sales = 1.25 x 24,000 = $30,000

Therefore total sales = $30,000

3. computation of average per unit cost at volume of 18,000 units –

Average per unit cost at volume of 18,000 units = $30

Computations –

Average per unit cost = variable unit cost + fixed manufacturing cost per unit

Variable unit cost = $17

Fixed manufacturing cost per unit = total fixed manufacturing cost/units produced

Total fixed manufacturing cost = per unit fixed cost x practical capacity

= $11.70 x 20,000 units = $234,000

Fixed manufacturing cost per unit at 18,000 units production = 234,000/18,000 units = $13

Average per unit cost = $17 + $13 = $30

4. determination of amount of increase in net income if the special order is accepted:

Increase in net income if special order is accepted is $40,000

Computations:

Increase in net income = sales – relevant costs

Special order from Louisiana Food Bank = 4,000 units

Price for special order = selling price – 25% discount

Selling price = $40 per unit

Special order price = 40 – 25% x 40 = $30

Special order sales revenue = 4,000 units x $30 = $120,000

Relevant costs –

Variable costs

Variable costs = total variable expenses per unit + cost of card

Total variable expenses per unit = $255,000/15,000 units = $17

Cost of card = $3 per unit

Total variable costs = $17 + $3 = $20

Total variable costs for special order 4,000 units x $20 = $80,000

Increase in net income = 120,000 – 80,000 = $40,000

Note: since the company has idle capacity, fixed costs are not relevant for the special order.

Hence, increase in net income from special order = $40,000

5. determination of amount of increase in net income if the special order is accepted:

decrease in net income if special order is accepted is ($58,000)

Net income decreases if the special order is accepted. Decrease in net income = $58,000

Computations:

Increase in net income = sales – relevant costs

Special order from Louisiana Food Bank = 8,000 units

Price for special order = selling price – 25% discount

Selling price = $40 per unit

Special order price = 40 – 25% x 40 = $30

Special order sales revenue = 8,000 units x $30 = $240,000

Relevant costs –

Variable costs

Variable costs = total variable expenses per unit + cost of card

Total variable expenses per unit = $306,000/18,000 units = $17

Cost of card = $3 per unit

Total variable costs = $17 + $3 = $20

Since, the company’s capacity is 20,000 units and production is 18,000 units the company has idle capacity of only 2,000 units.

Acceptance of special order would result in loss of 6,000 (8,000 – 2,000) units sales to regular customers. Hence, contribution margin lost on regular sales is relevant cost.

Contribution margin lost –

Contribution from regular sales = (18,000 units x $40) – 306,000 = $414,000

Per unit contribution = 414,000/18,000 units = $23

Contribution margin on 6,000 units = 6,000 x $23 = $138,000

Total variable costs for special order 8,000 units x $20 = $160,000

Hence, total relevant costs for special order = variable cost + contribution margin lost

= 160,000 + 138,000 = $298,000

decrease in net income = 240,000 – 298,000 = ($58,000)