Running head: EVALUATING DECISION-MAKING SCENARIOS USING LINEAR

Evaluating Decision-Making Scenarios Using Linear Profit Modeling

Claudette Clark- Zuokemefa
Walden University
Financial Management Tools for Decision Making ACCT 6120/ACMG 6120/MMBA 6782
Dr. Ana Machuca
September 4, 2014
Evaluating Decision-Making Scenarios Using Linear Profit Modeling

Darien Industries
Darien Industries operates a cafeteria for its employees. The operation of the cafeteria requires
fixed costs of $4,700 per month and variable costs of 40 percent of sales. Cafeteria sales are
currently averaging $12,000 per month.
Darien has an opportunity to replace the cafeteria with vending machines. Gross customer
spending at the vending machines is estimated to be 40 percent greater than current sales because
the machines are available at all hours. By replacing the cafeteria with vending machines, Darien
would receive 16 percent of the gross customer spending and avoid all cafeteria costs. How
much does monthly operating income change if Darien Industries replaces the cafeteria with
vending machines (Zimmerman, 2011, p. 61)?
Cafeteria current income
SALE
Variable cost 40% *12,000
Fixed cost

$12,000
($4,800)
($4,700

Operating income ($12,000-$4,800-$4,700)

$2,500

Vending machine income

Sales ( 12,000*1.4

$16,800

Monthly operating income change

(.16*$16.800)
Increase in operating income ( $2.688-$2500)

$2,688
$188

Silky Smooth Lotions

Silky Smooth lotions come in three sizes: 4, 8, and 12 ounces. The following table summarizes
the selling prices and variable costs per case of each lotion size.
Silky Smooth table
Per Case
Price
Variables

4 Once

8 Once
$36.00
13.00

12 Once
$66.00
25.50

$72.00
27.00

Fixed costs are $771,000. Current production and sales are 2,000 cases of 4-ounce bottles; 4,000
cases of 8-ounce bottles; and 1,000 cases of 12-ounce bottles, Silky Smooth typically sells the
three lotion sizes in fixed proportions as represented by the preceding sales amounts.
Required:
How many cases of 4-, 8-, and 12-ounce lotion bottles must be produced and sold for Silky
Smooth to break even, assuming that the three sizes are sold in fixed proportions(Zimmerman,
2011, p. 61)?
CASES

4oz.

8oz.

12oz.

Price

$36.00

$66.00

$72.00

Variable cost

$13.00

$24.50

$27.00

Contribution
margin(P-VC)

$23.00

41.50

$45.00

EVALUATING DECISION-MAKING SCENARIOS USING LINEAR

Current
production

2000

4000

1000

Cases

Margin per
bundle(Contribution
margin *Cases)

23.00 *2
$46.00

41.50*4
$166.00

45.00*1

45.+166.+45
.

$45.00
$257.00

Fixed costs

$771,000

breakeven (FC MPB)

Case amount to
breakeven
( 3000*number cases)

3000
2*3000
6000

4*3000
12000

1*3000
3000

J. P. Max Department Stores

J. P. Max is a department store carrying a large and varied stock of merchandise. Management is
considering leasing part of its floor space for $72 per square foot per year to an outside jewelry
company that would sell merchandise. Two areas currently in use are being considered: home
appliances (1,000 square feet) and televisions (1,200 square feet). These departments had annual
profits of $64,000 for appliances and $82,000 for televisions after allocated fixed occupancy
costs of $7 per square foot were deducted. Allocated fixed occupancy costs include property
taxes, mortgage interest, insurance, and exterior maintenance for the department store.
Required:

EVALUATING DECISION-MAKING SCENARIOS USING LINEAR

Considering all the relevant factors, which department should be leased and why (Zimmerman,
2011, p. 62)?
:

Leasing Space
Profits after FC
allocations
Fixed Costs

Home Appliances
$64,000

$7 per square
foot*1,000 square feet

Televisions
$82,000

$7 per square foot

*1,200 square feet

$7.00 *square foot

$7000
Profits before FC
allocations

$64,000+$7000
$71000

Lease Payments

$72.*1000 sqft

$82,000+$8400
$90,400
$72.00*1200 sqft

$72000
Yield Profits

$8400

$71,000-$72000
-$1,000

$86.400
$86,400-$90400
-$4,000

From the above calculation it seems that Home Appliance department would bring in a better
profits than the Facts that have not been consider in the calculations that can change the profits
margins; if J. P. Max Department Stores add a cost for storage of inventory in either of the above
listed departments.
Bidwell Company

EVALUATING DECISION-MAKING SCENARIOS USING LINEAR

Data for the Bidwell Company are as follows:

Sales (1000,000 units)

Cost

$1,000,000
Fixed

Variable

Raw material

0 $300,000

Direct labor

0 $200,000

Factory costs

$100,000 $150,000

Selling and
administrative costs

$110,000 $50,000

Total costs

$210,000 $700,000

Operating income

$910,000
$90,000

(Zimmerman, 2011, p. 62)

a. Based on the preceding data, calculate break-even sales in units.
=Fixed costs Contribution Margin
$210,000(100,000$1,000,000)
($700,0001,00,000
$210,00($10-$7)=70,000

Breakeven sales at 70,000 unites.

EVALUATING DECISION-MAKING SCENARIOS USING LINEAR

b. If Bidwell Company is subject to an effective income tax rate of 40 percent, calculate the
number of units Bidwell would have to sell to earn an after-tax profit of $90,000
ProfitT=[QT*(P - VC)-FC]*(1 - t)

Bidwell would have to sell

[10Q-7Q-210,000]( 1-.4 ) =90,000

120,000 units.

(3Q-210,000) (.6) =90,000

0.690,000 =150,000
3Q =150,000+210,000
3360,000
Q=120,000
c. If fixed costs increase $31,500 with no other cost or revenue factors changing, calculate
the break-even sales in units
Fixed costs Contribution Margin
240,000+31500
241500$3=80500

Break-even sales at 80,500 units.

EVALUATING DECISION-MAKING SCENARIOS USING LINEAR

References
Zimmerman, J. (2011). The Nature of Cost. In Accounting for Decision Making and Control (7th
ed. (p. 61-62). New York, NY: McGraw-Hill.