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Name _________________________

1. Mace Company accumulates the following data concerning a mixed cost,


using miles as the activity level.

January
February
March
April

Miles Driven

10,000
8,000
9,000
7,500

Total Cost

$15,000
13,500
14,400
13,000

INSTRUCTIONS
Compute the variable and fixed cost elements using the high-low
method.
2. The income statement for Dexter Company for 2005 appears below.
DEXTER COMPANY
Income Statement
For the Year Ended December 31, 2005

Sales (40,000 units) ................................. $1,000,000


Variable expenses ....................................
700,000

Contribution margin ..................................


300,000
Fixed expenses .......................................
360,000

Net Income (loss) .................................... $ (60,000)


INSTRUCTIONS
Answer the following independent questions and show computations
using the contribution margin technique to support your answers:
1. What was the company's break-even point in sales dollars in 2005?
2. How many additional units would the company have had to sell in
2006 in order to earn net income of $60,000?
3. If the company is able to reduce variable costs by $2.50 per unit
in 2006 and other costs and unit revenues remain unchanged, how
many units will the company have to sell in order to earn a net
income of $50,000?

--Page 2
3. Rush Company developed the following information for its product:

Sales price
Variable cost
Contribution margin
Total fixed costs

Per Unit

$90
54

$36
$1,440,000

INSTRUCTIONS
Answer the following independent questions and show computations
using the contribution margin technique to support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to
earn a profit of $60,000?
3. If the company is presently selling 75,000 units, but plans to
spend an additional $135,000 on an advertising program, how many
additional units must the company sell to earn the same net
income it is now making?
4. Using the original data in the problem, compute a new break-even
point in units if the unit sales price is increased 20%, unit
variable cost is increased by 10%, and total fixed costs are
increased by $261,000.
4. (a) What is the present value of $80,000 due 7 years from now,
discounted at 9%?
(b) What is the present value of $120,000 due 5 years from now,
discounted at 12%?
5. Tovar Company earns 12% on an investment that will return $300,000
eleven years from now. What is the amount that Tovar Company should
invest now to earn this rate of return?
6. Hale Company is considering investing in an annuity contract that
will return $75,000 annually at the end of each year for 20 years.
What amount should Hale Company pay for this investment if it
earns an 8% return?
7. Betty Klein purchased an investment for $53,680.64. From this
investment, she will receive $8,000 annually for the next 10 years
starting one year from now. What rate of interest will Betty be
earning on her investment?

--Page 3

ANSWER KEY
+-------+------+--------+------+--------+--------+--------+--------+------+
| Text | Bank | Exam |
|
| Ques | Ques | Study |
|
|Chapter| Ref |Question|Answer| Type | Tax
| Src
| Obj
| Min. |
+-------+------+--------+------+--------+--------+--------+--------+------+
| 23
135
1
Exercise
P
2
5 |
| 23
143
2
Exercise
N
5
17 |
| 23
144
3
Exercise
N
5
17 |
| 28
28
4
Exercise
P
|
| 28
30
5
Exercise
P
|
| 28
33
6
Exercise
P
|
| 28
37
7
Exercise
P
|
+-------------------------------------------------------------------------+

--Page 4
1. (5 min.)
$15,000 - $13,000

10,000 - 7,500

$0.80 = variable cost per mile

($0.80 x 10,000) + fixed cost = $15,000


Fixed cost = $7,000
2. (15-20 min.)
1. $360,000
= $1,200,000
30%
2. $360,000 + $60,000
= $1,400,000
30%

Total sales needed

$1,400,000
= 56,000 total units to be sold
$25
40,000 actual units sold

16,000 additional units to be sold


Note: Required sales in units can be obtained directly by dividing
fixed costs plus profit by contribution margin per unit:
($360,000 + $60,000) ($25 - $17.50) = 56,000 units
3. 2005 Variable cost per unit =
Variable cost reduction =
2006 Variable cost per unit
Expected contribution margin

$17.50 ($700,000 40,000 units)


2.50

$15.00
$10

$360,000 + $50,000
= 41,000 units
$10

($25 - $15)

--Page 5
3. (15-20 min.)
1. $1,440,000
= 40,000 units must be sold to break even.
$36
2. Contribution margin ratio = 40%

($36 $90).

$1,440,000 + $60,000
= $3,750,000 total sales
.40
3. $135,000

$36

= 3,750 additional units

4. New sales price


New variable cost
New contribution margin
New total fixed costs

$108.00
59.40

$ 48.60
$1,701,000

($90 x 1.20)
($54 x 1.10)

($1,440,000 + $261,000)

$1,701,000
= 35,000 units is the new break-even point.
$48.60
4. Use Table 1.
(a) $80,000 x .54703 (7 periods and 9%) = $43,762.40
(b) $120,000 x .56743 (5 periods and 12%) = $68,091.60
5. Use Table 1.
$300,000 x .28748 (11 periods and 12%) = $86,244
6. Use Table 2.
$75,000 x 9.81815 (20 periods and 8%) = $736,361
7. Use Table 2.
Answer:

8%

$53,680.64 $8,000 = 6.71008 (10 periods and 8%) = 6.71008