Browns’ Company sells ten different styles of relatively inexpensive football jerseys with identical purchase costs and selling prices. Brown is trying to determine the desirability of opening another store, which would have the following expense and revenue relationships (variable data on a per unit basis, fixed expenses in total):
Variable data: Selling Price $40.00; Cost of Shirt $18.00; Sales Commissions $7.00
Annual fixed expenses: Rent$80,000; Salaries $150,000; Other fixed expenses $70,000
1. What is the annual breakeven point in dollar sales and units?
2. If Brown has an effective tax rate of 40%, how many jerseys must they sell to make $80,000 after taxes?
3. Ignoring income taxes, If 21,000 jerseys are sold, what would be the stores operating income (loss)?
4. Refer to the original data. If Brown decided to do away with sales commissions and increase salespersons salaries by $140,000 per year, what would be the point of indifference, in units, between the two alternatives?
5. Brown has been approached by the Bear Advertising Agency to do their advertising. If Brown signs a contract for $150,000 for Bear to handle their account, how many additional units will have to be sold to cover the cost?
Arnold Company makes 20,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:
Direct materials……………… $24.70
Direct labor…………………. 16.30
Variable manufacturing overhead… 2.30
Fixed manufacturing overhead…… 13.40
Unit product cost………….. $56.70
An outside supplier has offered to sell the company all of these parts it needs at $51.80 a unit. If No-Win accepts this offer, the facilities now being used to make the part could be leased to another company. The incremental contribution margin from leasing the space would be $44,000 per year.
If the part were purchased from the outside supplier, all of the variable costs of the part would be avoided. However, $5.10 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost ($5.10) would be applied to the company’s remaining products. Ignore income taxes and the time value of money in this problem.
1. How much of the unit product cost of $56.70 is relevant in the decision of whether to make or buy the part?
2. What is the net total dollar advantage (disadvantage) of purchasing the part ratherthan making it?
3. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 20,000 units required each year? They will still lease the facility if they purchase from an outside supplier.
REMInc. collected the following data to determine their overhead cost function:
Overhead Costs Direct Labor Hours
1. Calculate the cost function using the high-low method.
2. If direct labor hours in the coming period are expected to be 1,600, what is the estimated overhead cost using the cost function calculated in Part 1?
3. What would the total fixed overhead be estimated at if the expected number of direct labor hours for the coming period was 1,750?
4. If the cost function was calculated using simple regression analysis, in one sentence explain what the primary difference would be between using simple regression analysis and the high-low method to calculate the cost equation.