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l

h-roProfit

planning

1-r,Bas!c

income taxes(Appendix 1)

Sales (40,000 pairs at $35)Cost of sales

Gross marginSelling expensesAdmi nistrative expenses

lncome

$ 1,400,000800,000

$ 600,000$350,000190,000 540,000

$ 60,000

Part 1 Cost-Volume-Profit Analysis and Decision Makino

Zaldec Company, a wholesaler of jeans, had the following income statement.

Mr. Zaldec informs you that the only variable costs are cost of sales and $2 per-unitselling costs. All admlnistrative expenses are fixed. ln planning for the coming year,

Mr. Zaldec expects his selling price to remain constant, with unit volume increasingbV 20Y". He also forecasts the following changes in costs and is concerned about howthey will affect profitability.

Variable costs:Cost of goods soldSelling costs

Fixed costs:Selling costsAdrninistrative costs

up $1.50 per unitup $b.10 per unit

up $40,000up $30,000

Required:.'1. Prepare an income statement for the coming year using the contribution margin

format and assuming that all forecasts are met.2. Determine the number of units that Zaldec will have to sell in the coming year to

earn the same profit as the current year.3. Mr. Zaldec is disturbed at the results of requirements 1 and 2. He asks you how

much he must raise his selling price to earn $60,000 selling 48,000 units.

Cornell Company is introducing an inkjet printer that will sell for $120. Unit variablemanufacturing cost is $72, and Cornell pays a 10% sales commission. Fixed costs forthe printer are $250,000 per year. The tax rate is 40%.

Required:1. Determine the profit after taxes that Cornell would eam selling 12,000 printers.2. Determine the number of units that Cornell has to sell to earn an after-tax profit

of $120,000.3. Determine the price that Cornell has to charg€ to earn a $180,000 pre-tax profit

,/' selling 11,000 units../,/

--Z-4 Allen Cosmetics makes two facial creams, Allergy-free and Cleansaway. Data are asBasic follows.

sales mix(Appendix 2l Allergy-free Cleansaway

Price per iar $18 $24Variable cost per iar I 6

Monthly fixed costs are $180,000.

statement' ":;&','iG:iE

E 1,400,000 .'E

800,000 :34,

--- ',8

; 600,000 ii

540,000

{

Jecision Making

i 60,000

-ts and $2 Per-unit'the coming Year,,olume increasing

serned about how

0 per unit3 per unit

100)00

Chaprcr 2 Profit Planning

/,"Weighted-

averagecontribution

margin{Appendix 2l

63

Required:t. it tt

" sales mix in dollars is 60% for Allergy-free and 407o for Cleansaway, what

is the weighted-average contribution margin percentage?.What dollar sales areneeded to earri a profit of 960,000 per month? At that level, how. many units ofeach product, and total units, will the company sell?

2. lf the sales mix is 50% for each product in units, what is the weighted-average. unit contribution margin? What unit sales are needed to earn $60,009 per month?

Why is this number of units different from the answer you found ih requirement1? What are total dollar sales and why is this figure different frorr your answerto requirement 1?

3. Suppose that the eornpany is operating at the level of sales that you calculatedin requirement 1,'earning a $60,000 monthly profit. The sales manager betievesthat it is possible to persuade customers to switch to Cleansaway from Allergy-free by increasing advertising expenses. He thinks that $8,fi)0 additional monthlyadvertising would change the mix to 4}yo for Allergy-fiee and 60% forCleansaway. Total dollar sales will not change, only the rnix. What effect wouldthe campaign have on profit?

Blue-Room Products sells three types of simulated,brass soap dishes, NecessaryFrill, and Luxury. Detailed selling price and cost data for the products are as follows.

Necessary Frill Luxury

Selling priceVariable cost

$to4

$20 $2512 50% of selling price

rtribution margin

e coming year to

He asks You how100 units.

20. Unit variablen. Fixed costs for

1 2,000 printers.n after-tax Profit

00 pre-tax Profit

JVay. Data are as

nssway

$2+6

Fixed.costs for these products are $286,000

Required:1. lf the company has a choice of selling one more unit of any one of its products,

which product should it choose?2. lf the company could, sell $1,000 more of any one of its products, which product

should it choose?3. Assume that the sales dollar volume of the company is distributed 40% from

Necessaiy, 20o/o trom Frill, and 407o from Luxury.(a) What is the weighted-average contribution margin percentage?(b) What is the break-even point for the company in sales dollars?(c) At the break-even point, how many units of Luxury are sold?

4. Assume, instead, that th€ company's sales in units are 40o/o tor Necessary 20%for Frill, and 40Y" for Luxury.(a) What is the weighted-average unit contribution margin?(b) What is the break-even point in units?(c) At the break-even point, how many units of Luxury are sold?

i,, / \fr:41 Travelco sells one of its products, a piece of soft-sided luggage, for 960. Variable costv IndiffederrLd per unit is $34, and monthly fixed costs are $60,000. A combination of changes in the

point way Travelco produces and selli this product could reduce per-unit variable cost to$28 but increase monthly fixed costs to $104,000.

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