a.
Calculate the profit after tax for Company L.
a.
Answer to Problem 68P
Company L earns $19,800 of profit after tax.
Explanation of Solution
Operating profit: The operating profit is the excess of total revenues over total expenses after adjusting for depreciation and taxes.
Contribution margin:
Particulars | Basic | Retest | Vital |
Sales price (unit) | $500 | $800 | $4,000 |
Less: variable cost (unit) | $120 | $400 | $2,800 |
Contribution margin (unit) | $380 | $400 | $1,200 |
Units sold per year | 850 | 100 | 50 |
Fixed cost | $390,000 | ||
Tax rate | 40% |
Table: (1)
Compute the profit after tax of Company L:
Particulars | Amount |
Sales revenue | |
Basic | $425,000 |
Retest | $80,000 |
Vital | $200,000 |
Total sales revenue (a) | $705,000 |
Less: | |
Variable cost | |
Basic | $102,000 |
Retest | $40,000 |
Vital | $140,000 |
Total variable cost (b) | $282,000 |
Contribution: | $423,000 |
Less: | |
Fixed cost (d) | $390,000 |
Profit before tax: | $33,000 |
Tax rate | 40% |
Tax (f) | $13,200 |
Profit after tax: | $19,800 |
Table: (2)
Thus, Company L earns $19,800 of profit after tax.
b.
Calculate the sales revenue for basic, retest and vital at the break-even point.
b.
Answer to Problem 68P
The sales revenue for basic, retest and vital is $392,000, $74,000 and $184,000 respectively at the break-even point.
Explanation of Solution
Breakeven point (BEP): 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 in order to avoid losses.
Sales mix: This refers to the relative proportions in which a company’s products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
Target volume: the level of sales which need to be achieved during a particular period of time is termed as target volume.
Target profit: the amount of profit which needs to be achieved during a particular period of time on a particular level of sales is termed as target profit.
Compute the total sales revenue of each product:
Particulars | Sales mix | Break-even point |
Sales Price (b) |
Total sales revenue |
Basic | 85% | 784 | $500 | $392,000 |
Retest | 10% | 92 | $800 | $74,000 |
Vital | 5% | 46 | $4,000 | $184,000 |
Table: (3)
Thus, the sales revenue for basic, retest and vital is $392,000 $74,000 and $184,000 respectively.
Working note 1:
Compute the break-even point:
Working note 2:
Compute the total weighted average contribution margin:
Particulars | Sales price (a) | Variable cost (b) | Contribution margin | Sales mix (d) | Weighted average contribution margin |
Basic | $500 | $120 | $380 | 85% | $323 |
Retest | $800 | $400 | $400 | 10% | $40 |
Vital | $4,000 | $2,800 | $1,200 | 5% | $60 |
Total weighted average contribution margin | $423 |
Table: (5)
c.
Calculate the dollar sales required to earn the profit after tax of $180,000.
c.
Answer to Problem 68P
To earn the profit after tax of $180,000, Company L must make the sales revenue of $693,500, $130,500 and $326,000 for basic, retest and vital respectively.
Explanation of Solution
Breakeven point (BEP): 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 in order to avoid losses.
Compute the dollar sales required to earn the profit after tax of $180,000:
The total target volume is 1,631, so it will be distributed among the products in their sales mix ratio.
Particulars | Sales mix |
Sales units |
Sales price (b) |
Sales revenue |
Basic | 85% | 1387 | $500 | $693,500 |
Retest | 10% | 163 | $800 | $130,500 |
Vital | 5% | 81.5 | $4,000 | $326,000 |
Total sales revenue | $1,149,855 |
Table: (7)
Thus, to earn the profit after tax of $180,000, Company L must make the sales revenue of basic, retest and vital for $693,500, $130,500 and $326,000 respectively.
Working note 3:
Compute the volume of sales required to earn the profit after tax of $180,000:
d.
- I. Calculate the revenue of the Company L if the number of retests increased to 400 per year, the number of vital increased to 200 per year, while the number of basic dropped to 100.
- II. Calculate the effect on the profit after tax if the company increases its fixed cost to $420,000 with the given product mix.
- III. Suggest that the given change is a good idea or not.
d.
Answer to Problem 68P
- I. The revenue of Company L would be $1,170,000 if the number of retests increased to 400 per year, the number of vital increased to 200 per year, while the number of basic dropped to 100.
- II. The profit after tax decreases by $9,000 if the company increases its fixed cost to $420,000 with the given product mix.
- III. No, the change of sales mix and an increase in fixed cost is not a good idea for Company L.
Explanation of Solution
I.
Compute the revenue of Company L if the number of retests increased to 400 per year, the number of vital increased to 200 per year, while the number of basic dropped to 100:
Particulars | Amount |
Sales revenue | |
Basic | $50,000 |
Retest | $320,000 |
Vital | $800,000 |
Total sales revenue (a) | $1,170,000 |
Table: (9)
Thus, The revenue of Company L is $1,170,000 if the number of retests increased to 400 per year, the number of vital increased to 200 per year, while the number of basic dropped to 100.
