CVP Analysis and Marginal Analysis Paper 6

1

Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product:
Unit Costs
Direct materials $3.25
Direct labor 4.00
Distribution .75
The company will also be absorbing $120,000 of additional fixed costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product. How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to gain $30,000 additional income before taxes?






2

Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product:
Unit Costs
Direct materials $3.25
Direct labor 4.00
Distribution .75
The company will also be absorbing $120,000 of additional fixed costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product. How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to increase after-tax income by $30,000? Bruell Electronics’ effective income tax rate is 40%.






3

Austin Manufacturing, which is subject to a 40% income tax rate, had the following operating data for the period just ended:
Selling price per unit $60
Variable cost per unit $22
Fixed costs 504,000
Management plans to improve the quality of its sole product by (1) replacing a component that costs $3.50 with a higher-grade unit that costs $5.50 and (2) acquiring a $180,000 packing machine. Austin will depreciate the machine over a 10-year life with no estimated salvage value by the straight-line method of depreciation. If the company wants to earn after-tax income of $172,800 in the upcoming period, it must sell






4

A company has just completed the final development of its only product, general recombinant bacteria, which can be programmed to kill most insects before dying themselves. The product has taken 3 years and $6,000,000 to develop. The following costs are expected to be incurred on a monthly basis for the normal production level of 1,000,000 pounds of the new product:
Direct materials 300,000
Direct labor 1,250,000
Variable factory overhead 450,000
Fixed factory overhead 2,000,000
Variable selling, general and administrative expenses 900,000
Fixed selling, general and administrative expenses 1,500,000
Total 6,400,000
At a sales price of $5.90 per pound, the sales in pounds necessary to ensure a $3,000,000 profit the first year would be (to the nearest thousand pounds)






5

A company that sells its single product for $40 per unit had after-tax net income for the past year of $1,188,000 after applying an effective tax rate of 40%. The projected costs for manufacturing and selling its single product in the coming year are listed below.
Variable costs per unit $
Direct material 5
Direct labor 4
Manufacturing overhead 6
Selling and administrative costs 3
Total variable cost per unit 18
Annual fixed operating costs
Manufacturing overhead 6,200,000
Selling and administrative costs 3,700,000
Total annual fixed cost 9,900,000
The dollar sales volume required in the coming year to earn the same after-tax net income as the past year is






6

A company that sells its single product for $40 per unit had after-tax net income for the past year of $1,188,000 after applying an effective tax rate of 40%. The projected costs for manufacturing and selling its single product in the coming year are listed below.
Variable costs per unit $
Direct material 5
Direct labor 4
Manufacturing overhead 6
Selling and administrative costs 3
Total variable cost per unit 18
Annual fixed operating costs
Manufacturing overhead 6,200,000
Selling and administrative costs 3,700,000
Total annual fixed cost 9,900,000
The company has learned that a new direct material is available that will increase the quality of its product. The new material will increase the direct material costs by $3 per unit. The company will increase the selling price of the product to $50 per unit and increase its marketing costs by $1,575,000 to advertise the higher-quality product. The number of units the company has to sell in order to earn a 10% before-tax return on sales would be






7

A manufacturer produces a product that sells for $10 per unit. Variable costs per unit are $6 and total fixed costs are $12,000. At this selling price, the company earns a profit equal to 10% of total dollar sales. By reducing its selling price to $9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling price were reduced to $9 per unit, the profit would be






8

Donnelly Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income last year was $5,040 . Donnelly’s expectations for the coming year include the following:
? The sales price of the T-shirts will be $9
? Variable cost to manufacture will increase by one-third
? Fixed costs will increase by 10%
? The income tax rate of 40% will be unchanged
Sales for the coming year are expected to exceed last year’s by 1,000 units. If this occurs, Donnelly’s sales volume in the coming year will be






9

Donnelly Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income last year was $5,040 . Donnelly’s expectations for the coming year include the following:
? The sales price of the T-shirts will be $9
? Variable cost to manufacture will increase by one-third
? Fixed costs will increase by 10%
? The income tax rate of 40% will be unchanged
If Donnelly Corporation wishes to earn $22,500 in net income for the coming year, the company’s sales volume in dollars must be






10

For one of its divisions, Buona Fortuna Company has fixed costs of $300,000 and a variable-cost percentage equal to 60% of its $10 per unit selling price. It would like to earn a pre-tax income of $90,000 per year from the division. How many units will Buona Fortuna have to sell to earn a pre-tax income of $90,000 per year?






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