Ciscoâ€™s Sumptuous Burritos produces two burritos, chicken
and steak, with the following characteristics:
Selling price per unit â€¦â€¦â€¦â€¦â€¦â€¦. $4 $6
Variable costs per unit â€¦â€¦â€¦â€¦â€¦. $2 $3
Expected sales (units) â€¦â€¦â€¦â€¦â€¦. 200,000 300,000
The total fixed costs for the company are $200,000.
a. What is the anticipated level of profits for the expected
b. Assuming that the product mix would be 40 percent chicken
and 60 percent stake at the break-even point, compute the break-even volume.
c. If the product sales mix were to change to four chicken
burritos for each steak burrito, what would be the new break-evenvolume?
A company is deciding which of two new thermostat systems to
produce and sell. The Basic system has variable costs of $8.00 per unit,
excluding sales commissions, and annual fixed costs of $520,000; the Deluxe
system has variable costs of $6.40, excluding sales commissions, and fixed
costs of $672,000. The companyâ€™s selling price is $32 per unit for the Basic
model and $38 for the Deluxe model. The company pays a 10 percent sales
a. Which of the two systems will be more profitable for the
firm if sales for either system are expected to average 150,000 units per year?
b. How many units must the company sell to break even if it
selects the Deluxe system?
c. Suppose the Basic system requires the purchase of
additional equipment that is not reflected in the preceding figures. The
equipment will cost $224,000 and will be depreciated over a 10-year life by the
straight-line method. How many units must the company sell to earn $40,000 of
income, after considering depreciation, if the Basic system is selected?
d. Now, ignore the information presented in part c. Write a
report that explains to management the level of volume at which it should be
indifferent between the Basic system and the Deluxe system.
The dean of the Graduate School of Management at the
University of California at Davis was considering whether to offer a particular
seminar for executives. The tuition was $650 per person. Variable costs, which
included meals, parking, and materials, were $80 per person. Certain costs of
offering the seminar, including advertising the seminar, instructorsâ€™ fees,
room rent, and audiovisual equipment rent, would not be affected by the number
of people attending (within a ?~?~relevant rangeâ€™â€™). Such costs, which could be
thought of as step costs, amounted to $8,000 for the seminar.
In addition to these costs, a number of staff, including the
dean of the school, worked on the program. Although the salaries paid to these
staff were not affected by offering the seminar, working on the seminar took
these people away from other duties, thus creating an opportunity cost
estimated at $7,000 for this seminar.
Given this information, the school estimated the break-even
point to be ($8,000 + $7,000)/($650 â€“ $80) = 26.3 students. If the school
wanted to at least break even on this program, it should offer the program only
if it expected at least 27 students to attend. Write a report to the dean that
evaluates the quality of this analysis. In particular, focus on concerns about
the accuracy of the data and the limitations of cost-volume-profit analysis.
Victoria Hair Salon styles hair in three operations washing,
cutting/setting, and drying, and charges $25 per styling. (Each styling is one
unit.) Victoria styles hair on a walk-in basis and does not take appointments;
customers who face a wait walk across the street to another salon. Victoria’s
owners find it has a cutting/setting bottleneck on Saturdays due to a limited
number of stylists. The bottleneck exists for a total of eight hours each
Saturday. Pertinent information follows:
Washing Cutting/setting Drying
Hourly capacity 30 Units 12 Units 15 Units
Saturday capacity 240 Units 96 Units 120 Units
Actual Saturday production 96 Units 96 Units 96 Units
Each hair styling has variable costs of $10. Victoria’s output is constrained
by the 96 units of cutting/setting capacity. Two options exist that can relieve
the bottleneck at the cutting/ setting operation. Consider the differential
costs associated with each of the following options to determine the impact on
Option 1. Victoria can increase
bottleneck output by hiring one nonstylist employee to prepare customers for
the cutting/setting by washing and combing their hair. This would increase the
cutting/setting capacity to 120 each Saturday. The cost for this additional
employee is $100 per Saturday.
Option 2. Victoria could hire another
stylist for each Saturday, increasing the cutting/ setting capacity to 108 each
Saturday and costing an additional $200 per Saturday.
Should Victoria’s owner go ahead with either of the two options? Why or whynot?
The purchasing agent responsible for ordering chairs
estimates that Folsom Furniture sells 30,000 chairs evenly throughout each
year, that each order costs $15 to place, and that holding each chair in
inventory for a year costs $4 per chair.
a. How many chairs should Folsom Furniture request in each
b. How many times per year should Folsom Furniture order
Hayley and Associates is a public accounting firm that
offers three types of servicesâ€”audit, tax, and consulting. The firm is
concerned about the profitability of its consulting business and is considering
dropping that line. If the consulting business is dropped, more tax work would
be done. If consulting is dropped, all consulting revenues would be lost, all
the variable costs associated with consulting would be saved, and 40 percent of
the fixed costs associated with consulting would be saved. If consulting is
dropped, tax revenues are expected to increase by 50 percent, the variable
costs associated with tax would increase by 50 percent, and the fixed costs
associated with tax would increase by 20 percent. Revenues and costs associated
with auditing would not be affected.
Segmented income statements for these product lines appear
Revenue â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦ $300,000 $400,000 $500,000
Variable costs â€¦â€¦â€¦â€¦..
250,000 300,000 350,000
Contribution margin… $50,000 $100,000 $150,000
Fixed costs â€¦â€¦â€¦â€¦â€¦â€¦
50,000 60,000 80,000
Operating profit â€¦â€¦â€¦ $ 0 $40,000 $ 70,000
Prepare a report to the management of Hayley and Associates
advising whether to drop consulting and increase tax. Assume tax would not be
increased if consulting were kept. Include a differentialanalysis.