II.
Compute the change in profit after tax of the given change:
Thus, the profit after tax decreases by $9,000 if the company increases its fixed cost to $420,000 with the given product mix.
Working note 4:
Compute the profit after tax of Company L:
Particulars | Amount |
Sales revenue | |
Basic | $50,000 |
Retest | $320,000 |
Vital | $800,000 |
Total sales revenue (a) | $1,170,000 |
Less: | |
Variable cost | |
Basic | $12,000 |
Retest | $160,000 |
Vital | $560,000 |
Total variable cost (b) | $732,000 |
Contribution: | $438,000 |
Less: | |
Fixed cost (d) | $420,000 |
Profit before tax: | $18,000 |
Tax rate | 40% |
Tax (f) | $7,200 |
Profit after tax: | $10,800 |
Table: (11)
III.
If the laboratory’s managers seek to maximize the clinic’s after-tax earnings, this is not a good idea as the profit has decreased by 9,000 with the change in sales mix and an increase in fixed cost.
Thus, the change in sales mix and an increase in fixed cost is not a good idea for Company L.
Want to see more full solutions like this?
Chapter 3 Solutions
Fundamentals Of Cost Accounting (6th Edition)
- Deepa Dalal opened a free-standing radiology clinic. She had anticipated that the costs for the radiological tests would be primarily fixed, but she found that costs increased with the number of tests performed. Costs for this service over the past nine months are as follows: Required: 1. Prepare a scattergraph based on the preceding data. Use cost for the vertical axis and number of radiology tests for the horizontal axis. Based on an examination of the scattergraph, does there appear to be a linear relationship between the cost of radiology service and the number of tests? 2. Compute the cost formula for radiology services using the high-low method. 3. Calculate the predicted cost of radiology services for October for 3,500 tests using the formula found in Requirement 2.arrow_forwardAllied Laboratories is combining some of its most common tests into one-price packages. One such package will contain three tests that have the following variable costs: Test A Test B Test C Disposable syringe $3.00 $3.00 $3.00 Blood vial 0.50 0.50 0.50 Forms 0.15 0.15 0.15 Reagents 0.80 0.60 1.20 Sterile bandage 0.10 0.10 0.10 Breakage/losses 0.05 0.05 0.05 When the tests are combined, only one syringe, form, and sterile ban- dage will be used. Furthermore, only one charge for breakage/losses will apply. Two blood vials are required, and reagent costs will remain the same (reagents from all three tests are required). a. As a starting point, what is the price of the combined test assuming marginal cost pricing? b. Assume that Allied wants a contribution margin of $10 per test. What price must be set to achieve this goal? c. Allied estimates that 2,000 of the combined tests will be conducted during the first year. The annual allocation of direct fixed and overhead costs totals $40,000.…arrow_forwardVIP-MD is a health maintenance organization (HMO) located in North Carolina. Unlike the traditional fee-for-service model that determines the payment according to the actual services used or costs incurred, VIP-MD receives a fixed, prepaid amount from subscribers. The per member, per month rate (PMPM) is determined by estimating the health care cost per enrollee within a geographic location. The average health care coverage in North Carolina costs $364 per month, which is the same amount irrespective of the subscriber’s age. Because individuals are demanding quality care at reasonable rates, VIP-MD must contain its costs to remain competitive. A major competitor, National Physicians, entered the North Carolina market early in the current year with a monthly premium of $321. VIP-MD wants to maintain its current market penetration and hopes to increase its enrollees in the current year. The latest data on the number of enrollees and the associated costs follow: Age Enrollment in…arrow_forward
- David Jones, the new administrator for a surgical clinic, was trying to determine how to allocate his indirect expenses. His staff was complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities based on square footage of each department, administration based on direct costs, and laboratory based on tests. Use the information in the chart below to answer problems 22, 23 and 24. Square Footage DirectExpenses Lab Tests Utilities $200,000 Administration 2,000 500,000 Laboratory 2,000 625,000 Day-op Suite 3,000 1,400,000 4,000 Cystoscopy 1,500 300,000 500 Endoscopy 1,500 600,000 500 Total 10,000 $3,375,000 5,000 1. What are the Day Op Suite’s total expenses? 2. What are the Cystoscopy Department’s total expenses? 3. What are the Endoscopy Department’s total expenses?arrow_forwardZachary Health Care Center Incorporated has three clinics servicing the Seattle metropolitan area. The company's legal services department supports the clinics. Moreover, its computer services department supports all of the clinics and the legal services department. The annual cost of operating the legal services department is $453,200. The annual cost of operating the computer services department is $345,000. The company uses the number of patients served as the cost driver for allocating the cost of legal services and the number of computer workstations as the cost driver for allocating the cost of computer services. Other relevant information follows. I Sewell clinic Alphretta clinic Gwinnett clinic Legal services Computer services Required a. Allocate the cost of computer services to all of the clinics and the legal services department. b. After allocating the cost of computer services, allocate the cost of legal services to the three clinics: c. Compute the total allocated cost of…arrow_forwardThe Audiology Department at Randall Clinic offers many services to the clinic’s patients. The three most common, along with cost and utilization data, are as follows: Service Variable cost per service Annual Direct fixed Cost Annual number of visits Basic examination $5 $50,000 30,000 Advanced examination 7 30,000 1,500 Therapy section 10 40,000 500 What is the fee schedule for these services, assuming that the goal is to cover only variable and direct fixed costs? Assume that the Audiology Department is allocated $100,000 in total overhead by the clinic, and the department director has allocated $50,000 of this amount to the three services listed above. What is the fee schedule assuming that these overhead costs must be covered? (To answer this question, assume that the allocation of overhead costs to each service is made on the basis of number of visits.) Assume that these services must make a combined profit of $25,000. Now, what is the…arrow_forward
