Accounting 221 Homework 2-8

wk_5_hw_problems.xls

Problem 1

Each of the cost "types" below should be matched to one of the descriptions that follow.
	Variable
	Fixed (committed)
	Fixed (discretionary)
	Mixed

(a)	Property taxes on land and building

(b)	Billboard advertising campaign

(c)	Raw material used in a manufacturing process

(d)	Employee picnic with band, food, and door prizes

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(a)	Property taxes on land and building

(b)	Billboard advertising campaign

(c)	Raw material used in a manufacturing process

(d)	Employee picnic with band, food, and door prizes

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Greg Morrison recently graduated from mortuary school. He is considering opening his own funeral home. A funeral home is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to burial containers like urns and caskets. An average casket costs $1,200. Greg's banker has asked a variety of questions in contemplation of providing a loan for this business.
(a)	If the average family is charged $6,000 for services and a burial container, how many families must be served to clear the break-even point?
(b)	If the banker believes Greg will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?
(c)	The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help Greg reach the break-even point sooner?

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(a)	Break-Even Point in Families =
(b)
(c)	New Break-Even Point in Families =

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Quintanilla Corporation's controller is preparing a business plan for 20X7. The anticipated level of business activity consists of the following key cost factors:
	Total fixed costs	$2,400,000
	Total variable costs	1,500,000
	Total revenues	4,500,000

Quintanilla's Bank has issued an economic advisory report suggesting that companies should anticipate a severe economic downturn during 20X7.
(a)	Determine the level of volume reduction that Quintanilla can absorb before becoming unprofitable.
(b)	Distinguish between committed fixed costs and discretionary fixed costs. What is the importance of this distinction in planning for business cycles?

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(a)

(b)

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Flip had sales of $10,000 (100 units at $100 per).
Manufacturing costs consisted of direct labor $1,500, direct materials $1,400, variable factory overhead $1,000, and fixed factory overhead $500.
The company did not maintain any inventories, so total cost of goods sold was $4,400. Selling expenses totaled $1,600 ($600 variable and $1,000 fixed),
and administrative expenses totaled $1,500 ($500 variable and $1,000 fixed). Operating income was $2,500.

Round all final answers to nearest dollar or whole number.

Requirements:
	a. What is the breakeven point in sales dollars and in units if the fixed factory overhead increased by $1,700?
	b. What is the breakeven point in sales dollars and in units if costs remain as originally projected?
	c. What would be the operating income be if sales units increased by 25%