Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows:

It is expected that 11,760 units will be sold at a price of $156 a unit. Maximum sales within the relevant range are 15,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

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1. Use the absorption costing format.

2. What is the expected contribution margin ratio? Round to the nearest whole percent.
%

3. Determine the break-even sales in units and dollars.

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
$

5. What is the expected margin of safety in dollars and as a percentage of sales?

6. Determine the operating leverage. Round to one decimal place.

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2. Sales minus variable costs equals contribution margin. Contribution margin divided by sales equals contribution margin ratio.

3. Fixed costs divided by unit contribution margin equals break-even point in units. Break-even units times unit sale price equals break-even dollars.

4. Draw lines for total costs and total sales. The two lines should intersect at the break-even point.

5. (Sales minus sales at break-even) divided by sales equals margin of safety.

6. Contribution margin divided by the income from operations equals operating leverage.

Please solve Problem 3-11 from your textbook (Introduction to Managerial Accounting; Fifth Canadian Edition, by Brewer, Garrison, Noreen, Kalagnanam, and Vaidyanathan) considering the following new information and requirements:

The company received a request for a 300-Kg order of potassium aspartate.

The customer offers to pay $12.50per Kg for this order.

The company usually adds a 30%markup for this type of orders.

Material requirements

The company pays its production workers an average of $20.00per hour plus $5.00per hour additional labour costs.

Expected direct labour time was 16 hours.

The company also estimated the following:

Prepare a job cost sheet for the proposed job.  Ignore the job completion status area. (9 points)

What is the gross margin expressed in %, if the customer agrees to pay a price of cost plus 25%? (1 point). Please show all your calculations. (1 point)

What is the total gross margin per total order (expressed in dollar amount) (1 point). Please clearly show all you calculations. (1 point)

What is the gross margin per unit (per Kg) (expressed in dollar amount).  (1 point) Please clearly show all your calculations. (1 point)

Assume that the actual production level was only 280 Kg despite using the expected quantity of materials and labour.  What is the gross margin of this order: percentage-wise (1 point), total gross margin per order (dollar amount)(1 point), gross margin per unit (per Kg)(dollar amount)(1 point). Please clearly show all you calculations. (1 point)

Solution b:

Total expected cost of order = $3,218.76

Solution c:

Unit (per Kg) cost of this order = $3,218.76 / 300 = $10.73 per kg

Solution d:

Required selling price considering 30% markup = $10.73 + 30% of $10.73 = $13.95 per Kg

Price offered by customer = $12.50 per Kg

As price offered by customer is lesser than minimum required price therefore company should not accept price offered by customer.

Solution e:

If customer agree to pay cost + 25% then

Let cost = $100

Selling price = $125

Gross margin = $125 - $100 = $25

Gross margin percentage = $25 / $125 = 20%

The solutions are to help complete the following questions above.

Please solve Problem 3-11 from your textbook (Introduction to Managerial Accounting; Fifth Canadian Edition, by Brewer, Garrison, Noreen, Kalagnanam, and Vaidyanathan) considering the following new information and requirements:

The company received a request for a 300-Kg order of potassium aspartate.

The customer offers to pay $12.50per Kg for this order.

The company usually adds a 30%markup for this type of orders.

Material requirements

The company pays its production workers an average of $20.00per hour plus $5.00per hour additional labour costs.

Expected direct labour time was 16 hours.

The company also estimated the following:

Prepare a job cost sheet for the proposed job.  Ignore the job completion status area. (9 points)

What is the gross margin expressed in %, if the customer agrees to pay a price of cost plus 25%? (1 point). Please show all your calculations. (1 point)

What is the total gross margin per total order (expressed in dollar amount) (1 point). Please clearly show all you calculations. (1 point)

What is the gross margin per unit (per Kg) (expressed in dollar amount).  (1 point) Please clearly show all your calculations. (1 point)

Assume that the actual production level was only 280 Kg despite using the expected quantity of materials and labour.  What is the gross margin of this order: percentage-wise (1 point), total gross margin per order (dollar amount)(1 point), gross margin per unit (per Kg)(dollar amount)(1 point). Please clearly show all you calculations. (1 point)

Solution b:

Total expected cost of order = $3,218.76

Solution c:

Unit (per Kg) cost of this order = $3,218.76 / 300 = $10.73 per kg

Solution d:

Required selling price considering 30% markup = $10.73 + 30% of $10.73 = $13.95 per Kg

Price offered by customer = $12.50 per Kg

As price offered by customer is lesser than minimum required price therefore company should not accept price offered by customer.

