# Application Problems

Page 209: Brief Exercises 5-1, 5-2, 5-4

BE5-1 Monthly production costs in Dilts Company for two levels of production are as

follows.

Cost 2,000 Units4,000 Units

Indirect labor \$10,000 \$20,000

Supervisory salaries 5,000 5,000

Maintenance 4,000 6,000

Indicate which costs are variable, fixed, and mixed, and give the reason for each answer.

BE5-2 For Lodes Company, the relevant range of production is 40–80% of capacity. At 40% of capacity, a variable cost is \$4,000 and a fixed cost is \$6,000. Diagram the behavior of each cost within the relevant range assuming the behavior is linear.

BE5-4 Bruno Company accumulates the following data concerning a mixed cost, using miles as the activity level.

Miles Total Miles Total

Driven Cost Driven Cost

January 8,000 \$14,150 March 8,500 \$15,000

February 7,500 13,500 April 8,200 14,490

Compute the variable- and fixed-cost elements using the high-low method.

Pages 260-261: Exercises 6-2, 6-5, 6-7

E6-2 In the month of June, Jose Hebert’s Beauty Salon gave 4,000 haircuts, shampoos, and permanents at an average price of \$30. During the month, fixed costs were \$16,800 and variable costs were 75% of sales.

Instructions

(a) Determine the contribution margin in dollars, per unit and as a ratio.

(b) Using the contribution margin technique, compute the break-even point in dollars and in units.

(c) Compute the margin of safety in dollars and as a ratio.

E6-5 Carey Company had sales in 2016 of \$1,560,000 on 60,000 units. Variable costs totaled \$900,000, and fixed costs totaled \$500,000.

A new raw material is available that will decrease the variable costs per unit by 20% (or \$3). However, to process the new raw material, fixed operating costs will increase by \$100,000. Management feels that one-half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 5% increase in the number of units sold.

Instructions

Prepare a projected CVP income statement for 2017 (a) assuming the changes have not been made, and (b) assuming that changes are made as described.

E6-7 PDQ Repairs has 200 auto-maintenance service outlets nationwide. It performs primarily two lines of service: oil changes and brake repair. Oil change–related services represent 70% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 40% contribution margin ratio. The company’s fixed costs are \$15,600,000 (that is, \$78,000 per service outlet).

Instructions

(a) Calculate the dollar amount of each type of service that the company must provide in order to break even.

(b) The company has a desired net income of \$52,000 per service outlet. What is the dollar amount of each type of service that must be performed by each service outlet to meet its target net income per outlet?

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