Accounting 202

E3-21 Alternative Production Procedures and Operating Leverage

Assume Paper Mate is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method.

The predicted manufacturing costs for each method are as follows:

Capital Intensive Labor Intensive

Direct materials per unit……………………………………………...$ 5.00

$ 6.00

Direct labor per unit…………………………………………………….. 5.00

12

Variable manufacturing overhead per unit…………………… 4.00

2

Fixed manufacturing overhead per year……………….... 2,440,000.00

700,000.00

Paper Mate’s market research department has recommended an introductory unit sales price of $30.

The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold.

a.       Determine the annual break-even point in units if Paper Mate uses the:

1.       Capital-intensive manufacturing method.

2.       Labor-intensive manufacturing method.

E3-22 Contribution Income Statement and Operating Leverage

a.       Prepare a contribution income statement for the year ended December 31, 2012.

b.      Determine the company’s 2012 operating leverage.

c.       Calculate the percentage change in profits if sales decrease by 10 percent.

d.      Managements is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $375,000 and reduce variable costs to $77.50 per crate.

Variable Costs per Unit		Fixed Costs per Year
Manufacturing…………………. $18	Manufacturing………………… $80,000
Selling and administrative……. 7	Selling and administrative…………. 30,000
Total…………………………………. $25	Total…………………………………. $110,000
Required
a.       Determine the tax rate the company paid last year.

b.      What unit sales volume is required to provide an after-tax profit of $90,000?

c.       If the company reduces the unit variable cost by $2.50 and increase fixed manufacturing cost by $20,000, what unit sales volume is required to provide an after-tax profit of $90,000?

Florida Berry Basket harvests early -season strawberries for shipmen t throughout the eastern United

States in March. The strawberry farm is maintained by a permanent staff of 10 employees and

seasonal workers who pick and pack the strawberries. The strawberries are sold in crates containing

100 individually packaged one -quart containers. Affixed to each one -quart containers is the

distinctive Florida Berry Basket logo inviting buyers to “Enjoy the berry best strawberries in the

world!” The selling price is $90 per crate, variable costs are $80 per crate, and fixed costs are

$275,000 per year. In the year 2012, Florida Berry Basket sold 45,000 crates.

Chandler Manufacturing Company produces that it sells for $35 per unit. Last year, the company

manufactured and sold 20,000 units to obtain an after -tax profit of $54,000. Variable a nd fixed costs

follow.