Solution e:

If customer agree to pay cost + 25% then

Let cost = $100

Selling price = $125

Gross margin = $125 - $100 = $25

Gross margin percentage = $25 / $125 = 20%

The solutions are to help complete the following questions above

And please solve the questions based on the 30% mark up.

Many entrepreneurial ventures raise money from venture capitalists. Getting venture capital funding is a complex process of finding one or more partners to commit to back the company on its journey. The relationship between entrepreneurs and venture capitalists is important – it can be very positive and help a venture succeed, or it can be stressful and have negative implications. We will spend quite a bit of time trying to understand what venture capitalists do and how they structure deals with entrepreneurial ventures. The big question – Can venture capitalists help you and your venture succeed? Venture capitalists are professionals who specialize in investing in high growth potential ventures. They typically raise funds from institutional investors, corporations or individuals and form partnerships that deploy capital over a period of up to ten years. The venture capitalists act as General Partners and the investors are Limited Partners. Venture capital firms have two income streams. They charge a management fee based on the amount in the fund and they take a share of the profits – that share is called the carried interest. For most funds, the management fee is under 2% per year and the carried interest percentage is between 15 and 30%. Most venture capital firms have several partners and invest in multiple companies, often in separate rounds of financing for each company. Venture capital firms tend to specialize in geography, stage of investment, and/or industry. At one end of the spectrum, some funds only invest in early-stage companies. Other firms invest in more established companies to fund growth. The professional venture capital industry has existed since the 1940s though the industry remained small until the mid-1990s as the Internet revolution took hold. Total capital deployed in the industry is under $300 billion. There are several hundred active venture capital funds in the United States and around the world. Venture capital is a “hits” business. Even the best investors lose money or make modest returns on a majority of the companies they back. A few great successes generate most of the value, as was true with companies like Intel, Genentech, Apple, Amazon, Google, Facebook and more recent companies like Uber and Airbnb. A small number of venture capital firms consistently back big winners. In recent years, Sequoia, Benchmark, Accel, and Greylock have had a disproportionate number of “Unicorn” hits – these are companies that attain valuations of $1 billion or more. There is enormous variety in the industry. Some funds are small – from $10 million up to $100 million. These firms are willing to back new companies and write initial checks of several hundred thousand up to a few million dollars. Most venture funds reserve capital to make follow-on investments in companies that are doing well. Larger funds – those up to $1 billion in capital – will only invest in companies that might need tens of millions of dollars over the life of the fund. Venture capitalists are active investors. They often insist on a seat on the board of directors and they negotiate for certain control rights such as the right to replace the CEO or to approve any large capital expenditure or corporate action. Venture capitalists almost always use a standard investment vehicle – convertible preferred stock – though the exact terms depend on many factors. Some venture capitalists have been successful entrepreneurs while others have experience in large companies or finance.

What do you think about raising money from venture capital firms? How do you decide whether you should do so?

Clayton Company bought real estate, on which there was an old office building, for $300,000. It paid $50,000 in cash as a down payment and signed a 10% mortgage for the remainder. It immediately had the old building razed at a net cost of $35,000. Attorneys were paid $6,000 in connection with the land purchase and an additional $3,000 in connection with permits and zoning variances necessary for Patton's new office building. $20,000 was paid for excavation for the basement of the new building, $1,400,000 was paid for construction of the new building, and $75,000 was paid for a parking lot and necessary walkways and driveways.

1. The new office building should be recorded at a

. $1,400,000. b. $1,423,000. c. $1,420,000. d. $1,458,000.

2. Land should be recorded at a cost of

a. $335,000. b. $341,000. c. $364,000. d. $361,000

3. Mac Creamy Bakery purchased machinery for $60,000 eight years ago. It was expected to have a useful life of ten years, no salvage value, and was depreciated using the straight-line method. At the end of its eighth year of use, it was retired from service and given to a junk dealer. The entry to record the retirement includes a

a. debit to Loss on Disposal for $12,000. b. credit to Depreciation Expense for $6,000. c. debit to Machinery for $60,000. d. credit to Accumulated Depreciation—Machinery for $48,000.

4. Which of the following should not be included in the plant assets (property, plant, and equipment) classification?

a. Land on which warehouse sits b. Building housing corporate headquarters c. Parking lot used by visitors d. All of the above should be included

5. Salvage (residual) value is deducted in the computation of depreciation expense in all of the following methods with the exception of

a. straight-line. b. units-of-activity. c. declining-balance. d. All of the above include a deduction of salvage value.

6. When recording exchanges of assets that have commercial substance,

a. both gains and losses are recognized immediately. b. the gain or loss on the old asset is the difference between its cost and its fair market value. c. gains are treated as increases in the cost of the new asset. d. none of the above.

