# 2.5 Review Exercises

1. Logitech manufactures a surround sound multimedia speaker system for personal computers. The average selling price is \$120 per unit, with unit variable costs totaling \$64. Fixed costs associated with this product total \$980,000.
1. Calculate the profit or loss if 25,000 units are sold.
2. Calculate the profit or loss if 16,000 units are sold.

a. \$420,000; b. -\$84,000

2. Microsoft sells its wireless laser desktop mouse and keyboard for \$70. Unit variable costs are \$45.60 and fixed costs associated with this product total \$277,200.
1. What is the break-even point in units?
2. What is the net income or loss if 40,000 units are sold?
3. Suppose the fixed costs decrease by \$20,000 with no changes to selling price or unit variable costs.  What is the new break-even point?
4. Suppose the selling price increases by \$5 with no changes to the selling price or unit variable costs.  What is the new break-even point?
5. Suppose the fixed costs increase by \$10,000 and the unit variable costs increase by \$1.40 with no changes to the selling price.  What is the new break-even point?

a. 11,361; b. \$698,800; c. 10,541; d. 9429; e. 12,487

3. Frances has a home-based Avon business. She purchases makeup from Avon for an average price of \$12 and sells it to her customers on average for \$20. She assigns \$100 of her monthly computer leasing costs to this product line and spends \$260 per month advertising this product line. In hosting Avon parties, she estimates her labour cost at \$2 per unit sold.
1. What is her net income or loss if 100 units are sold?
2. What is her net income or loss if 35 units are sold?
3. What is the break-even point in both units and dollars?
4. What is the new unit break-even point if Frances increases her advertising costs by 50% per month?

a. \$240; b. -\$150; c. 60, \$120; d. 82

4. Brynne is developing a business plan. From market research she has learned that her customers are willing to pay \$49.95 for her product. Unit variable costs are estimated at \$23.75, and her monthly total fixed costs are \$12,000. To earn a net income of at least \$5,000, what minimum level of monthly sales (in units) does she need?

649

5. Advanced Microcomputer Systems had annual sales of \$31,979,000 with total variable costs of \$20,934,000 and total fixed costs of \$6,211,000.
1. What is the company’s contribution rate?
2. What annual revenue is required to break even?
3. Suppose the fixed costs increase by \$50,000 with no changes to the selling price or variable costs.  What is the new break-even revenue?
4. In the following year, a competitor dealt a severe blow to sales and total revenues dropped to \$15,000,000. Calculate the net income.

a. 34.54%; b. \$17,982,939.70; c. \$17,838,172.84; d. -\$1,030,256.39

6. In the North American automotive markets, Toyota and Honda are two of the big players. The following financial information (all numbers in millions of dollars) for each was reported to its shareholders:
 Toyota Honda Total Revenue \$247,734 \$101,916 Total Variable Costs \$204,135 \$75,532 Total Fixed Costs \$20,938 \$24,453 Net Income \$22,661 \$1,931

Compare the break-even revenue between the two companies based on these reports.

Toyota=\$118,971.86 million; Honda=\$94,456.94 million; Honda is lower by 20.61%

7. Lagimodiere Industry’s unit variable costs are 45% of the unit selling price. Annual fixed costs are \$1.5 million.
1. What total revenue results in an income of \$250,000?
2. Calculate the break-even dollars for Lagimodiere Industry.
3. If revenues exceed the break-even dollars by 20%, determine the net income.

a. \$3,181,818.18; b. \$2,727,272.73; c. \$300,000

8. Svetlana and Yoric are each thinking of starting the same type of business. Svetlana is young and into technology and mechanization. She has a large fixed cost of \$15,000, but her advanced production machinery minimizes her labour, resulting in a low unit variable cost of \$25. Yoric is a little older and believes the best quality items are handmade. He has a low fixed cost of \$8,000 but incurs more labour costs, resulting in a high unit variable cost of \$60. Regardless of who makes the product, market research shows that consumers would pay \$100 for the product.
1. Calculate the unit break-even for both Svetlana and Yoric.
2. Calculate the net income or loss for both if unit sales are 50% higher than the break-even point.
3. Calculate the net income or loss for both if unit sales are 50% lower than the break-even point.

a. Svetlana=200, Yoric=200; b. Svetlana=\$9,075, Yoric=\$4,000; c. Svetlana=-\$6,975, Yoric=-\$4,000

9. A surfboard manufacturer lost \$500,000 last year during a recession. Total revenue was \$5,000,000 and total variable costs were 40% of sales. The production facility ran at 50% capacity. The production manager wants to know the following:
1. What is the percent capacity required to break even?
2. When the economy recovers this year, if the plant runs at 100% capacity what net income could the company realize?
3. There is a possibility that sales could be so strong this year that the plant may be required to run at 120% capacity by offering a lot of overtime to its production workers. This would result in total variable costs rising by 35%. On a strictly financial basis, should the production manager plan to exceed capacity or should he advise top management to freeze production at 100% capacity? Justify your answer.

a. 58.3%; b. \$2,500,000; c. \$3,100,000

10. The following annual information is known about a company:
 Material Inputs to Manufacturing \$17,400,000 Marketing and Advertising \$3,500,000 Management Salaries \$2,750,000 Production Worker Wages \$9,990,000 Supplies Needed for Manufacturing \$8,345,000 Utilities Used in Production \$6,235,000 Utilities Used in Non-Production \$2,222,000 Property Taxes \$2,100,000 Number of Units Sold 75,132 Unit Price \$749
1.   Calculate the unit variable cost, total fixed costs, unit contribution margin, contribution rate, net income, and breakeven in both units and dollars.
2. The marketing research manager shows that if the company lowers its price by 5%, unit sales will rise by 5%. Should the company lower its price? Justify your decision.
3. Assume that the price remained the same. Due to economic pressures, fixed costs are forecasted to rise by 6% and variable costs by 4% next year. At the same level of output, by what percentage must the selling price rise to maintain the same level of net income achieved in (a)?