Variable cost free essay sample

Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per unit of $8, compute the break-even point. 5-3. Solution: Therapeutic Systems Fixed CostsVariable Costs (per unit) Rent$120,000 Factory labor$1. 50 Executive under contract$112,000 Raw materials. 70 $232,000$2. 20 4. Break-even analysis (LO2) Draw two break-even graphs—one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms profits. -4. Solution: Labor-Intensive and capital-intensive break-even graphs The company having the high fixed costs will have lower variable costs than its competitor since it has substituted capital for labor. With a lower variable cost, the high fixed cost company will have a larger contribution margin. Therefore, when sales rise, its profits will increase faster than the low fixed cost firm and when the sales decline, the reverse will be true. We will write a custom essay sample on Variable cost or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 5. Break-even analysis (LO2) Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit. a. Compute the break-even point. b. Ms. Eaton comes up with a new plan to cut fixed costs to $150,000. However, more labor will now be required, which will increase variable costs per unit to $34. The sales price will remain at $56. What is the new break-even point? c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)? 5-5. Solution: Eaton Tool Company a. b. The breakeven level decreases. c. With less operating leverage and a smaller contribution margin, profitability is likely to be less than it would have been at very high volume levels. . Break-even analysis (LO2) Jay Linoleum Company has fixed costs of $70,000. Its product currently sells for $4 per unit and has variable costs per unit of $2. 60. Mr. Thomas, the head of manufacturing, proposes to buy new equipment that will cost $300,000 and drive up fixed costs to $105,000. Although the price will remain at $4 per unit, the increased automation will reduce variable c osts per unit to $2. 25. As a result of Thomass suggestion, will the break-even point go up or down? Compute the necessary numbers. 5-6. Solution: Jay Linoleum Company The break-even point will go up. 7. Cash break-even analysis (LO2) Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $400,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $3. 60. How many units does the firm need to sell to reach the cash break-even point? 5-7. Solution: Calloway Cab Company Cash related fixed costs = Total Fixed Costs – Depreciation = $400,000 – 20% ($400,000) = $400,000 – $80,000 = $320,000 9. Cash break-even analysis (LO2) Boise Timber co. omputes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $6,000,000, but 25 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $4. How many units does the firm need to sell to reach the cash break-even point? 5-9. Solution: Boise Timber Co. Cash related fixed costs = Total Fixed Costs – Depreciation = $6,000,000 – 25% ($6,000,000) = $6,000,000 – $1,500,000 = $4,500,000 10. Degree of leverage (LO2 5) The Sterling Tire Companys income statement for 2010 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 2010 Sales (20,000 tires at $60 each)$1,200,000 Less: Variable costs (20,000 tires at $30)600,000 Fixed costs 400,000 Earnings before interest and taxes (EBIT)200,000 Interest expense 50,000 Earnings before taxes (EBT)150,000 Income tax expense (30%) 45,000 Earnings after taxes (EAT)$ 105,000 Given this income statement, compute the following: a. Degree of operating leverage. b. Degree of financial leverage. c. Degree of combined leverage. d. Break-even point in units. 5-10. Solution: Sterling Tire Company Q = 20,000, P = $60, VC = $30, FC = $400,000, I = $50,000 a. b. c. d.