The Fashion Shoe Company operates a chain of women’s shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial commission on each pair of shoes sold (in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts.
The following worksheet contains cost and revenue data for Shop 48 and is typical of the company’s many outlets:
Required: 1. Calculate the annual break-even point in unit sales and in dollar sales for Shop 48.
Add caption
Explanation:
1.
Profit
= Unit CM × Q − Fixed expenses
$0
= ($40 − $24) × Q − $206,000
$0
= ($16) × Q − $206,000
$16Q
= $206,000
Q
= $206,000 ÷ $16
Q
= 12,875 pairs
Alternative solution:
Unit sales to break even
=
Fixed expenses
Unit CM
=
$206,000
= 12,875 pairs
$16.00
Dollar sales to break even
=
Fixed expenses
CM ratio
=
$206,000
= $515,000 in sales
0.4
12,875 pairs × $40 per pair = $515,000 in sales
2.
The simplest approach is:
Break-even sales
12,875
pairs
Actual sales
12,175
pairs
Sales short of break-even
700
pairs
700 pairs × $16 contribution margin per pair = $11,200 loss
Alternative solution:
Sales (12,175 pairs × $40.00 per pair)
$487,000
Variable expenses (12,175 pairs × $24.00 per pair)
292,200
Contribution margin
194,800
Fixed expenses
206,000
Net operating loss
$ (11,200)
3.
The
variable expenses will now be $24.80 ($24.00 + $0.80) per pair, and the
contribution margin will be $15.20 ($40.00 − $24.80) per pair.
Profit
= Unit CM × Q − Fixed expenses
$0
= ($40.00 − $24.80) × Q − $206,000
$0
= ($15.20) × Q − $206,000
$15.20Q
= $206,000
Q
= $206,000 ÷ $15.20
Q
= 13,553 pairs (rounded)
13,553 pairs × $40.00 per pair = $542,105 in sales
Alternative solution:
Unit sales to break even
=
Fixed expenses
CM per unit
=
$206,000
= 13,553 pairs
$15.20
Dollar sales to break even
=
Fixed expenses
CM ratio
=
$206,000
= $542,105 in sales
0.380
4.
The new variable expenses will be $19.50 per pair.
Profit
= Unit CM × Q − Fixed expenses
$0
= ($40.00 − $19.50) × Q − $237,800
$0
= ($20.50) × Q − $237,800
$20.50Q
= $237,800
Q
= $237,800 ÷ $20.50
Q
= 11,600 pairs
11,600 pairs × $40 per pair = $464,000 in sales
Although
the change will lower the break-even point from 12,875 pairs to 11,600
pairs, the company must consider whether this reduction in the
break-even point is more than offset by the possible loss in sales
arising from having the sales staff on a salaried basis. Under a salary
arrangement, the sales staff has less incentive to sell than under the
present commission arrangement, resulting in a potential loss of sales
and a reduction of profits. Although it is generally desirable to lower
the break-even point, management must consider the other effects of a
change in the cost structure. The break-even point could be reduced
dramatically by doubling the selling price but it does not necessarily
follow that this would improve the company’s profit.
Sereno Company makes piñatas for children’s birthday
parties. Information for Sereno’s last six months of operation is listed below.
Required:
Prepare the journal entries to record each of the following transactions.(If no entry is required for a transaction/event, select
"No Journal Entry Required" in the first account field.)
(a) Purchased $9,000 of raw materials on credit. (b) Issued $4,000 of direct materials into production. (c) Recorded $15,000 in direct labor. (d) Applied $17,200 in manufacturing overhead. (e) Completed pinatas costing $20,650. (f) Recorded $19,900 in actual manufacturing overhead. (g) Sold piñatas for $34,300 that cost $17,600 to produce (assume that
Sereno Company uses a perpetual inventory system).
The word that is central to the definition of economics is ________. scarcity
Explanation:
In this chapter’s first section, “Economics Defined,” you’ll see that the word, scarcity, is central to the definition of economics. See also the second section, “The Central Fact of Economics: Scarcity.”
Human wants are ________. relatively unlimited
Explanation:
In the chapter’s first section, we see that a part of the definition of economics is the satisfaction of human wants, which are relatively unlimited.
