5.E: Marketing and Accounting Fundamentals (Exercises)

5.1 Exercises

In each of the following questions, round all of the money and percentages to two decimals.

Mechanics

1. Classify each of the following costs as fixed costs, variable costs, or blended costs. If a cost is blended, separate it into its fixed and variable components.
   1. Natural gas bill for $15 per month plus \(\$0.33/m^2\).
   2. A chief executive officer salary of $240,000 per year.
   3. An author earning a royalty of 5% of sales.
   4. Placing a commercial on television for $300,000.
   5. A cell phone bill for $40 per month plus $0.25/minute for long distance.
   6. Hourly production worker wages of $18/hr.
   7. Sales staff who are compensated at a salary of $1,000 per month plus 15% of sales.

For questions 2–7, solve for the unknown variables (identified with a ?) based on the information provided.

	Total Fixed Costs	Total Variable Costs	Unit Variable Cost	Selling Price	Total Revenue	Level of Output	Net Income	Contribution Rate	Unit Contribution Margin
2.	$5,000	$6,600	?	$13	?	?	$4,000	?	$7.50
3.	$2,000	?	$5	$10	$10,000	?	?	?	?
4.	?	?	?	$75	$60,000 ?	?	$14,500	35%	?
5.	$18,000	$45,000	?	?	$84,600	1,800	?	?	?
6.	?	?	?	?	$78,000	3,000	$1,8000	?	$13
7.	?	$94,050	$75.24	?	?	?	−$19,500	38%	?

Applications

8. In the current period, Blue Mountain Packers in Salmon Arm, British Columbia, had fixed costs of $228,000 and a total cost of $900,000 while maintaining a level of output of 6,720 units. Next period sales are projected to rise by 20%. What total cost should Blue Mountain Packers project?
9. Fred runs a designer candle-making business out of his basement. He sells the candles for $15 each, and every candle costs him $6 to manufacture. If his fixed costs are $2,300 per month, what is his projected net income or loss next month, for which he forecasts sales of 225 units?
10. A college print shop leases an industrial Xerox photo copier for $1,500 per month plus 1.5¢ for every page. Additional printing costs are estimated at 2¢ per page, which covers toner, paper, labour, and all other incurred costs. If copies are made for students at 10¢ each, determine the following:
    1. How does net income change with every 100 copies sold?
    2. What is the monthly net income if, on average, the shop makes 25,000 copies for students each month?
11. Gayle is thinking of starting her own business. Total fixed costs are $19,000 per month and unit variable costs are estimated at $37.50. From some preliminary studies that she completed, she forecasts sales of 1,400 units at $50 each, 1,850 units at $48 each, 2,500 units at $46 each, and 2,750 units at $44 each. What price would you recommend Gayle set for her products?
12. Last year, A Child's Place franchise had total sales of $743,000. If its total fixed costs were $322,000 and net income was $81,000, what was its contribution rate?
13. What level of output would generate a net income of $15,000 if a product sells for $24.99, has unit variable costs of $9.99, and total fixed costs of $55,005?
14. In the current year, a small Holiday Inn franchise had sales of $1,800,000, fixed costs of $550,000, and total variable costs of $750,000. Next year, sales are forecast to increase by 25% but costs will remain the same. How much will net income change (in dollars)?

Challenge, Critical Thinking, & Other Applications

15. Monsanto Canada reported the following on its income statement for one of its divisions:\[\begin{array}{ll}{\text { Sales }} & {\$ 6,000,000} \\ {\text { Total Fixed Costs }} & {\$ 2,000,000} \\ {\text { Total Variable Costs }} & {\$ 3,200,000} \\ {\text { Total Costs }} & {\underline{55,200,000}} \\ {\text { Net Income }} & {\$ 800,000} \end{array}\nonumber \]Calculate the total contribution margin in dollars and the contribution rate for this division.
16. Procter and Gamble is budgeting for next year. For one of its brands, P&G projects it will operate at 80% production capacity next year and forecasts the following:\[\begin{array}{ll}{\text { Sales }} & {\$ 80,000,000} \\ {\text { Total Fixed Costs }} & {\$ 20,000,000} \\ {\text { Total Variable Costs }} & {\$ 50,000,000} \\ {\text { Total Costs }} & {\underline{570,000,000}} \\ {\text { Net Income }} & {\$ 10,000,000} \end{array}\nonumber \]Determine the net income if sales are higher than expected and P&G realizes 90% production capacity.
17. Through market research, a marketing manager determines that consumers are willing to pay 5% more for the company’s product. However, some of their customers would not like this price increase, so the level of output would drop by 5%. Should the marketing manager leave things as they are or increase the price by 5%? Justify your solution.
18. Francesca is a departmental manager in the women's wear department for The Bay. She believes that if she places her line of $100 dresses on sale at 20% off, she would see her sales rise by 75%. The contribution rate on her dresses is 50%. On a strictly financial basis, should she place the dresses on sale?

