University of Waterloo

• AFM 382

• Question 1 Simple Joys makes and sells gift baskets. The average selling price and variable cost for each product are as follows: Basket A Basket B Selling Price 24 29 Variable Costs 16 18 Fixed costs are $32,400 and cannot be separated evenly between the two products. a) What is the break-even point in units for each type of basket if Simple Joys sells twice as many Basket As than Bs? Sales Bundle in units = A + B. A = 2B. Sales Bundle in units = 2B + B Contribution Margin = (2B($24-$16) + ($29-18)B) Breakeven point: 0 = $16B + $11B - $32,400 Breakeven point B = $32,400/27B Breakeven point B = 1,200 units of B A units = 2 x 1,200 = 2,400 units. The breakeven point for Simple Joys is selling 2,400 units of basket A and 1,200 units of basket B. b) What is the operating income if she sells 6,300 gift baskets; selling twice as many basket As than Bs? 6,300 baskets = 2B + B B = 2,100 baskets. Joys sells 4,200 A gift baskets and 2,100 B gift baskets. Operating Income = (2B($24-$16) + ($29-18)B) – 32,400 Operating Income = 4,200 x $8 + 2,100 x $11 – 32,400 Operating income = 33600 + 23,100 – 32,400 Operating income = $24,300 c) If Simple Joys sells 6,300 gift baskets, but they sell more B gift baskets than As, would Simple Joys operating income be lower or higher than your answer in part b. It would be higher, because the contribution margin per unit of basket B is greater than the contribution margin per unit of basket B.10 Question 2 ABC Manufacturing Company uses two different independent variables (machine-hours and number of packages) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are