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BA225 Week 4 Ch5 Ch6

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Brief Exercises: BE5-1,B E5-2, BE5-4
Exercises: E6-3, E6-5, E6-7

BE5-1 Monthly production costs in Pesavento Company for two levels of production are
as follows.

Cost 2,000 Units 4,000 Units
 Indirect labor   10,000  20,000
 Supervisory salaries   5,000  5,000
 Maintenance   4,000  7,000

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 Driven Total Cost Miles Driven Total 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.

E6-3 Norton Company reports the following operating results for the month of August:
sales $310,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management
is considering the following independent courses of action to increase net income.
1. Increase selling price by 10% with no change in total variable costs or sales volume.
2. Reduce variable costs to 58% of sales.
3. Reduce fixed costs by $20,000.

Instructions
Compute the net income to be earned under each alternative. Which course of action will
produce the highest net income?

E6-5 Hall Company had sales in 2014 of $1,560,000 on 60,000 units. Variable costs totaled
$720,000, and fixed costs totaled $500,000.
A new raw material is available that will decrease the variable costs per unit by 25%
(or $3.00). However, to process the new raw material, fixed operating costs will increase
by $150,000. 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 2014 (a) assuming the changes have not
been made, and (b) assuming that changes are made as described

E6-7 Qwik Repairs has over 200 auto-maintenance service outlets nationwide. It provides
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 60% contribution margin ratio. The company’s
fixed costs are $16,000,000 (that is, $80,000 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 $60,000 per service outlet. What is the dollar
amount of each type of service that must be provided by each service outlet to meet its
target net income per outlet?


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