Use the following information for questions 19 and 20:

\[\begin{array}{ll}{TFC=\$ 3,200,000.00} & {S=\$ 99.97} \\ {TVC=\$ 5,009,440.00} & {n=131,000}\end{array}\nonumber \]

19. Calculate the following information: unit variable cost, total revenue, net income, unit contribution margin, total contribution margin, and contribution rate.
20. Determine a new value for net income if the following situations occur:
    1. Fixed costs rise by 10%.
    2. The selling price is lowered by 25% during a sale, resulting in 50% more volume.
    3. Fixed costs are lowered by 5%, total variable costs rise by 3%, the price is lowered by 5%, and the level of output rises 10%.

5.2 Exercises

In each of the following questions, round all of the money and percentages to two decimals unless otherwise specified.

Mechanics

1. Franklin has started an ink-jet print cartridge refill business. He has invested $2,500 in equipment and machinery. The cost of refilling a cartridge including labour, ink, and all other materials is $4. He charges $14.95 for his services. How many cartridges does he need to refill to break even?
2. Hasbro manufactures a line of children's pet toys. If it sells the toy to distributors for $2.30 each while variable costs are 75¢ per toy, how many toys does it need to sell to recover the fixed cost investment in these toys of $510,000? What total revenue would this represent?
3. You are thinking of starting your own business and want to get some measure of feasibility. You have determined that your total fixed costs would be $79,300. From annual business reports and competitive studies, you estimate your contribution rate to be 65%. What is your break-even in dollars?
4. If a business has total revenue of $100,000, total variable costs of $60,000, and total fixed costs of $20,000, determine its break-even point in dollars.
5. If the break-even point is 15,000 units, the selling price is $95, and the unit variable cost is $75, what are the company's total fixed costs?
6. Louisa runs a secretarial business part time in the evenings. She takes dictation or handwritten minutes and converts them into printed word-processed documents. She charges $5 per page for her services. Including labour, paper, toner, and all other supplies, her unit variable cost is $2.50 per page. She invested $3,000 worth of software and equipment to start her business. How many pages will she need to output to break even?
7. If your organization has a contribution rate of 45% and knows the break-even point is $202,500, what are your organization's total fixed costs?
8. What is the unit contribution margin on a product line that has fixed costs of $1,800,000 with a break-even point of 360,000 units?

Applications

9. Ashley rebuilds old laptops as a home hobby business. Her variable costs are $125 per laptop and she sells them for $200. She has determined that her break-even point is 50 units per month. Determine her net income for a month in which she sells 60 units.
10. Burton Snowboards reported the following figures last week for its Custom V Rocker Snowboard:\[\begin{array}{ll}{\text { Sales }} & {\$ 70,000} \\ {\text { Total Fixed Costs }} & {\$ 19,000} \\ {\text { Total Variable costs }} & {\$ 35,000} \\ {\text { Total costs }} & {\underline{554,000}} \\ {\text { Net lncome }} & {\$ 16,000}\end{array}\nonumber \]If the above numbers represent 70% operational capacity, express the weekly break-even point in dollars as a percentage of maximum capacity.
11. Shardae is starting a deluxe candy apple business. The cost of producing one candy apple is $4.50. She has total fixed costs of $5,000. She is thinking of selling her deluxe apples for $9.95 each.
    1. Determine her unit break-even point at her selling price of $9.95.
    2. Shardae thinks her price might be set too high and lowers her price to $8.95. Determine her new break-even point.
    3. An advertising agency approaches Shardae and says people would be willing to pay the $9.95 if she ran some "upscale" local ads. They would charge her $1,000. Determine her break-even point.
    4. If she wanted to maintain the same break-even units as determined in (a), what would the price have to be to pay for the advertising?
12. Robert is planning a wedding social for one of his close friends. Costs involve $865 for the hall rental, $135 for a liquor licence, $500 for the band, and refreshments and food from the caterer cost $10 per person. If he needs to raise $3,000 to help his friend with the costs of his wedding, what price should he charge per ticket if he thinks he can fill the social hall to its capacity of 300 people?
13. Boston Beer Company, the brewer of Samuel Adams, reported the following financial information to its shareholders:\[\begin{array}{ll}{\text { Total Revenue }} & {\$ 388,600,000} \\ {\text { Total Variable costs }} & {\$ 203,080,000} \\ {\text { Total Fixed costs }} & {\$ 182,372,000} \\ {\text { Total Costs }} & {\overline{5385,452,000}} \\ {\text { Net Income }} & {\$ 3,148,000}\end{array}\nonumber \]If this represented sales of 2,341,000 barrels of beer, determine its break-even point in units and dollars.
14. In the beverage industry, PepsiCo and The Coca-Cola Company are the two big players. The following financial information, in millions of dollars, was reported to its shareholders:

