M. Anthony, LLP, produces music in a studio in London. The cost of producing one typical song follows:
The fixed costs allocated to each song are based on the assumption that the studio produces 60 songs per month.
Required
Treat each question independently. Unless stated otherwise, M. Anthony charges $80,000 per song produced.
- a. How many songs must the firm produce per month to break even?
- b.
Market research estimates that a price increase to $90,000 per song would decrease monthly volume to 52 songs. The accounting department estimates that fixed costs would remain unchanged in total, and variable costs per song would remain unchanged if the volume were to drop to 52 songs per month. How would a price increase affect profits? - c. Assume that M. Anthony’s studio is operating at its normal volume of 60 songs per month. It has received a special request from a university to produce 30 songs that will make up a two-CD set. M. Anthony must produce the music next month or the university will take its business elsewhere. M. Anthony would have to give up normal production of 10 songs because it has the capacity to produce only 80 songs per month. Because of the need to produce songs on a timely basis, M. Anthony could not make up the production of those songs in another month. Because the university would provide its own musicians, the total variable cost (labor plus
overhead ) would be cut to $15,000 per song on the special order for the university. The university wants a discounted price; it is prepared to pay only $40,000 per song and believes a fee reduction is in order. Total fixed costs will be the same whether or not M. Anthony accepts the special order. Should M. Anthony accept the special order? - d. Refer to the situation presented in requirement (c) above. Instead of offering to pay $40,000 per song, suppose the university comes to M. Anthony with the following proposition. The university official says, “We want you to produce these 30 songs for us. We do not want you to be worse off financially because you have produced these songs. On the other hand, we want the lowest price we can get.” What is the lowest price that M. Anthony could charge and be no worse off for taking this order?
a.
Calculate the number of songs that are needed to be produced for the break-even.
Answer to Problem 56P
The break-even point is 46 songs.
Explanation of Solution
Break-even point:
The breakeven point or BEP is that level of output at which the total revenue is equal to the total cost. The BEP means there are no operating income and no operating losses. The management keeps an eye on the breakeven point in order to avoid the operating losses.
Calculate the break-even point:
Thus, the break-even point is 46 songs.
Working note 1:
Calculate the fixed costs:
Working note 2:
Calculate the fixed cost per unit:
Working note 3:
Calculate the contribution margin per unit:
Working note 4:
Calculate the variable cost (unit):
b.
Calculate the change in price affect the profit of the company.
Answer to Problem 56P
The change in profit is $40,000 in the case of the price increase.
Explanation of Solution
Operating profit:
The operating profit is the excess of total revenues over total expenses after adjusting for depreciation and taxes.
Calculate the change in the profit after the increase in price:
Particulars |
Amount (60 songs) |
Amount (52 songs) | Change |
Revenue | $4,800,000 | $4,680,000 | $120,000 lower |
Less: variable costs | $1,200,000 | $1,040,000 | $160,000 lower |
Contribution margin | $3,600,000 | $3,640,000 | $440,000 higher |
Fixed costs | $2,760,000 | $2,760,000 | No change |
Profit | $840,000 | $880,000 | $40,000 higher |
Table: (1)
Thus, the change in profit is $40,000 in the case of the price increase.
c.
Suggest whether Mr. M should accept the special offer or not.
Answer to Problem 56P
The change in profit is $150,000 in case of special order.
Explanation of Solution
Special order:
When the company gets a bigger order, then the usual order and the price of the unit is relatively lower than the price of normal units. Then this order is known as special order.
Calculate the change in profit:
Particulars |
Amount (Status quo sales) |
Amount (alternate) | Change |
Revenue | $4,800,000 | $5,200,000 | $400,000 lower |
Less: variable costs | $1,200,000 | $1,450,000 | $250,000 lower |
Contribution margin | $3,600,000 | $3,750,000 | $150,000 higher |
Fixed costs | $2,760,000 | $2,760,000 | no change |
Profit | $840,000 | $990,000 | $150,000 higher |
Table: (2)
Thus, the change in profit is $150,000 in case of special order.
d.
Calculate the change in case of special order.
Answer to Problem 56P
The change in price is $35,000.
Explanation of Solution
Special order:
When the company gets a bigger order, then the usual order and the price of the unit is relatively lower than the price of normal units. Then this order is known as special order.
Calculate the change in price:
Thus, the change in price is $35,000.
Working note 5:
Calculate the contribution margin per unit:
Working note 6:
Calculate the contribution margin foregone:
Mr. M has to foregone the contribution margin of 10 songs in order to produce the school’s songs. Contribution margin is calculated as follows:
Want to see more full solutions like this?
