Assignment # 1 Dated 13th Feb 2015

Prepared By Amit Kumar Roll number : x003-14

Problem 16-2
Q a) What is Doyle's Candy Company's break-even point in boxes of candyfor the
current year?
A a) Break-even volume = Fixed costs / Unit contribution
= $1,056,000 / $9.60 - $5.76
= $1,056,000 / $3.84
= 275,000 boxes
Q b) What selling price per box must Doyle's Candy Company charge tocover the
15 percent increase in variable production costs of candy andstill maintain the
current contribution margin percentage?
A b) Current contribution margin percentage = $3.84 / $9.60 = 40%.
CMP =( UR-UVC) / UR
Solving for UR (Selling Price):
UR = UVC / (1-CMP)
With a 15% increase in variable production costs (to $5.52, giving total UVC
of $6.48), the selling price per box is: UR = $ 6.48 / ( 1-.04) =$ 6.48/0.6 =$
10.80
Q c) What volume of sales in dollars must Doyle's Candy Company achieve in the
coming year to maintain the same net income after taxes as projected for the
current year if the selling price of candy remains at $9.60 per box and the variable
production costs of candy increase 15percent?

A c)
Projected income statement:
Revenues (390,000 x 9.60)
Variable costs (390,000 x $5.76)
Contribution
Fixed costs
Income before tax
Taxes (40%)
Net income after tax

$3,744,000
2,246,400
1,497,600
1,056,000
441,600
176,640
$ 264,960

Income before tax = (UR - UVC) X - TFC. With a 15% increase in variable
production costs (to $5.52, giving total UVC of $6.48).
Therefore,
441,600
$3.12 X
X
TR

=
=
=
=

($9.60 6.48) X - 1,056,000

$1,497,600
480,000 boxes
480,000 $9.60 = $4,608,000

Problem 16-3
Q a) What is the break-even point in number of pizzas that must be sold?

A a) If cost of food sold is the only item of variable expense then

Breakeven sales volume*$308,000 / $8.50 =36,235 pizzas
Variable Cost / Pizza:$92,400 /36,235= $2.55
Break even volume = (Fixed cost / Unit Contribution)
= ($ 241360 - $ 92400)/($8.50-$ 2.55) = 25035 number of Pizzas
Q b) What is the cash flow break-even point in number of pizzas that must be sold?
A b) Cash Breakeven Point = (fixed costs - depreciation) / contribution margin per unit
= Cash fixed costs depreciation

= $148,960 - ($16,000 + $8,000)

= $148,960 - ($24,000) =$124,960
depreciation tax shield($24,000x 30%) =$7,200
Therefore, Net Cash Fixed Cost = $124,960 - ($7,200 )= $117,760.
So,
Break-even volume = $117,760 $5.95 = 19,792 number of pizza
Q c) If Mr. Solid withdraws $14,400 for personal use, how much cash will be left
from the 2002 income-producing activities?
A c) Cash generated by operations
= net income + noncash expenses
= $46,648 + $24,000
=$70,648
Since withdrawal is $14,400
Final Cash generated is
$70,648- $14,400 = $56,248

Q d) Mr. Solid would like an after-tax net income of $60,000, what volume must
bereached in number of pizzas in order to obtain the desired income?
A d) Assuming pretax income as a fixed cost
target pretax income
= $60,000/.7= $ 85714.2
dollar sales at target pretax income
$85714.2+ $148,960 (fixed costs) = $234,674
So required volume
= (dollar sales at target pretax income) / (unit contributionmargin)= $234,674/
$5.95=
39,441 pizzas.

Q e) Briefly explain to Mr. Solid why his profits have increased at a faster rate than
his sales.
A e) A large volume of salesis required before any profit is made because most of
the expenses are fixed.Once this point is reached (break-even), each sale
contributes $5.95 to profits, a larger change in profits since profits begin at zero
at this point while the $8.50 change in sales is a smaller proportion of sales
because of the large amount of sales required to reach the break-even point.
Q f) Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.
A f) Depreciation of delivery equipment = $ 16,000
Depreciation of restaurant equipment = $ 8,000
Total Depreciation = $ 24,000
Since Depreciation is non current cash consuming cost, the cash flow from
operations will exceed his profits.