Ch3 – CVP Analysis | Complete Test Bank – 17e - Horngrens Cost Accounting 17th Global Edition | Test Bank with Answer Key by Srikant M. Datar, Madhav V. Rajan. DOCX document preview.
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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan
Chapter 3 Cost-Volume-Profit Analysis
Objective 3.1
1) Managers use cost-volume-profit (CVP) analysis to:
A) forecast the cost of capital for a given period of time
B) to study the behavior of and relationship among the elements such as total revenues, total costs, and income
C) estimate the risks associated with a given job
D) analyze a firm's profitability and help to decide wealth distribution among its stakeholders
Diff: 1
Objective: 1
AACSB: Analytical thinking
2) One of the first steps to take when using CVP analysis to help make decisions is:
A) calculating the break-even point
B) identifying the variable and fixed costs
C) calculation of the degree of operating leverage for the company
D) estimating the volume of sales to make a good profit
Diff: 2
Objective: 1
AACSB: Analytical thinking
3) Which of the following is true of cost-volume-profit analysis?
A) The theory assumes that all costs are variable.
B) The theory assumes that units manufactured equal units sold.
C) The theory states that total variable costs remain the same over a relevant range.
D) The theory states that total costs remain the same over the relevant range.
Diff: 2
Objective: 1
AACSB: Application of knowledge
4) The selling price per unit less the variable cost per unit is the:
A) fixed cost per unit
B) gross margin
C) margin of safety
D) contribution margin per unit
Diff: 1
Objective: 1
AACSB: Analytical thinking
5) In the graph method of CVP analysis:
A) the total revenue line starts at the origin and the total costs line starts at the fixed intercept
B) the operating income line starts at the origin and the total costs line starts at the fixed intercept
C) the breakeven point is at the fixed intercept where the total revenues line intersects
D) the operating income area is the section where the total costs line is above the total revenues line
Diff: 2
Objective: 1
AACSB: Analytical thinking
6) Which of the following is an assumption of CVP analysis?
A) Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.
B) When graphed, total costs curve upward.
C) The unit-selling price is variable as it is subject to demand and supply.
D) Total costs can be divided into inventoriable and period costs with respect to the level of output.
Diff: 2
Objective: 1
AACSB: Analytical thinking
7) Which of the following would most likely not be useful inputs to a system that helps managers forecast sales using data analytics and machine learning?
A) details about the company's existing customers
B) details about new management techniques to be implemented next month
C) details about potential customers
D) details surrounding last month's disappointing sales volume
Diff: 2
Objective: 1
AACSB: Analytical thinking
8) A revenue driver is defined as:
A) any factor that affects costs and revenues
B) any factor that affects revenues
C) the only factor that can influence a change in selling price
D) the only factor that can influence a change in demand
Diff: 1
Objective: 1
AACSB: Analytical thinking
9) The contribution margin per unit equals:
A) fixed cost - contribution margin ratio
B) selling price - fixed costs per unit
C) selling price - variable costs per unit
D) selling price - costs of good sold
Diff: 1
Objective: 1
AACSB: Analytical thinking
10) Which of the following is true about the assumptions underlying basic CVP analysis?
A) Selling price varies with demand and supply of the product.
B) Only selling price and variable cost per unit are known and constant.
C) Only selling price, variable cost per unit, and total fixed costs are known and constant.
D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant.
Diff: 1
Objective: 1
AACSB: Analytical thinking
11) The contribution margin income statement:
A) reports gross margin
B) is allowed for external reporting to shareholders
C) categorizes costs as either direct or indirect
D) can be used to predict operating income at different levels of activity
Diff: 1
Objective: 1
AACSB: Analytical thinking
12) Contribution margin equals:
A) revenues minus period costs
B) revenues minus product costs
C) revenues minus variable costs
D) revenues minus fixed costs
Diff: 1
Objective: 1
AACSB: Analytical thinking
13) Generation X Fashions Inc. sells 400 units resulting in $8,000 of sales revenue, $4,000 of variable costs, and $1,500 of fixed costs. Contribution margin per unit is: (Round the final answer to the nearest cent.)
A) $23.75
B) $20.00
C) $10.00
D) $6.25
Diff: 2
Objective: 1
AACSB: Application of knowledge
14) Generation X Fashions Inc. sells 600 units resulting in $7,000 of sales revenue, $3,000 of variable costs, and $1,500 of fixed costs. Calculate the variable cost per unit. (Round the final answer to the nearest cent.)
A) $6.67
B) $3.33
C) $1.67
D) $5.00
Diff: 2
Objective: 1
AACSB: Application of knowledge
15) Tally Corp. sells software during the recruiting seasons. During the current year, 12,000 software packages were sold resulting in $470,000 of sales revenue, $110,000 of variable costs, and $48,000 of fixed costs.
