# Chapter 3 -HwkACCT 302

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Student: Everardo Navarro Instructor: Akbar Safari Assianment: Chabter 3 - Homework Date: 10/21/23 Course: ACCT 302-03 9 +hap 1. O'Reilly Manufacturing sold 435,000 units of its product for \$64 per unit in 2020. Variable cost per unit is \$54, and total fixed costs are \$1,740,000. Read the requirements'. Review Only Click the icon to see the Worked Solution. Requirement 1. Calculate (a) contribution margin and (b) operating income. (a) Determine the formula used to calculate the contribution margin. Total sales - Total variable costs = Contribution margin The contribution marginis \$ 4,350,000 (b) Determine the formula used to calculate the operating income. Contribution margin - Total fixed costs = Operating Income Operating incomeis \$ 2,610,000 Requirement 2. O'Reilly's current manufacturing process is labor intensive. Kate Kein, O'Reilly's production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to \$5,655,000. The variable costs are expected to decrease to \$50 per unit. O'Reilly expects to maintain the same sales volume and selling price next year. How would acceptance of Kein's proposal affect your answers to (a) and (b) in requirement 1? Recalculate (a) and (b) if the proposal is accepted. (@) The contribution margin wouldbe \$ 6,090,000 under Kein's proposal. (b) Operating income would changeto \$ 435,000 . Requirement 3. Should O'Reilly accept Kein's proposal? Explain. Operating income is expected to decrease by \$ 2,175,000 . Based on the operating income alone, O'Reilly should reject the proposal. Manangement would consider other factors before making the final decision. It is likely that product quality would improve as a result of using state-of-the-art equipment. However, the proposal increases the company's fixed cost. This will increase the company's operating leverage and risk. 1: Requirements 1. Calculate (a) contribution margin and (b) operating income. 2. O'Reilly's current manufacturing process is labor intensive. Kate Kein, O'Reilly's production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to \$5,655,000. The variable costs are expected to decrease to \$50 per unit. O'Reilly expects to maintain the same sales volume and selling price next year. How would acceptance of Kein's proposal affect your answers to (a) and (b) in requirement 1? 3. Should O'Reilly's executives accept Kein's proposal? Explain.
2. Sunshine Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Georgetown Air. Sunshine's fixed costs are \$25,500 per month. Georgetown Air charges passengers \$1,400 per round-trip ticket. Read the requirement?. Review Only Click the icon to see the Worked Solution. Begin by selecting the formula to calculate the breakeven points. Breakeven number of units = Fixed costs + Contribution margin per unit Next, select the formula to calculate the number of tickets needed to meet the target operating income. Quantity of units required to be sold = ( Fixed costs + Target operating income )+ Contribution margin per unit Now complete the requirement for each of the cases. Begin with case 1. Case 1: Sunshine's variable costs are \$40 per ticket. Georgetown Air pays Sunshine 10% commission on ticket price. Sunshine must sell 255 tickets to break evenand 375 tickets to meet the target operating income. Case 2: Sunshine's variable costs are \$38 per ticket. Georgetown Air pays Sunshine 10% commission on ticket price. Sunshine must sell 250 tickets to break evenand 368 tickets to meet the target operating income. Case 3: Sunshine's variable costs are \$38 per ticket. Georgetown Air pays \$55 fixed commission per ticket to Sunshine. Comment on the results. Sunshine must sell 1,500 tickets to break even and 2,206 tickets to meet the target operating income. When comparing Case 3 to Case 2, the decreased commission sizably increases the breakeven point and the number of tickets required to yield a target operating income of \$12,000. Case 4: Sunshine's variable costs are \$38 per ticket. It receives \$55 commission per ticket from Georgetown Air. It charges its customers a delivery fee of \$8 per ticket. Comment on the results. Sunshine must sell 1,020 tickets to break even and 1,500 tickets to meet the target operating income. When comparing Case 4 to Case 3, the \$8 delivery fee results in a higher contribution margin which decreases both the breakeven point and the number of tickets sold to attain operating income of \$12,000. 2: Requirement Calculate the number of tickets Sunshine must sell each month to (a) break even and (b) make a target operating income of \$12,000 per month in each of the following independent cases. (Round up to the nearest whole humber. For example, 10.2 should be rounded up to 11.) 1. Sunshine's variable costs are \$40 per ticket. Georgetown Air pays Sunshine 10% commission on ticket price. 2. Sunshine's variable costs are \$38 per ticket. Georgetown Air pays Sunshine 10% commission on ticket price. 3. Sunshine's variable costs are \$38 per ticket. Georgetown Air pays \$55 fixed commission per ticket to Sunshine. Comment on the results. 4. Sunshine's variable costs are \$38 per ticket. It receives \$55 commission per ticket from Georgetown Air. It charges its customers a delivery fee of \$8 per ticket. Comment on the results.
3. The Edwards Company has a maximum production capacity of 75,000 units per year. For that capacity level, fixed costs are \$300,000 per year. Variable costs per unit are \$35. In the coming year, the company has orders for 79,500 units at \$70. The company wants to make a minimum overall operating income of \$150,000 on these 79,500 units. Requirement What maximum unit purchase price would Edwards Company be willing to pay to a subcontractor for the additional 4,500 units it cannot manufacture itself to earn an operating income of \$150,000? Review Only Click the icon to see the Worked Solution. Determine the maxiumum total cost to Edwards Company of producing the 79,500 units while earning an operating income of \$150,000. Total costs to produce 79,500 units is \$ 5,415,000 . Identify the total cost to Edwards Company to manufacture 75,000 units. Total costs to manufacture 75,000 units \$ 2,925,000 . Determine the maxiumum additional costs to purchase 4,500 units from a subcontractor that Edwards Company would pay in order to earn an operating income of \$150,000. The additional costs to purchase 4,500 units from a subcontractoris \$ 2,490,000 . What maximum unit purchase price would Edwards Company be willing to pay to a subcontractor for the additional 4,500 units it cannot manufacture itself to earn an operating income of \$150,000? (Round your answer to the nearest cent.) The maximum price per unit that can be paid to a subcontractor is \$ 553.33 .