Question

I just need help figuring out 5 through 8

ACC 299 Winter 2020 Prof. Graybeat Sis a small company that currently operates in Knoxville, TN and has a single product – stadium seat cushions bearing the University of Tennessee logo. Eventually Gary wants to expand and sell this product for other university and professional sports teams, and to add other merchandise. In the meantime, Gary is having a little difficulty understanding margins, and operating income and product mix. "I'll never understar I never understand this accounting stuff." Gary velled, waving the income statement he had the morning mail. "last month we sold 1,000 stadium seat cushions and earned $6,850 in operating income. This month, when we sold 1,500, I thought we'd make $10,275. But this income statement shows an operating income of $12,100! How can Tever make plans if I can't predict my income? I'm going to give Cathy one last chance to explain this to me," he declared as he picked up the phone to call Cathy, his accountant **Will you try to explain this operating income thing to me one more time please Gary asked Cathy. "After I saw last month's income statement, I though each cushion we sold generated $6.85 in net income; now this month, each one generates $8.07! There was no change in the price we paid for each cushion, and we didn't change our selling price, so I don't understand how this happened. If I had known I was going to have $12.100 in operating income, I would have looked more seriously at adding to our product line." Taking a deep breath, Cathy replied, "Sure, Gary. I'd be happy to explain how you made so much more operating income than you were expecting." Required: 1. Assume the role of Cathy. Explain to Gary why his use of operating income per cushion was in error. 2. Using the following income statements, prepare a contribution margin income statement for October. Sales Cost of Goods Sold Gross Profit Rent Expense Wages Expenses Shipping expense Utilities expense Advertising expense Insurance expense Operating income September $25,000 10,000 15,000 1,500 3.500 1.250 750 750 400 $6.850 October $37,500 15,000 22,500 1,500 5,000 1,875 750 875 400 $12.100 Wages and advertising are mixed costs. The fixed portion of each of those costs is $500. 3. What is Gary's break-even sales in units and dollars? 4. Gary plans to sell 500 seat cushions next month. How much operating income can Gary expect to earn next month if he actually realizes his target sales?

Answer 1

Based on available detail we can ascertain that sale price per unit is 25, total variable cost 14.5 per unit, Contribution is 10.5 per unit & fixed cost is 3,650

Total Units Sold	1000	1500	Per Unit
Revenue	25000	37500	25
Variable Cost
COGS	10000	15000	10
Wages	3000	4500	3
Advertising	250	375	0.25
Shipping	1250	1875	1.25
Total Variable Cost			14.5
Contribution			10.5
Fixed Cost
Wages	500	500
Advertising	500	500
Rent	1500	1500
Utilities	750	750
Insurance	400	400
Total	3650	3650

Q.5 : How many Seats cushion he will need to sell to earn 3700 in Operating Income

Response : 700 unit is required to be sold to earn 3700 Operating income calculated as under :

Contribution required to earn operating profit of 3700 = Fixed cost +3750
Contribution required (a)			7350	(3650+3700)
Per Unit contribution (b)			10.5
Number of product to be sold (a/b)			700

Q.6 : Evaluation of advertising and sales price reduction plan :

Advertising Plan Evaluation
Incremental contribution (460*10.5)			4,830
Less : Incremental cost for advertising			(1,200)
Incremental Profit			3,630

Reduction in selling price evaluation :

a. Determine reduction in selling price

Current Selling price			25.00
10% reduction			2.50

b. 10% reduction in selling price impact on contribution per unit

Existing contribution per unit			10.50
Less : Reduction for price decrease			(2.50)
Revised contribution			8.00

c. Reduction in selling price impact on contribution

Incremental Contribution (500*8)			4,000
Less : Reduction in contribution for existing level of sales (500*2.5)			(1,250)
Net Incremental contribution			2,750

In view of above the net incremental contribution is higher in advertising plan as compared to reduction in sale price

Q.7 Evaluation whether cost should be increased or not :

Ans :

a. Calculation of increment in cost

Cost of Cushion			10
20% Incremental price			2

b. Calculation of number of unit to be sold

Projected Sales			1200
5% reduction due to increase in price			60
Balance Unit sold			1140

c. Evaluation of proposal

Amount recovered by Increasing price (2*50%*1140)			1140
Contribution lost for incremental price (60*10.5)			-630
Incremental Contribution			510

Since the net result is incremental contribution hence increment in cost would be advisable

Q.8 Break even point for blanket and cushion

Ans :

a. contribution per unit of Blanket

Sales Price of Blanket			55.00
Variable cost per unit
Cost of Blaket			32.00
Wages			3.00
Advertising			0.25
Shipping			1.25
Total Variable Cost			36.50
Contribution per unit			18.50

b. Calculation of overhead

Existing Fixed Overhead			3,650
Incremental fixed overhead for Blanket			350
Total Fixed overhead for stadium cushion & blanket (A)			4,000

c. Calculation of break even

Contribution of 3 Stadium cushion			31.50
Contribution of 1 Blanket			18.50
Total contribution of 3 cushion and 1 blanket (B)			50.00
80 Sets Need to be sold for break even which mean 80 Blanket and 240 Cushion (A/B)			80.00