Contribution margin per software is:
A) $39.17
B) $30.00
C) $35.17
D) $9.17
Diff: 2
Objective: 1
AACSB: Application of knowledge
16) Tally Corp. sells software during the recruiting seasons. During the current year, 11,000 software packages were sold resulting in $440,000 of sales revenue, $120,000 of variable costs, and $52,000 of fixed costs.
If sales increase by $100,000, operating income will increase by: (Round interim calculations to two decimal places and the final answer to the nearest whole dollar.)
A) $37,504
B) $48,000
C) $52,000
D) $72,725
Diff: 2
Objective: 1
AACSB: Application of knowledge
17) Pacific Company sells only one product for $15 per unit, variable production costs are $3 per unit, and selling and administrative costs are $1.50 per unit. Fixed costs for 11,000 units are $5,000. The operating income is ________ when 11,000 units are sold.
A) $11.55 per unit
B) $10.05 per unit
C) $10.50 per unit
D) $4.50 per unit
Diff: 2
Objective: 1
AACSB: Application of knowledge
18) The contribution income statement highlights:
A) gross margin
B) the segregation of costs into period costs and inventoriable costs
C) different product lines
D) variable and fixed costs
Diff: 1
Objective: 1
AACSB: Analytical thinking
19) Fixed costs equal $18,000, unit contribution margin equals $35, and the number of units sold equal 1,300. Operating income is:
A) $45,500
B) $27,500
C) $18,000
D) $63,500
Diff: 2
Objective: 1
AACSB: Application of knowledge
20) Orion Company sells several products. Information of average revenue and costs is as follows:
Selling price per unit $25
Variable costs per unit:
Direct material $4
Direct manufacturing labor $1.70
Manufacturing overhead $0.50
Selling costs $2.10
Annual fixed costs $100,000
The company sells 12,000 units at the end of the year.
The contribution margin per unit is:
A) $18.40
B) $16.70
C) $20.50
D) $21.00
Diff: 2
Objective: 1
AACSB: Application of knowledge
21) Orion Company sells several products. Information of average revenue and costs is as follows:
Selling price per unit $21
Variable costs per unit:
Direct material $6
Direct manufacturing labor $1.80
Manufacturing overhead $0.50
Selling costs $2
Annual fixed costs $96,000
The company sells 12,000 units at the end of the year.
If direct labor and direct material costs increase by $1 each, contribution margin:
A) increases by $24,000
B) increases by $12,000
C) decreases by $24,000
D) decreases by $12,000
Diff: 3
Objective: 1
AACSB: Application of knowledge
22) Bell Company sells several products. Information of average revenue and costs is as follows:
Selling price per unit $32.00
Variable costs per unit:
Direct material $5.25
Direct manufacturing labor $2.50
Manufacturing overhead $0.30
Selling costs $2.25
Annual fixed costs $115,000
The company sells 11,000 units.
The contribution margin per unit is:
A) $11.25
B) $21.70
C) $23.95
D) $24.25
Diff: 2
Objective: 1
AACSB: Application of knowledge
23) Bell Company sells several products. Information of average revenue and costs is as follows:
Selling price per unit $30
Variable costs per unit:
Direct material $6
Direct manufacturing labor $1.75
Manufacturing overhead $0.3
Selling costs $1.9
Annual fixed costs $111,000
The company sells 14,000 units.
What is the proportion of variable costs to total costs?
A) 45.03%
B) 43.08%
C) 79.1%
D) 55.65%
Diff: 2
Objective: 1
AACSB: Application of knowledge
24) Family Furniture sells a table for $1,000. Its fixed costs are $35,000, while its variable costs are $600 per table. It currently plans to sell 190 tables this month.
What is the budgeted revenue for the month assuming that Family Furniture sells 190 tables?
A) $76,000
B) $190,000
C) $155,000
D) $114,000
Diff: 2
Objective: 1
AACSB: Application of knowledge
25) Family Furniture sells a table for $1,000. Its fixed costs are $35,000, while its variable costs are $700 per table. It currently plans to sell 180 tables this month.
What is the budgeted operating income for the month assuming that Family Furniture sells 180 tables?
A) $145,000
B) $54,000
C) $19,000
D) $180,000
Diff: 2
Objective: 1
AACSB: Application of knowledge
26) SaleCo sells 8,200 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $55,000 of fixed costs. The contribution margin percentage is:
A) 45%
B) 65%
C) 10%
D) 35%
Diff: 2
Objective: 1
AACSB: Application of knowledge
27) Which of the following is the mathematical expression of contribution margin ratio?