	PepsiCo	The Coca-Cola Company
Total Revenue	$14.296	$21.807
Total Variable Costs	$7.683	$12.663
Total Fixed Costs	$6.218	$8.838
Total Costs	$13.901	$21.501
Net Income	$0.395	$0.306

Compare the break-even points in total dollars between the two companies based on these reports.

Challenge, Critical Thinking, & Other Applications

15. Calculate the following:
    1. By what percentage does the unrounded unit break-even point change if the unit contribution margin increases by 1% while all other numbers remain the same?
    2. By what percentage does the unrounded unit break-even point change if total fixed costs are reduced by 1% while all other numbers remain the same?
    3. What do the solutions to the above questions illustrate?
16. École Van Belleghem is trying to raise funds to replace its old playground equipment with a modern, child-safe structure. The Blue Imp playground equipment company has quoted the school a cost of $49,833 for its 20 m × 15 m megastructure. To raise the funds, the school wants to sell Show 'n' Save books. These books retail for $15.00 each and cost $8.50 to purchase. How many books must the school sell to raise funds for the new playground?
17. The Puzzle Company had total revenue of $4,750,000, total fixed costs of $1,500,000, and total variable costs of $2,750,000. If the company desires to earn a net income of $1,000,000, what total sales volume is needed to achieve the goal?
18. Whirlpool Corporation had annual sales of $18.907 billion with a net income of $0.549 billion. Total variable costs amounted to $16.383 billion.
    1. Determine Whirlpool Corporation's break-even in dollars.
    2. If Whirlpool Corporation managed to increase revenues by 5% the following year while implementing cost-cutting measures that trimmed variable costs by 2%, determine the percent change in the break-even dollars.

Use the following information for questions 19 and 20:

\[S=\$ 100 \quad VC=\$ 60 \quad TFC=\$ 250,000\nonumber \]

19. Calculate the current break-even point in both units and dollars.
20. A production manager is trying to control costs but is faced with the following tradeoffs under three different situations:
    1. Total fixed costs are reduced by 15%, but unit variable costs will rise by 5%.
    2. Unit variable costs are reduced by 10%, but fixed costs will rise by 5%
    3. Total fixed costs are reduced by 20%, but unit variable costs will rise by 10%.
    4. Unit variable costs are reduced by 15%, but fixed costs will rise by 15%.

Based strictly on break-even calculations, which course of action would you recommend she pursue?

Review Exercises

In each of the following questions, round all of the money and percentages to two decimals unless otherwise specified.

Mechanics

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. Calculate the net income or loss if 25,000 units are sold.
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. 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?

Applications

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?
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. In the following year, a competitor dealt a severe blow to sales and total revenues dropped to $15,000,000. Calculate the net income.
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:\[\begin{array}{lll}{} & {\text { Toyota }} & {\text { Honda }} \\ {\text { Total Revenue }} & {\$ 247,734} & {\$ 101,916} \\ {\text { Total Variable Costs }} & {\$ 204,135} & {\$ 75,532} \\ {\text { Total Fixed Costs }} & {\$ 20,938} & {\$ 24,453} \\ {\text { Total Costs }} & {\$ \overline{225,073}} & {\$ \overline{99,985}} \\ {\text { Net Income }} & {\$ 22,661} & {\$ 1,931}\end{array}\nonumber \]Compare the break-even points in total dollars between the two companies based on these reports.
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.

Challenge, Critical Thinking, & Other Applications

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.
   4. Comment on your findings from the above solutions.
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.
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 activities	$6,235,000
Utilities used in non-production activities	$2,222,000	Property taxes	$2,100,000
# 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 break-even 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)?

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