2024 – 23 Differential costs Special order Assume Road Runner Shoes has a plant capacity that can produce

23.    Differential costs: Special order. Assume Road-Runner Shoes has a plant capacity that

can produce 3.000 units per week (each unit is a pair of shoes). Its predicted operations

for the week follow:

 Sales (2,000 units at $40 each)…………………………………………..80,000

    Manufacturing Costs

Fixed cost …………………..  $10,000

Variable cost……………………. $15 per unit

Marketing and administrative cost

Variable ( all sales commission)……………………..$ 3 per unit

Fixed……………….$15,000

Should Road-Runner accept a special order for 400 units at a selling price of S30each? Assume these units are subject to half the usual sales commission rate per unit, and assume no effect on regular sales at regular prices. How will the decision affect theCompany’s operating profit?

27.  Customer profitability analysis. Squeaky Clean, a commercial  laundry service, has two clients, Super 6 Motel and Seaside Inn. The following is information about Squeaky ‘srevenues and costs (in thousands) by customer for the previous year:

                                                               Super 6 Motel         Seaside Inn           Total Revenue (fees charged)                                   $230                     $350              $580 Operation cost

 Cost of service (variable)                               $212                      $305           $517

Salaries rent and general administration ( fixed    20                  35                 55

Total operating cost …………………..            232                         340                 572

Operating profits   ……………………                    2                           10                    8              

The Analysis apparently shows that Super 6 Motel is not profitable for Squeaky. Use

Differential analysis to decide whether Squeaky should discontinue the Super 6 Motel Account.

 

a 1IL I

tetal    PI        or

 

PROBLEMS

 

28.    Explaining sales and cost changes. You iline acquired the follov,mt2. ata for Ye irs

and 2 for Harry’s Horseback Rides.

                         Year 1

Dollar Increase Year 2 Revenue from Rides  4•11601010110.00•So•rse•

$750,000 495,000 $255,000 $840,000 560,000  $280,000 100.0% 663  33 + 3% $90000          65,000 $25,000

Variable Costs of Operations.

Contribution Margin.•46 • • • • • • • •Price per Personper Hour••100400/0

66.0 34.0%

aranalmeams•

•           *$10$12

 Write a short report to Harry s uncle, who loaned Harry the money to start this

business. Explain the cause of the increase in total contribution margin between Year

1 and Year 2. Your report should consider the effect of each of the following: change

in price per person per hour, change in volume, and change in operating costs per

admission.

 

29.  CVP analysis and financial modeling (adapted from CMA exam). Brow_kowski is a retailer

for high-tech recording disks. The projected operating profit for the current year is

$200,000 based on a sales volume of 200,000 units. The company has been selling the

disks for $16 each; variable costs consist of the $10 purchase price and a     handling

cost. The company’s annual fixed costs are $600,000.

Management is planning for the coming year, when it expects that the unit purchase

price of the disks will increase by 30 percent.

a.         Calculate the company’s break-even point for the current year in units.

b.         What will be the company’s operating profit for the current year if there is a 20 per-

cent increase in projected unit sales volume?

cc, What volume of dollar sales must be achieved in the coming year to maintain the

current year’s operating profit if the selling price remains at $16?

‘Ato uld the use of a financial model be helpful to the firm in addressing issues such

as those raised in requirements b. and c.? Explam.

30. cvp_missing data. Ramadan, Inc., has performed cost studies and projected the fol.

Jowing annual costs based on 200,000 units of production and sales:

 

.

33.   make or buy :OI salt enterprise produces 1000 sail boats per year. Although the company currently buys sails for the sailboats (one set of sails per boat), it is considering

making sails in some space that it does not currently use. The company purchases each

set of sails for $300. It could make the sails for variable costs of $250 per set, plus it

would allocate $200,000 of fixed costs per year to the sail-making operation. However,

this $200,000 is not a differential cost of making sails; it is part of the costs the company

already incurs that it would allocate away from sailboat manufacture to sail making.

a. Prepare a differential analysis to show whether 01′ Salt Enterprises should make

OF buy the sails. What should you recommend to management’? Explain why the

$200,000 fixed costs allocated to sail making is or is not relevant to the decision.

b. If Or Salt buys the sails, then it would have unused factory space. Suppose 01 Salt

r

received an opportunity to rent out this unused factory space for $80,000 per year.

Would that affect your recommendation in part a.?

 

37. Dropping a product line. Timepiece Products, a clock manufacturer, operates at capac.

it}. Constrained by machine time, the company decides to drop the most unprofitable

with the following

of its three product lines. The accounting department came up

from last .vear’s operations:       data

Machine Time per

Selling Price per Unit

Less Variable Costs per

Contribution Margin

 Which line should Timepiece Products drop? (Hint: Compute the contribution per

machine hour because machine time is the constraint.)

 

 

Additional Problem – Mountain Bagels

Mountain Bagels bakes and sells authentic New York style kettle-boiled bagels. For the most recent year, Mountain Bagels sold 250,000 bagels at a selling price of $1 per bagel.  During this same year, Mountain Bagels incurred fixed costs of $100,000 and variable costs of $0.40 per bagel.

 Management of Mountain Bagels is considering extending their product line to include bagel sandwiches. Management estimates that adding bagel sandwiches would increase their total fixed costs by $25,000 per year and that the variable cost per bagel sandwich would be $1.80.

REQUIRED:

a.       Ignoring the new product line, how does Mountain Bagels’ profit increase or decrease with the number of bagels sold? What was Mountain Bagels’ profit for the most recent year?

b.       How would adding bagel sandwiches change Mountain Bagels’ profit? What information would you need before you can determine how introducing bagel sandwiches would affect Mountain Bagels’ overall profit?  Is it reasonable to assume Mountain Bagels will still sell 250,000 bagels?

c.        Assume Mountain Bagels believes that, in addition to selling 250,000 bagels in the coming year, it can sell 25,000 bagel sandwiches. What price should Mountain Bagels charge per bagel sandwich if it wishes to increase overall profit by $50,000?

d.       Assume Mountain Bagels believes that it can sell 25,000 bagel sandwiches at $4.50 but that this will reduce the number of bagels sold by 25,000 to 225,000 (i.e., there is a one-for-one tradeoff between bagels and bagel sandwiches). Assuming this sales mix remains constant, what is the break even point in sales dollars and units for each product?