The opportunity cost of spending four hours studying a review book the night before a final exam would be ________. missing four hours of TV
Explanation:
In the section in the text on opportunity cost, we define it as the forgone value of the next best alternative.
An economy operating its plant and equipment at full capacity implies a capacity utilization rate of ________. 85 percent Explanation:
At the beginning of the section, “Full Employment and Full Production,” we state that utilizing 85 or 90 percent of our plant and equipment would employ virtually all of our usable productive capacity.
The full-production level of our economy implies ________. an efficient allocation of our resources Explanation:
In the section, “Full Employment and Full Production,” we state that “By full production we mean that our nation’s resources are being allocated in the most efficient manner possible.”
The production possibilities curve represents ________. our economy at full production and full employment Explanation:
In the section, “Productive Efficiency,” we state that only on the production possibilities curve can we attain productive efficiency. This is attained when the maximum possible output of any one good is produced, given the output of other goods.
If we are operating inside our production possibilities curve ________. there is definitely less than full employment Explanation:
If our economy is operating on its production possibilities curve, we are at full employment. Therefore, if we are operating inside the curve, there is definitely less than full employment.
The closer we are to the origin and farther away we are from the production possibilities curve ________. the more unemployment there is
Explanation:
At the origin, we have an unemployment rate of 100%. So as we approach the origin, the more unemployment there is.
Economic growth will occur if any of the following occur except ________. the level of consumption rises and the savings rate falls Explanation:
If consumption rises and savings falls, less money will be available for investment in new plant, equipment, and technology. These key elements of economic growth would have less scarce resources to utilize.
To attain a higher rate of economic growth, we need to devote ________. a higher proportion of our production to capital goods and a lower proportion to consumer goods Explanation:
For an economy to grow, it needs to devote a high proportion of its resources to the production of capital goods like plant and equipment.
Employment discrimination is most closely related to ________. underemployment Explanation:
Employment discrimination results in underemployment because we are not using people in our labor force at their highest skill level. Many examples are given in the section, “Full Employment and Full Production.”
Which statement is true? Our economic problem is that we have limited resources available to satisfy relatively unlimited wants.
Explanation:
This choice is discussed in the section of the text titled “Economics Defined.”
Suppose you had $1,000 to spend. If you spent it on a vacation trip rather than on new clothes, your second choice, or 1,000 lottery tickets, your third choice, what was your opportunity cost of going on a vacation trip? not buying the new clothes
Explanation:
Because buying new clothes is your second best alternative, it is, by definition, your opportunity cost.
As we produce increasing amounts of a particular good, the resources used in its production ________. become less suitable Explanation:
As we produce more and more of a good, we are forced to use resources that are less and less suitable. We choose the best suited and most productive resources first, and then, to further increase output, we need to use whatever resources are available.
The law of increasing costs is explained by each of the following except ________. overspecialization Explanation:
Overspecialization is not an explanation. The factors listed in the other choices are discussed in the Advanced Work Box: “The Law of Increasing Returns.”
As a firm grows larger, ________. economies of scale set in, then diseconomies of scale
Explanation:
Economies of scale and diseconomies of scale are described in the Advanced Work Box: “The Law of Increasing Returns.” As a firm expands, it takes advantage of economies of scale such as securing quantity discounts and spreading the cost of expensive and productive machinery over larger amounts of output. But as the firm continues to grow, diseconomies of scale begin to set in such as bloated bureaucracies, using less suitable resources, and incurring rising resource costs.
If the following figure shows our production possibilities frontier during the Great Depression, at which point were we operating?
point B
Explanation:
During the depths of the Great Depression about 25 percent of our labor force was officially unemployed, and perhaps another 10 percent had just given up looking for work. Point A represents an unemployment rate of 100 percent, and point C, an unemployment rate of 5 percent. So point B would be where we were during the Great Depression.
Which statement is true? As our economy recovers from a recession, it moves closer to its production possibilities curve. Explanation:
During a recession, we’re some distance inside the production possibilities curve. As we recover, we move closer to the curve.
Refer to the figure below.
If we were at point C, could we quickly produce substantially more houses and more cars?
