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Tagged: breakeven point, business expects, relevant costs, revenue
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February 20, 2018 at 8:39 am #16495Ayush NairMember
(1) Footy fever purchases football jerseys for $55 and sells them for $65. Sales of football jerseys (in units) for the first quarter of 2018 are expected to be as follows: Jan 5,000; Feb 5,500; Mar 6,000 and 7,000 for April 2018.
The business expects inventory of 1,250 units on hand at 1st January 2018 and has a target finished inventory of 25% of the following month’s sales units.
Actual sales for November and December 2017 were 9,000 and 7,500 jerseys respectively.
Sales are 80% cash, and 20% credit. Credit customers pay 40% in the month following the sale and 60% two months following.
Payment for purchases is made in the month following the purchase. The budgeted cash balance on 1 January 2018 is $1,000.
a) Prepare a sales budget for the quarter January – March 2018 (note 1)
b) Prepare a purchases budget for the quarter January – March 2018 (note 1)
c) Prepare a schedule of receipts from accounts receivable for quarter January – March 2018 (note 1)
d) Prepare a cash budget for the quarter January – March 2018 (note 1)
e) Comment on the cash position of Footy Fever for each month
(2) NRG Ltd has a current breakeven point of 43,000 units. Which of the following would result in a decrease to the breakeven point?
a. a decrease in the variable costs per unit
b. an increase in the contribution margin per unit
c. a decrease in the selling price per unit
d. an increase in the fixed costs
(3) Zen Ltd has 13,000 units in inventory that cost $2.75 per unit to produce. Due to changing technology, the sales department is having difficulty selling this product. It will cost $4,300 to scrap the units and Zen Ltd needs to clear the warehouse to make room for new stock. A customer has approached Zen Ltd and is willing to take all 13,000 units. However, as this is old technology, they are not willing to pay for this item. Should Zen Ltd simply give these units away? If not, what is the minimum price for which Zen Ltd should sell these units?
(4) Kendo Ltd has fixed costs of $149,000 and variable costs are 75% of the selling price. To realize profits of $741,000 from sales of 35,600 units, what must the selling price be per unit?
(5) Dragon’s Lair makes small gadgets. The manufacturing costs per unit to produce a gadget are as follows:
Direct Materials $65
Direct Labor $25
Variable Manufacturing Overhead $15
Fixed Manufacturing Overhead $95
Total Manufacturing Costs $200
Variable selling costs to obtain and fill orders normally average $5 per unit when Dragon’s Lair sells gadgets locally. Dragon’s Lair has recently paid $48,000 to advertise in an international magazine. Dragon’s Lair has just received an order from a German Company for 400 gadgets for a total offering price of $45,000. The German Company will pay all shipping charges except the initial packaging costs which are expected to be $2.75 per gadget. Dragon’s Lair has excess capacity.
(a) Should Dragon’s Lair accept this one time only special order? Support your answer with calculations.
(b) Why is knowing that Dragon’s Lair has excess capacity important?
(6) Lolly Water Company makes lemonade. Lolly Water Company normally sells 34,000 bottles of lemonade for $4 per bottle. The cost to manufacture the lemonade is $1.50 per bottle. Management of Lolly Water Company have undertaken some research and have determined that further processing of the lemonade could convert the product into raspberry-lemonade flavor. Lolly Water Company could sell the raspberry-lemonade for $5.50 per bottle and would incur variable processing costs to convert the lemonade to raspberry-lemonade of $1.50 per bottle. Variable selling costs for lemonade are $1.00 per bottle, but for the raspberry-lemonade would be $0.80 per bottle.
Based on this information, assuming Lolly Water Company can sell 34,000 bottles of raspberry/lemonade:
(a) Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
(b) If the selling price of the raspberry-lemonade dropped to $5.00 per bottle, should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
(c) Describe relevant revenues and relevant costs. Provide management of Lolly Water Company with a list of relevant revenues and relevant expenses for this decision. Identify any revenues and/or expenses that would not be relevant for this decision.
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