7. The cost of a patent should be amortized over

a. 20 years. b. the shorter of its legal life or its useful life. c. the longer of its legal life or its useful life. d. its useful life

8. On June 30, 2015, Fox Enterprises sold equipment with an original cost of $495,000 for $200,000. The equipment was purchased January 1, 2014, and was depreciated using the straight-line method assuming a five-year useful life and $45,000 salvage value. The necessary entries for 2015 include a

a. debit to Accumulated Depreciation—Equipment for $90,000. b. credit to Gain on Sale of Equipment for $160,000. c. credit to Cash for $200,000. d. debit to Depreciation Expense for $45,000

Complete the Following Problems (Show All Calculations)

9. Milan Company purchased land and an office building on March 1 for a combined cash price of $1,600,000. The land had a cost of $940,000 and the building had a book value of $200,000 on the seller's books. The land and building had fair market values of $1,040,000 and $560,000, respectively on March 1. Milan made the following entry at acquisition: Land ........................................................................................... 940,000 Building ...................................................................................... 1,000,000 Gain on Purchase .............................................................. 140,000 Accumulated Depreciation ................................................. 200,000 Cash .................................................................................. 1,600,000

In the space below, prepare the correct entry for the acquisition.

10. Northern Company bought machinery on January 1, 2009 at a cost of $500,000. The machinery had an estimated life of ten years and salvage value of $50,000. On January 1, 2011, Northern estimates that the machinery will have a life of only five more years and a $60,000 salvage value. Northern uses straight-line depreciation. Compute the revised annual depreciation.

11. Bagley Company bought equipment on July 1, 2014 at a total cost of $500,000. The equipment has an estimated useful life of 5 years and salvage value of $100,000. Bagley uses the double-declining-balance method of depreciation. Compute depreciation for 2013 and 2014.

12. Westlake Construction gave up a used crane and $224,000 cash for a new crane. The old crane cost $336,000, had $126,000 of accumulated depreciation, and a fair market value of $238,000. The exchange had commercial substance. In recording this exchange, the new crane should be recorded at

43.) Lens Care Inc. (LCI) manufactures specialized equipment for polishing optical lenses. There are two models - one mainly used for fine eyewear (F-32) and another for lenses used in binoculars, cameras, and similar equipment (B-13).

The manufacturing cost of each unit is calculated using activity-based costing, using the following manufacturing cost pools:

LCI currently sells the B-13 model for $2,900 and the F-32 model for $2,620. Manufacturing costs and activity usage for the two products are as follows:

The product cost for model B-13 is:

Multiple Choice

• $1,813.89.

• $1,649.39.

• $1,515.41.

• $1,261.38.

• $1,336.98.

44.) Lens Care Inc. (LCI) manufactures specialized equipment for polishing optical lenses. There are two models - one mainly used for fine eyewear (F-32) and another for lenses used in binoculars, cameras, and similar equipment (B-13).

The manufacturing cost of each unit is calculated using activity-based costing, using the following manufacturing cost pools:

LCI currently sells the B-13 model for $4,475 and the F-32 model for $4,580. Manufacturing costs and activity usage for the two products are as follows:

If the market price for B-13 and F-32 are reduced to $4,395 and $4,455 respectively, and Lens Care wants to maintain market share and profitability, what is the target cost for B-13 and F-32 (round to nearest whole dollar)?

Multiple Choice

• Option A

• Option B

• Option C

• Option D

• Option E

45.) Bryan Inc. produces a specialty top-quality juice machine. The product, the JM50, requires four processes to be completed. Specifically, these processes are exterior construction, pulp filter insertion, painting, and packaging. Each process is performed at separate workstations with different completion rates:

Exterior construction can manufacture 108,000 juicer exteriors per day.
Pulp filter insertion can install 27,000 filters every 6 hours.
Painting can decorate 3,040 juicers every half hour.
Packaging can package 5,040 juicers per hour.

The plant operates 24/7, 24 hours a day every day of the week.

How many JM50 machines can Bryan Inc. manufacture per month (assume an average 30-day month)?

Multiple Choice

• 4,560,000 juicers.

• 3,840,000 juicers.

• 3,240,000 juicers.

• 3,440,000 juicers.

Define the following: fixed cost, variable cost, marginal cost and marginal revenue

Why are the terms direct cost and indirect cost independent of the terms fixed cost and variable cost? Give an example to illustrate.

What generally happens to the cost of debt, cost of equity, and cost of capital when a firm increases Debt and holds Equity constant?