3-46 CVP, alternative cost structures. Classical Glasses operates a kiosk at the local mall, selling sunglasses for $30 each. Classical Glasses currently pays $1,000 a month to rent the space and pays two full-time employees to each work 160 hours a month at $10 per hour. The store shares a manager with a neighboring kiosk and pays 50% of the manager’s annual salary of $60,000 and benefits of $12,000. The wholesale cost of the sunglasses to the company is $10 a pair. 1. How many sunglasses does Classical Glasses need to sell each month to break even? 2. If Classical Glasses wants to earn an operating income of $5,300 per month, how many sunglasses does the store need to sell? 3. If the store’s hourly employees agreed to a 15% sales-commission-only pay structure, instead of their hourly pay, how many sunglasses would Classical Glasses need to sell to earn an operating income of $5,300? 4. Assume Classical Glasses pays its employees hourly under the original pay structure, but is able to pay the mall 10% of its monthly revenue instead of monthly rent. At what sales levels would Classical Glasses prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay 10% of its monthly revenue as rent? 3-47 CVP analysis, income taxes, sensitivity. (CMA, adapted) Thompson Engine Company manufactures and sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Company estimates the following: Selling price $ 7,000 Variable cost per engine $ 2,000 Annual fixed costs $5,560,000 Net income $ 900,000 Income tax rate 40% The first-quarter income statement, as of March 31, reported that sales were not meeting expectations. During the first quarter, only 300 units had been sold at the current price of $7,000. The income statement showed that variable and fixed costs were as planned, which meant that the 2017 annual net income projection would not be met unless management took action. A management committee was formed and presented the following mutually exclusive alternatives to the president: a. Reduce the selling price by 15%. The sales organization forecasts that at this significantly reduced price, 1,400 units can be sold during the remainder of the year. Total fixed costs and variable cost per unit will stay as budgeted. b. Lower variable cost per unit by $750 through the use of less-expensive direct materials. The selling price will also be reduced by $800, and sales of 1,130 units are expected for the remainder of the year. c. Reduce fixed costs by 5% and lower the selling price by 25%. Variable cost per unit will be unchanged. Sales of 1,500 units are expected for the remainder of the year. 1. If no changes are made to the selling price or cost structure, determine the number of units that Thompson Engine Company must sell (a) to break even and (b) to achieve its net income objective. 2. Determine which alternative Thompson Engine Company should select to achieve its net income objective. Show your calculations.
3-46 CVP, alternative cost structures. Classical Glasses operates a kiosk at the local mall, selling
sunglasses for $30 each. Classical Glasses currently pays $1,000 a month to rent the space and pays two
full-time employees to each work 160 hours a month at $10 per hour. The store shares a manager with a
neighboring kiosk and pays 50% of the manager’s annual salary of $60,000 and benefits of $12,000. The
wholesale cost of the sunglasses to the company is $10 a pair.
1. How many sunglasses does Classical Glasses need to sell each month to break even?
2. If Classical Glasses wants to earn an operating income of $5,300 per month, how many sunglasses does
the store need to sell?
3. If the store’s hourly employees agreed to a 15% sales-commission-only pay structure, instead of their
hourly pay, how many sunglasses would Classical Glasses need to sell to earn an operating income
of $5,300?
4. Assume Classical Glasses pays its employees hourly under the original pay structure, but is able to
pay the mall 10% of its monthly revenue instead of monthly rent. At what sales levels would Classical
Glasses prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay
10% of its monthly revenue as rent?
3-47 CVP analysis, income taxes, sensitivity. (CMA, adapted) Thompson Engine Company manufactures
and sells diesel engines for use in small farming equipment. For its 2017 budget, Thompson Engine Company
estimates the following:
Selling price $ 7,000
Variable cost per engine $ 2,000
Annual fixed costs $5,560,000
Net income $ 900,000
Income tax rate 40%
The first-quarter income statement, as of March 31, reported that sales were not meeting expectations.
During the first quarter, only 300 units had been sold at the current price of $7,000. The income statement
showed that variable and fixed costs were as planned, which meant that the 2017 annual net income projection
would not be met unless management took action. A management committee was formed and presented
the following mutually exclusive alternatives to the president:
a. Reduce the selling price by 15%. The sales organization
price, 1,400 units can be sold during the remainder of the year. Total fixed costs and variable cost per
unit will stay as budgeted.
b. Lower variable cost per unit by $750 through the use of less-expensive direct materials. The selling
price will also be reduced by $800, and sales of 1,130 units are expected for the remainder of
the year.
c. Reduce fixed costs by 5% and lower the selling price by 25%. Variable cost per unit will be unchanged.
Sales of 1,500 units are expected for the remainder of the year.
1. If no changes are made to the selling price or cost structure, determine the number of units
that Thompson Engine Company must sell (a) to break even and (b) to achieve its net income
objective.
2. Determine which alternative Thompson Engine Company should select to achieve its net income objective.
Show your calculations.
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