Chapter 4 Solutions
COST ACCOUNTING W/CONNECT
- Markson and Sons leases a copy machine with terms that include a fixed fee each month plus acharge for each copy made. Markson made 9,000 copies and paid a total of $480 in January. In April, they paid $320 for 5,000 copies. What is the variable cost per copy if Markson uses the high-low method to analyze costs?arrow_forwardThe Chimes Clock Company sells a particular clock for $40. The variable costs are $23 per clock and the breakeven point is 230 clocks. The company expects to sell 280 clocks this year. If the company actually sells 430 clocks, what effect would the sale of additional 150 clocks have on operating income? Explain your answer. The sale of an additional 150 clocks would operating income by the amount of The total effect would amount toarrow_forwardoncorde Ltd has been asked to quote a price for an order of 8 units of Product Delta. Making this product will require skilled labour, which is currently in hort supply and is paid £15 an hour. If the order is accepted, all necessary labour will have to be transferred from existing work. As a result, other orders will be lost. It is estimated that for each hour transferred to this contract £45 will be lost (calculated as lost sales revenue £75, less materials £15 and labour 15). The production manager believes that, owing to a learning process, the time taken to make each unit will reduce, from 20 hours to make the first one, by one hour a unit made. (That is 20 hours to make the first one, 19 hours to make the second, 18 hours to make the third one and so on.) What is the total relevant cost of skilled labour for the purposes of the order? The relevant cost for skilled labour will be will be £. ... Time Remaining: 00:43:50 Nextarrow_forward
- The Mighty Music Company produces and sells a desktop speaker for $200. The company has the capacity to produce 60,000 speakers each period. At capacity, the costs assigned to each unit are as follows: Unit-level costs Product-level costs Facility-level costs The company has received a special order for 11,000 speakers. If this order is accepted, the company will have to spend $20,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order? Multiple Choice O O $96.82 $146.82 $104.32 $95 $25 $15 $107.32arrow_forwardA company is planning to manufacture computer desks. The fixed cost will be $60,000 and it will cost $200 to produce each desk. Each desk will be sold for $450. a. Write the cost function, C, of producing x desks. b. Write the revenue function, R, from the sale of x desks. c. Determine the break-even point. Describe what thisarrow_forwardMaple Incorporated manufactures a product that costs $33 per unit plus $45,000 in fixed costs each month. Maple currently sells 4,000 of these units per month for $63 each. If Maple leased a machine for $12,000 a month, it could add features to the product that would allow it to increase the selling price. It would cost an additional $8 per unit to add these features. How much would Maple have to charge for the product with additional features to make it worthwhile to lease the machine?arrow_forward
- Gwen is the managerial accountant in charge of Company A, which sellswater bottles. She previously determined that the fixed costs of Company A consist ofproperty taxes, a lease, and executive salaries, which add up to P500,000. Thevariable cost associated with producing one water bottle is P80 per unit. The waterbottle is sold at a premium price of P500. d. Determine the breakeven quantity and the breakeven sales.e. Use the graphical method to determine the breakeven point.arrow_forwardNotson, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has provided the following unit costs for its commercial clocks: Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable) $100 140 80 150 What is the incremental effect on net income if Notson choses to outsource the production of the 1,000 clocks annually? Should Notson make or buy the clocks?arrow_forwardNoblesya Co. produces 1,000 parts per year, which are used in the assembly of one ofits products. The unit product cost of these parts are: Variable manufacturing cost,P12.00; fixed manufacturing cost, P9.00. The part can be purchased from an outsidesupplier at P20.00. If the part is purchased from the outside supplier, two thirds of thefixed manufacturing costs can be eliminated. What would be the annual impact on thecompany’s net operating income as a result of buying the part from the outside supplier? provide solutionarrow_forward
- A producer of chairs is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $10000 per month and a variable costs of $1.50 per unit produced. Each item is sold to the retailers at a price that averages $2.10 per unit. a. What volume per month is required to break even? b. What profit would be realized on a monthly volume of 65000 units? c. What volume is needed to obtain a profit of $15000 per month? d. What volume is needed to provide a revenue of $23000 per montharrow_forwardPerennial Company, a manufacturer of decorative pots, expects sales of 500,000 pots at $10 each during the coming year. Variable manufacturing costs are $4 per unit and fixed manufacturing costs are $2.50 per unit. The company received a special order from an overseas customer to purchase 50,000 pots at $6 each. The company has sufficient plant capacity to manufacture this order. However, additional overtime labor costs of $1.00 per pot would be required to produce the pots. No other costs would be incurred as a result of accepting the order. If the special order is accepted, how will operating profit be impacted?arrow_forwardAmarjit Truckers, Ltd. operates a fleet of delivery trucks in North America. The company has determined that, if a truck is driven 120,000 kilometres during a year, the average operating cost is 18.000 cents per kilometre. If a truck is driven only 50,000 kilometres during a year, the average operating cost increases to 21.0 cents per kilometre. Required: 1. Using the high - low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Do not round intermediate calculations. Round the "Variable cost" to 5 decimal places. Round "Fixed cost" to 2 decimal places.) 2. Express the variable and fixed costs in the form Y = a + bX. (Do not round intermediate calculations. Round the "Variable cost" to 5 decimal places. Round "Fixed cost" to 2 decimal places.) 3. If a truck were driven 80,000 kilometres during a year, what total cost would you expect to be incurred? (Do not round intermediate calculations. Round "Total annual cost" to 2 decimal places.)arrow_forward
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning