BUSI 1005 – Tutorial 8
Test 2 Review
Question 1
Polaris, Inc., manufactures two types of metal stampings for the automobile industry:
door handles and trim kits. Fixed costs equal $146,000. Each door handle sells for $12
and has variable costs of $9; each trim kit sells for $8 and has variable costs of $5.
Required:
(a) If Polaris sells 20,000 door handles and 40,000 trim kits, what is its operating
income?
(b) How many door handles and how many trim kits must Polaris sell to break even?
Assume the same sales mix as in part (a)
(c) What level of sales will generate an operating income equal to 15% of sales?
(d) (i) Assume that Polaris has the opportunity to rearrange its plant to produce
only trim kits. If this is done, fixed costs will decrease by $35,000, and
70,000 trim kits can be produced and sold in a year. Is this a good idea?
Show computations.
(ii) Assume again that they only produce and sell trim kits. If the tax rate is
35%, how many units must be sold to earn an after-tax income of
$50,000?
(e) Polaris is considering purchasing a separate business that has the following
income statement:
Sales
$290,000
Variable costs
191,400
Contribution margin
98,600
Fixed costs
60,000
Operating income
$38,600
What is the breakeven point of the new business?
Question 2
During October, the Meerkat Company Ltd. Produced 10,000 units. The beginning
inventory on October 1 was 4,000 units. The opening inventory included fixed costs of
$7.00 per unit. During October, 12,000 units were sold for $720,000. October cost
information is available:
Direct materials
$15.00
per unit
Direct labour
9.00
per unit
Variable overhead
12.00
per unit
Variable selling expenses
2.00
per unit
Fixed overhead
$70,000
Fixed selling and administrative expenses
24,000
