1. Exercise in Cost-Volume-Profit Relationships Barkins Moving Company specializ
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Question
1. Exercise in Cost-Volume-Profit RelationshipsBarkins Moving Company specializes in hauling heavy goods over long distances. The company’s revenues and expenses depend on revenue miles, a measure that combines both weights and mileage. Summarized budget data for next year are based on predicted total revenue miles of 800,000. At that level of volume, and at any level of volume between 700,000 and 900,000 revenue miles, the company’s fixed costs are $120,000. The selling price and variable costs are
Per Revenue Mile
Average selling price (revenue) $1.50
Average variable expenses $1.30
1. Compute the budgeted net income. Ignore income taxes.
2. Management is trying to decide how various possible conditions or decisions might affect net income. Compute the new net income for each of the following changes. Consider each case independently.
a. A 10% increase in sale price
b. A 10% increase in revenue miles
c. A 10% increase in variable expense
d. A 10% increase in fixed expenses
e. An average decrease in selling price of 3¢ per revenue mile and a 5% increase in revenue miles. Refer to the original data.
f. An average increase in selling price of 5¢ and a 10% decrease in revenue miles
g. A 10% increase in fixed expenses in the form of more advertising and a 5% increase in revenue miles
Explanation / Answer
Cont per Rev mile or Cont pu = SP pu-VC pu = 1.50-1.30 = $0.20 per rev mile. 1. Total Cont = COnt pu*Avge Rev miles = $0.20*800,000 = $160,000 Net Inc = Total Cont - FC = $160,000 -120,000 = $40,000.............Ans (1) 2.(a) New SP pu = (1+10%)*$1.50 = $1.65 SO new COnt pu = SP pu-VC pu =1.65-1.30 =0.35pu Total Cont = COnt pu*Avge Rev miles = $0.35*800,000 = $280,000 Net Inc = Total Cont - FC = $280,000 -120,000 = $160,000.............Ans (2a) 2B.A 10% increase in revenue miles New Rev miles = 1.10*800,000 = 880,000 Total Cont = COnt pu*Avge Rev miles = $0.20*880,000 = $176,000 Net Inc = Total Cont - FC = $176,000 -120,000 = $56,000.............Ans (2B) c. A 10% increase in variable expense New VC pu = (1+10%)*$1.30 = $1.43 SO new COnt pu = SP pu-VC pu =1.50-1.43 =0.07pu Total Cont = COnt pu*Avge Rev miles = $0.07*800,000 = $56,000 Net Inc = Total Cont - FC = $56,000 -120,000 = Loss of $64,000........Ans (2c) d. A 10% increase in fixed expenses New FC = 1.10*120000 = 132000 Total Cont = COnt pu*Avge Rev miles = $0.20*800,000 = $160,000 Net Inc = Total Cont - FC = $160,000 -132,000 = $28,000.............Ans (2d) e. An average decrease in selling price of 3¢ per revenue mile and a 5% increase in revenue miles. Refer to the original data. New SP pu = 1.50-0.03 = 1.47. SO cont pu = 1.47-1.30 = 0.17pu New Rev miles = 1.05*800,000 = 840,000 Total Cont = COnt pu*Avge Rev miles = $0.17*840,000 = $142,800 Net Inc = Total Cont - FC = $142800 -120000 = $22,800.............Ans (2e) f. An average increase in selling price of 5¢ and a 10% decrease in revenue miles New SP pu = 1.50+0.05 = 1.55. SO cont pu = 1.55-1.30 = 0.25pu New Rev miles = 0.90*800,000 = 720,000 Total Cont = COnt pu*Avge Rev miles = $0.25*720,000 = $180000 Net Inc = Total Cont - FC = $180000 -120000 = $60000.............Ans (2f) g. A 10% increase in fixed expenses in the form of more advertising and a 5% increase in revenue miles New FC = 1.10*120000 = 132000 New Rev miles = 1.05*800,000 = 840,000 Total Cont = COnt pu*Avge Rev miles = $0.20*840,000 = $168,000 Net Inc = Total Cont - FC = $168000 -132000 = $36000.............Ans (2g)
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