COST ACCOUNTING
16th Edition
ISBN: 9781323169261
Author: Horngren
Publisher: PEARSON C
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Chapter 3, Problem 3.30E
Operating leverage. Cover Rugs is holding a 2-week carpet sale at Josh’s Club, a local warehouse store. Cover Rugs plans to sell carpets for $950 each. The company will purchase the carpets from a local distributor for $760 each, with the privilege of returning any unsold units for a full refund. Josh’s Club has offered Cover Rugs two payment alternatives for the use of space.
- Option 1 : A fixed payment of $7,410 for the sale period
- Option 2: 10% of total revenues earned during the sale period
Assume Cover Rugs will incur no other costs.
- 1. Calculate the breakeven point in units for (a) Option 1 and (b) Option 2.
Required
- 2. At what level of revenues will Cover Rugs earn the same operating income under either option?
- a. For what range of unit sales will Cover Rugs prefer Option 1?
- b. For what range of unit sales will Cover Rugs prefer Option 2?
- 3. Calculate the degree of operating leverage at sales of 65 units for the two rental options.
- 4. Briefly explain and interpret your answer to requirement 3.
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Curt Rugs is holding a 2-week carpet sale at Jacob's Club, a local warehouse store. Curt Rugs plans to sell carpets for $1000 each. The company will purchase the carpets from a local distributor for $400 each, with the privilege of returning any unsold units for a full refund. Jacob's Club has offered Curt Rugs two payment alternatives for the use of space.
Option 1: A fixed payment of $17400 for the sale period
Option 2: 20% of total revenues earned during the sale period.
Assume Curt Rugs will incur no other costs.
Calculate the breakeven point in units for (a) option 1 and (b) option 2.
At what level of revenues will CurtRugs earn the same operating income under either option?
For what range of unit sales will Curt Rugs prefer Option 1?
For what range of unit sales will Curt Rugs prefer Option 2?
Calculate the degree of operating leverage at sales of 87 units for the two rental options.
Briefly explain and interpret your answer to the above calculation
Operating leverage. Cover Rugs is holding a 2-week carpet sale at Josh’s Club, a local warehouse store. Cover Rugs plans to sell carpets for $950 each. The company will purchase the carpets from a local distributor for $760 each, with the privilege of returning any unsold units for a full refund. Josh’s Club has offered Cover Rugs two payment alternatives for the use of space.
Option 1: A fixed payment of $7,410 for the sale period
Option 2: 10% of total revenues earned during the sale period
Required:
Assume Cover Rugs will incur no other costs.
Calculate the breakeven point in units for (a) Option 1 and (b) Option 2.
At what level of revenues will Cover Rugs earn the same operating income under either option?
For what range of unit sales will Cover Rugs prefer Option 1?
For what range of unit sales will Cover Rugs prefer Option 2?
Calculate the degree of operating leverage at sales of 65 units for the two rental options.
Briefly explain and interpret your answer to requirement 3.
Curt Rugs is holding a 2-week carpet sale at Jean's Club, a local warehouse store. Curt Rugs plans to sell carpets for $1,000 each. The company will purchase the
carpets from a local distributor for $400 each, with the privilege of returning any unsold units for a full refund. Jean's Club has offered Curt Rugs two payment
alternatives for the use of space.
Read the requirements.
Requirement 1. Calculate the breakeven point in units for (a) option 1 and (b) option 2.
Begin by determining the formula to calculate the breakeven point in units.
Number of units to breakeven
More Info
• Option 1: A fixed payment of $17,400 for the sale period
• Option 2: 20% of total revenues earned during the sale period
Assume Curt Rugs will incur no other costs.
Chapter 3 Solutions
COST ACCOUNTING
Ch. 3 - Define costvolumeprofit analysis.Ch. 3 - Describe the assumptions underlying CVP analysis.Ch. 3 - Distinguish between operating income and net...Ch. 3 - Prob. 3.4QCh. 3 - Prob. 3.5QCh. 3 - Why is it more accurate to describe the subject...Ch. 3 - CVP analysis is both simple and simplistic. If you...Ch. 3 - Prob. 3.8QCh. 3 - Prob. 3.9QCh. 3 - Give an example of how a manager can decrease...
Ch. 3 - Give an example of how a manager can increase...Ch. 3 - What is operating leverage? How is knowing the...Ch. 3 - There is no such thing as a fixed cost. All costs...Ch. 3 - Prob. 3.14QCh. 3 - In CVP analysis, gross margin is a less-useful...Ch. 3 - Jacks Jax has total fixed costs of 25,000. If the...Ch. 3 - During the current year, XYZ Company increased its...Ch. 3 - Under the contribution income statement, a...Ch. 3 - A company needs to sell 10,000 units of its only...Ch. 3 - Once a company exceeds its breakeven level,...Ch. 3 - Prob. 3.21ECh. 3 - CVP computations. Garrett Manufacturing sold...Ch. 3 - CVP analysis, changing revenues and costs. Sunset...Ch. 3 - CVP exercises. The Deli-Sub Shop owns and operates...Ch. 3 - CVP exercises. The Doral Company manufactures and...Ch. 3 - CVP analysis, income taxes. Westover Motors is a...Ch. 3 - CVP analysis, income taxes. The Home Style Eats...Ch. 3 - CVP analysis, sensitivity analysis. Perfect Fit...Ch. 3 - CVP analysis, margin of safety. Suppose Morrison...Ch. 3 - Operating leverage. Cover Rugs is holding a 2-week...Ch. 3 - CVP analysis, international cost structure...Ch. 3 - Sales mix, new and upgrade customers. Chartz 1-2-3...Ch. 3 - Prob. 3.33ECh. 3 - Prob. 3.34ECh. 3 - Contribution margin, decision making. Welch Mens...Ch. 3 - Contribution margin, gross margin, and margin of...Ch. 3 - Uncertainty and expected costs. Kindmart is an...Ch. 3 - CVP analysis, service firm. Lifetime Escapes...Ch. 3 - CVP, target operating income, service firm....Ch. 3 - CVP analysis, margin of safety. Marketing Docs...Ch. 3 - CVP analysis, income taxes. (CMA, adapted) J.T....Ch. 3 - CVP, sensitivity analysis. The Derby Shoe Company...Ch. 3 - CVP analysis, shoe stores. The HighStep Shoe...Ch. 3 - CVP analysis, shoe stores (continuation of 3-43)....Ch. 3 - Prob. 3.45PCh. 3 - Prob. 3.46PCh. 3 - CVP analysis, income taxes, sensitivity. (CMA,...Ch. 3 - Choosing between compensation plans, operating...Ch. 3 - Prob. 3.49PCh. 3 - Multiproduct CVP and decision making. Crystal...Ch. 3 - Sales mix, two products. The Stackpole Company...Ch. 3 - Prob. 3.52PCh. 3 - Ethics, CVP analysis. Megaphone Corporation...Ch. 3 - Deciding where to produce. (CMA, adapted) Portal...
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