No
Explanation:
Point C is on the production possibilities frontier which indicates that the economy is currently operating at full capacity, which precludes producing more of both goods in the near term.
Refer to the graph below.
If we were at point M in the figure provided, could we quickly produce substantially more houses and more cars?
Yes
Explanation:
Point M is below the production possibilities frontier which indicates that the economy is currently below capacity, meaning producing more of both goods in the near term should be feasible.
Refer to the graph below.
If we were at point C in the figure provided, could we quickly go to point J?
No
Explanation:
Point J is above the production possibilities frontier which indicates that it is currently above the economy's capacity to produce. Economic growth may make it feasible to achieve at some point in the future, but that would most likely take years rather than months.
Refer to the graph below.
Associate each point on the graph provided with an appropriate description of economic conditions.
Point X: a catastropic depression Point Y: a serious recession Point Z: where our economy generally operates Point W: economic growth
Explanation:
The position of the PPF indicates the current capacity of the economy. Any individual point above the PPF requires a period of economic growth. Points below the PPF represents varying amounts of unemployment depending on how far below the curve the point is located.
Fill in a new productions possibilities frontier representing substantial economic growth.
Instructions: On the graph above, use the tool provided, PPF2 ,to fill in a new production possibilities frontier line showing substantial growth.
Explanation:
Substantial economic growth of a nation is exhibited by a sizable rightward shift of the production possibilities frontier.
On the graph provided, place point M where there is 100 percent unemployment.
Instructions: Use the graph tool, M1 , to identify the point on the graph that indicates total unemployment.
Explanation:
It is assumed that any level of production requires the use of some resources. In order for all resources to be unemployed there can be no production of any good.
Indicate the general condition of the economy in terms of approximate unemployment for each of the points on the figure provided.
Point A is consistent with an unemployment rate of 50 percent.
Point B is consistent with an unemployment rate of 20 percent.
Point C is consistent with an unemployment rate of 5 percent.
Explanation:
The further below the productions possibilities frontier a particular point is the greater the unemployment rate. Point A is approximately half way between the curve and the origin. Point B is closer to the curve but still indicates idle capacity of close to 20%. Point C is very close to the curve putting unemployment in the more normal single digit range.
Given the information in the following table.
Point
Unit of Butter
Unit of Guns
A
15
0
B
14
1
C
12
2
D
9
3
E
5
4
F
0
5
What is the opportunity cost of going from point B to point D?
unit(s) of butter.
What is the opportunity cost of going from point E to point B?
unit(s) of guns.
Explanation:
The opportunity cost of any choice is the forgone value of the next best alternative. Units of butter: 14 - 9 = 5; Units of guns: 4 - 1 = 3.
Use the figure provided to answer the following questions.
a) What is the opportunity cost of going from point B to point C? DVDs b) What is the opportunity cost of going from point D to point C? Cameras c) What is the opportunity cost of going from point B to point A? Cameras d) What is the opportunity cost of going from point C to point D? DVDs
Explanation:
Finding opportunity cost from a production possibilities frontier is simply a matter of comparing the coordinates of the designated points. Movement from point B (170 DVDs, 50 Cameras) to point C (160 DVDs, 80 Cameras) leads to 30 more cameras at a loss/sacrifice of 10 DVDs.
Use the graph provided to illustrate the law of increasing costs numerically. (Hint: Start at point E and move toward point A.)
Instructions: Determine the opportunity cost for more DVDs from each move.
The opportunity cost of a move from E to D is units of cameras. The opportunity cost of a move from D to C is units of cameras. The opportunity cost of a move from C to B is units of cameras. The opportunity cost of a move form B to A is units of cameras.
These values indicate that the opportunity cost of DVDs is increasing as more DVDs are produced.
Explanation:
The opportunity cost of each move is determined by the horizontal distance from point to point. Movement along a concave PPF will always exhibit increasing cost as this example demonstrates.
Refer to the figure below.
Which point best represents where our economy operated in 2012?
C
Explanation:
Point C is the best answer because the U.S. economy still possessed significant idle capacity with the unemployment rate in the 7.8 to 8.3 percent range in 2012.
