PROBLEM 7-44 (45 MINUTES)

1.

Break-even point in units:

Break -even point

fixed costs
unit contribution margin

Calculation of contribution margins:

Selling price......................................
Variable costs:
Direct material..............................
Direct labor...................................
Variable overhead.........................
Variable selling cost.....................
Contribution margin per unit
(a)

LaborIntensive
Production
System
$45.00
$8.40
10.80
7.20
3.00

29.40
$15.60

Labor-intensive production system:

$1,980,000 $750,000
$15.60
$2,730,000

$15.60
175,000 units

Break - even point in units

(b)

Computer-assisted manufacturing system:

$3,660,000 $750,000
$21
$4,410,000

$21
210,000 units

Break - even point in units

ComputerAssisted
Manufacturing
System
$45.00
$7.50
9.00
4.50
3.00

24.00
$21.00

PROBLEM 7-44 (CONTINUED)

2.

Zodiacs management would be indifferent between the two manufacturing methods

at the volume (X) where total costs are equal.
$29.40X + $2,730,000 =

$24X + $4,410,000

$5.40X =

$1,680,000

X =

311,111 units*
*Rounded

3.

Operating leverage is the extent to which a firm's operations employ fixed operating
costs. The greater the proportion of fixed costs used to produce a product, the
greater the degree of operating leverage. Thus, the computer-assisted
manufacturing method utilizes a greater degree of operating leverage.
The greater the degree of operating leverage, the greater the change in
operating income (loss) relative to a small fluctuation in sales volume. Thus, there
is a higher degree of variability in operating income if operating leverage is high.

4.

Management should employ the computer-assisted manufacturing method if annual

sales are expected to exceed 311,111 units and the labor-intensive manufacturing
method if annual sales are not expected to exceed 311,111 units.

5.

Zodiacs management should consider many other business factors other than
operating leverage before selecting a manufacturing method. Among these are:

Variability or uncertainty with respect to demand quantity and selling price.

The ability to produce and market the new product quickly.
The ability to discontinue production and marketing of the new product while
incurring the least amount of loss.

CASE 7-54 (50 MINUTES)

1.

The break-even point is 16,900 patient-days calculated as follows:

SUSQUEHANNA MEDICAL CENTER
COMPUTATION OF BREAK-EVEN POINT
IN PATIENT-DAYS: PEDIATRICS
FOR THE YEAR ENDED JUNE 30, 20X6

Total fixed costs:

Medical center charges.........................................................................................
Supervising nurses ($30,000 4).......................................................................
Nurses
($24,000 10).....................................................................
Aids
($10,800 20).....................................................................
Total fixed costs
.............................................................................................

$3,480,000
120,000
240,000
216,000
$4,056,000

Contribution margin per patient-day:

Revenue per patient-day.......................................................................................

$360

Variable cost per patient-day:

($7,200,000 $360 = 20,000 patient-days)
($2,400,000 20,000 patient-days)..................................................................
Contribution margin per patient-day....................................................................

120
$240

Break-even point
in patient-days

total fixed costs

$4,056,000

contribution margin per patient - day

$240
16,900 patient days

CASE 7-54 (CONTINUED)

1. Net earnings would decrease by $728,000, calculated as follows:
SUSQUEHANNA MEDICAL CENTER
COMPUTATION OF LOSS FROM RENTAL
OF ADDITIONAL 20 BEDS: PEDIATRICS
FOR THE YEAR ENDED JUNE 30, 20X6
Increase in revenue
(20 additional beds 90 days $360 charge per day)....................................

$ 648,000

Increase in expenses:
Variable charges by medical center
(20 additional beds 90 days $120 per day)...........................................

$ 216,000

Fixed charges by medical center

($3,480,000 60 beds = $58,000 per bed)
($58,000 20 beds).......................................................................................

1,160,000

Salaries
(20,000 patient-days before additional 20 beds + 20 additional
beds 90 days = 21,800, which does not exceed 22,000 patient-days;
therefore, no additional personnel are required).........................................
Total increase in expenses.....................................................................................
Net change in earnings from rental of additional 20 beds...................................

-0$1,376,000
$ (728,000)