- S Zachary Health Care Center Incorporated has three clinics servicing the Seattle metropolitan area. The company's legal services department supports the clinics. Moreover, its computer services department supports all of the clinics and the legal services department. The annual cost of operating the legal services department is $316,050. The annual cost of operating the computer services department is $451,000. The company uses the number of patients served as the cost driver for allocating the cost of legal services and the number of computer workstations as the cost driver for allocating the cost of computer services. Other relevant information follows. Number of Patients 6,900 5,300 7,100 Number of Workstations Sewell clinic Alphretta clinic Gwinnett clinic Legal services Computer services Required a. Allocate the cost of computer services to all of the clinics and the legal services department. b. After allocating the cost of computer services, allocate the cost of legal services…arrow_forwardJordan Health Care Center, Inc. has three clinics servicing the Seattle metropolitan area. The company's legal services department supports the clinics. Moreover, its computer services department supports all of the clinics and the legal services department. The annual cost of operating the legal services department is $460,300. The annual cost of operating the computer services department is $371,300. The company uses the number of patients served as the cost driver for allocating the cost of legal services and the number of computer workstations as the cost driver for allocating the cost of computer services. Other relevant information follows. Number of Number of Patients 7,200 5,500 6,900 Workstations Sewell clinic 10 9 Alphretta clinic Gwinnett clinic 23 Legal services Computer services 13 Required a. Allocate the cost of computer services to all of the clinics and the legal services department. b. After allocating the cost of computer services, allocate the cost of legal services…arrow_forwardThornton Health Care Center Incorporated has three clinics servicing the Seattle metropolitan area. The company's legal services department supports the clinics. Moreover, its computer services department supports all of the clinics and the legal services department. The annual cost of operating the legal services department is $331,000. The annual cost of operating the computer services department is $292,600. The company uses the number of patients served as the cost driver for allocating the cost of legal services and the number of computer workstations as the cost driver for allocating the cost of computer services. Other relevant information follows. Number of Patients:Number of Workstations Sewell clinic 6, 500 : 7 Alphretta clinic 5, 600: 11 Gwinnett clinic 6,300 : 14 Legal services 6 Computer services 18 Required Allocate the cost of computer services to all of the clinics and the legal services department. After allocating the cost of computer services, allocate the cost of…arrow_forward
- Suppose that Demont has been given a summer job as an intern at Isaac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help it finance its growth. The bank requires financial statements before approving such a loan. Classify each cost listed below as either product costs or period costs for the purpose of preparing the financial statements for the bank. Costs Product Cost/Period Cost 1. Depreciated on salesperson's cars 2. Rent on equipment used in the factory 3. Lubricants used for machine maintenance 4. Salaries of personnel who work in the finished goods warehouse 5. Soap and paper towels used by factory workers at the end of a shiftarrow_forwardPace Labs. Inc. provides mad cow disease testing for both state and federal governmental, agricultural agencies. Because the company's customers are governmental agencies, prices are strictly regulated. Therefore, Pace Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test. Direct materials (2 test tubes @ $1.46 per tube) $ 2.92 Direct Labor (1 hour @ $24 per hour) 24.00 Variable overhead (1 hour @ $6 per hour) 6.00 Fixed overhead (1 hour @ $10 per hour) 10.00 Total standard cost per test $42.92 The lab does not maintain an inventory of test tubes. Therefore, the tubes purchased each month are used that month. Actual activity for the month of November 2014, when 1,500 tests were conducted, resulted in the following. Direct materials (3,050 test…arrow_forwardPace Labs. Inc. provides mad cow disease testing for both state and federal governmental, agricultural agencies. Because the company's customers are governmental agencies, prices are strictly regulated. Therefore, Pace Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test. Direct materials (2 test tubes @ $1.46 per tube) $ 2.92 Direct Labor (1 hour @ $24 per hour) 24.00 Variable overhead (1 hour @ $6 per hour) 6.00 Fixed overhead (1 hour @ $10 per hour) 10.00 Total standard cost per test $42.92 The lab does not maintain an inventory of test tubes. Therefore, the tubes purchased each month are used that month. Actual activity for the month of November 2014, when 1,500 tests were conducted, resulted in the following. Direct materials (3,050 test…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning