WF222 MBA W2 Week 2 Practice Set

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Webster University *

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5200

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Management

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Feb 20, 2024

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Week 2 – Practice Set Name: Please type a numerical solution to the problems below: 1. Malden Corporation has annual fixed costs of $4,000,000, variable costs of $25 per unit and a selling price of $60 per unit. What is Malden’s breakeven point in units? Answer Breakeven Point = Annual Fixed Costs / (Selling Price per Unit – Variable Cost per Unit) = $4,000,000 / ($60 - $25 = $35) = 114,285.714 units 2. Bluff Corporation has a selling price per unit of $30 and a variable cost per unit of $14. What is Bluff’s contribution margin per unit in dollars and what is its contribution margin in percentage terms? Answer Contribution margin = Price – Unit variable cost = $30 - $14 = $16 Contribution Margin in Percentage Terms = ($16 / $30)*100 = 53.333% 3. Gideon currently has a fixed annual cost of $2,100,000, variable cost of $42 per unit, and a selling price of $80 per unit. What is Gideon’s current breakeven point? Answer Breakeven Point = Annual Fixed Costs / (Selling Price per Unit – Variable Cost per Unit) = $2,100,000 / ($80 - $42) = 55,263.1579 4. Continuing from the prior problem, Gideon is studying the possibility of expanding with a new factory because demand for their product is more than they can service in the old factory. If they proceed with this plan their annual fixed costs will increase to $3,000,000. Their variable cost per unit and selling price per unit will stay the same. What is Gideon’s new breakeven point with the new factory? Answer New Break Even Point in Units = Fixed Cost / Contribution Margin per unit New Break Even Point in Units = $3,000,000 / $38 New Break Even Point in Units = 78,947.3684 (78,948) units 5. Clarkton currently has a fixed annual cost of $48,000, variable cost of $6 per unit, and a selling price of $15 per unit. What unit volume is needed for Clarkton to earn a desired profit of $60,000. Answer unit volume= (fixed cost + desired profit)/(selling price per unit-variable cost per unit) here: fixed cost= 48000; desired profit= 60000; selling price per unit= 15; and variable cost per unit= 6 unit volume= (48000+60000)/(15-6) unit volume= 108000/9 unit volume= 12000

6. Dexter Corporation forecast the following units and selling prices: Year 1 Year 2 Year 3 Year 4 Unit sales 1,000 1,500 2,000 3,000 Selling price per unit $12 $14 $18 $22 Please calculate Dexter’s projected or proforma sales. Answer Year 1 2 3 4 Unit Sales 1,000 1,500 2,000 3,000 Selling Price per Unit $12 $14 $18 $22 Projected or Proforma Sales $12,000 $21,000 $36,000 $66,000 7. Continuing from the prior problem, Dexter has the following fixed cost per year and variable cost per unit each year: Year 1 Year 2 Year 3 Year 4 Annual fixed costs $4,000 $4,200 $4,600 $5,000 Variable costs per unit $7 $8 $10 $12 Assuming these are all the costs for Dexter. Please calculate Dexter’s projected or proforma profit. Answer COSTS Year 1 Year 2 Year 3 Year 4 Units Sales $1,000 $1,500 $2,000 $3,000 Variable Costs per Unit $7 $8 $10 $12 Variable Costs (total) $7,000 $12,000 $20,000 $36,000 Fixed Costs (total) $4,000 $4,200 $4,600 $5,000 Projected Total Costs $11,000 $16,200 $24,600 $41,000 PROFIT Year 1 Year 2 Year 3 Year 4 Sales $12,000 $21,000 $36,000 $66,000 Projected Total Costs $11,000 $16,200 $24,600 $41,000 Projected Profit $1,000 $4,800 $11,400 $25,000 8. Continuing from the prior two problems, if Dexter pays 31% of pretax income (not sales) in taxes to various government authorities, please calculate Dexter’s after-tax net income. Answer Year 1 Year 2 Year 3 Year 4 After-tax Income $690.00 $3,312.00 $7,866.00 $17,250. 9. Knowing what you now know about fixed and variable costs, assume that you read these two headlines:  Comcast (an internet supplier with high sunk costs and very low variable costs in its internet operations) expects to sign up 200,000 new internet subscribers this month for $50 per month or $600 per year for a total increase in sales of $120,000,000 per year.  Kroger (a large grocery store operation with high variable costs) expects its sales to increase $120,000,000 this year.

Assume that in both situations the increase is within the relevant range of operations and no additional capacity will need to be added. Which of these two companies will benefit the least financially from the increase in sales? Why? Answer Comcast will benefit the least financially from the increase in sales compared to Kroger. Comcast’s sunk costs combined with a likely increase in variable costs due to the acquisition of 200,000 new subscribers 10. New Madrid Chocolate Corporation manufactures bulk chocolate that it sells to Venus Candy Company. Currently, New Madrid packages and ships their bulk chocolate in 50-pound bars that are then shipped by truck to Venus. Venus then unpacks the bars, disposes of the packaging, melts the bars, and works the chocolate into smaller retail products. An astute and environmental conscientious employee observes that New Madrid could make the chocolate keep it hot or warm and ship it in heated train tanker cars to Venus rather than by truck as they do now. This would save cooling and reheating energy cost, packaging cost and time associated with these activities. Assume the following cost:  Existing cooling cost and time for New Madrid $12,000  Existing packaging cost for New Madrid $15,000  Existing annual transportation cost by truck $65,000 paid by New Madrid  New annual transportation cost by train $50,000 paid by New Madrid (if implemented)  Existing unpackaging and disposal cost of packaging for Venus $8,000  Existing reheating cost and time for Venus $33,000 How much will New Madrid gain if they approach Venus and Venus agrees to implement this “activity-reducing” plan? How much will Venus benefit financially by implementing this plan? Answer Venus could benefit as much as of $41,000 ($8,000 in unpacking and disposal costs + $33,000 in reheating cost and time). However, the saving in reheating costs and time will likely not be the full $33,000 as there may be costs and time associated with the new method of product shipment.

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