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Problem 11

Give an example of how a manager can increase variable costs while decreasing fixed costs.

Expert verified

A manager can increase variable costs by increasing production volume, such as producing more units and hiring additional labor. To decrease fixed costs, the manager can reduce expenses not tied to production levels, like downsizing the production facility to pay lower rent, or renegotiating supplier contracts for lower fixed prices. For example, a clothing manufacturing company manager hires temporary workers to meet higher demand (increasing variable costs) and moves operations to a smaller facility with lower rent (decreasing fixed costs).

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Chapter 3

Classical Glasses operates a kiosk at the local mall, selling sunglasses for \(\$ 30\) each. Classical Glasses currently pays \(\$ 1,000\) a month to rent the space and pays two full-time employees to each work 160 hours a month at $\$ 10\( per hour. The store shares a manager with a neighboring kiosk and pays \)50 \%\( of the manager's annual salary of \)\$ 60,000\( and benefits of \)\$ 12,000$. The wholesale cost of the sunglasses to the company is \(\$ 10\) a pair. 1\. How many sunglasses does Classical Glasses need to sell each month to break even? 2\. If Classical Glasses wants to earn an operating income of \(\$ 5,300\) per month, how many sunglasses does the store need to sell? 3\. If the store's hourly employees agreed to a \(15 \%\) sales-commission-only pay structure, instead of their hourly pay, how many sunglasses would Classical Glasses need to sell to earn an operating income of \(\$ 5,300 ?\) 4\. Assume Classical Glasses pays its employees hourly under the original pay structure, but is able to pay the mall \(10 \%\) of its monthly revenue instead of monthly rent. At what sales levels would Classical Glasses prefer to pay a fixed amount of monthly rent, and at what sales levels would it prefer to pay \(10 \%\) of its monthly revenue as rent?

Chapter 3

Westover Motors is a small car dealership. 0 n average, it sells a car for 32,000, which it purchases from the manufacturer for 28,000 .Each month, Westover Motors pays 53,700 in rent and utilities and 69,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of 400 for each car they sell. Westover Motors also spends 10,500 each month for local advertisements. Its tax rate is 40 \% 1\. How many cars must Westover Motors sell each month to break even? 2\. Westover Motors has a target monthly net income of 69,120 .What is its target monthly operating income? How many cars must be sold each month to reach the target monthly net income of 69,120 ?

Chapter 3

The Kenosha Company has three product lines of beer mugs \(-A, B,\) and \(\mathrm{C}-\) with contribution margins of \(\$ 5, \$ 4,\) and \(\$ 3,\) respectively. The president foresees sales of 175,000 units in the coming period, consisting of 25,000 units of \(A, 100,000\) units of \(B,\) and 50,000 units of \(C .\) The company's fixed costs for the period are \(\$ 351,000\) 1\. What is the company's breakeven point in units, assuming that the given sales mix is maintained? 2\. If the sales mix is maintained, what is the total contribution margin when 175,000 units are sold? What is the operating income? 3\. What would operating income be if the company sold 25,000 units of $A, 75,000\( units of \)B,\( and 75,000 units of \)C ?$ What is the new breakeven point in units if these relationships persist in the next period? 4\. Comparing the breakeven points in requirements 1 and 3 , is it always better for a company to choose the sales mix that yields the lower breakeven point? Explain.

Chapter 3

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 760each, 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 . 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 .

Chapter 3

Define cost-volume-profit analysis.

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