A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars)
B) Contribution margin ratio = Contribution margin percentage × Fixed costs (in dollars)
C) Contribution margin ratio = Contribution margin percentage × Variable costs (in dollars)
D) Contribution margin ratio = Contribution margin percentage × Operating leverage
Diff: 1
Objective: 1
AACSB: Analytical thinking
28) Contribution Margin = Total revenues - Total variable costs
Diff: 1
Objective: 1
AACSB: Analytical thinking
29) Contribution margin = Total revenues - Total manufacturing costs
Diff: 1
Objective: 1
AACSB: Analytical thinking
30) Contribution margin percentage = Selling price - Variable cost per unit
Diff: 1
Objective: 1
AACSB: Analytical thinking
31) Contribution margin per unit equals contribution margin divided by number of units sold.
Diff: 2
Objective: 1
AACSB: Analytical thinking
32) In CVP analysis, the graph of total revenues versus total costs is linear in nature relation to units sold within a relevant range and time period.
Diff: 1
Objective: 1
AACSB: Analytical thinking
33) The difference between total revenues and total variable costs is called profit margin.
Diff: 2
Objective: 1
AACSB: Analytical thinking
34) The shorter the time horizon, the lower the percentage of total costs considered fixed.
Diff: 2
Objective: 1
AACSB: Analytical thinking
35) The three methods used to study CVP analysis are graph method, contribution method, and equation method.
Diff: 1
Objective: 1
AACSB: Analytical thinking
36) Contribution margin = Contribution margin percentage × Revenues (in dollars).
Diff: 1
Objective: 1
AACSB: Analytical thinking
37) A revenue driver is a variable, such as volume, that causally affects revenues.
Diff: 1
Objective: 1
AACSB: Analytical thinking
38) Operating income plus total fixed costs equals the contribution margin.
Diff: 2
Objective: 1
AACSB: Analytical thinking
39) Contribution margin percentage equals the unit contribution margin divided by the selling price.
Diff: 1
Objective: 1
AACSB: Analytical thinking
40) The classification of costs as variable and fixed depends on the relevant range, the length of the time horizon, and the specific decision situation.
Diff: 2
Objective: 1
AACSB: Analytical thinking
41) The difference between total revenues and total variable costs is called contribution margin.
Diff: 1
Objective: 1
AACSB: Analytical thinking
42) Only variable production costs are used when calculating contribution margin.
Diff: 2
Objective: 1
AACSB: Analytical thinking
43) A contribution margin income statement is an income statement that groups costs into their variable and fixed components.
Diff: 2
Objective: 1
AACSB: Analytical thinking
44) Arthur's Plumbing reported the following:
Revenues $4,500
Variable manufacturing costs $ 900
Variable nonmanufacturing costs $ 810
Fixed manufacturing costs $ 630
Fixed nonmanufacturing costs $ 545
Required:
a. Compute contribution margin.
b. Compute contribution margin percentage.
c. Compute gross margin.
d. Compute gross margin percentage.
e. Compute operating income.
a. Contribution margin $4,500 - $900 - $810 = $2,790
b. Contribution margin percentage = ($2,790/$4,500) × 100 = 62%
c. Gross margin $4,500 - $900 - $630 = $2,970
d. Gross margin percentage = ($2,970/$4,500) × 100 = 66%
e. Operating income $4,500 - $900 - $810 - $630 - $545 = $1,615
Diff: 3
Objective: 1
AACSB: Application of knowledge
Objective 3.2
1) SaleCo sells 10,000 units resulting in $100,000 of sales revenue, $40,000 of variable costs, and $45,000 of fixed costs. To achieve $170,000 in operating income, sales must total: (Round intermediate calculations to two decimal places and the final answer to the nearest dollar.)
A) $255,000
B) $309,091
C) $140,000
D) $358,333
Diff: 2
Objective: 2
AACSB: Application of knowledge
2) Sparkle Jewelry sells 500 units resulting in $80,000 of sales revenue, $30,000 of variable costs, and $26,000 of fixed costs.
Breakeven point in units is: (Round intermediary calculations to the nearest cent, and the final answer to the nearest whole unit.)
A) 300 units
B) 540 units
C) 560 units
D) 260 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
3) Sparkle Jewelry sells 500 units resulting in $75,000 of sales revenue, $32,000 of variable costs, and $20,000 of fixed costs.
The number of units that must be sold to achieve $41,000 of operating income is: (Round intermediary calculations to two decimal places, and your final answer up to the nearest whole number.)
A) 555 units
B) 233 units
C) 710 units
D) 477 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
4) Sky High sells helicopters. During the current year, 100 helicopters were sold resulting in $860,000 of sales revenue, $260,000 of variable costs, and $350,000 of fixed costs. Breakeven point in units is: (Round intermediary calculations to two decimal places, and your final answer up to the nearest whole number.)
A) 69 units
B) 44 units
C) 59 units
D) 41 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
5) Sky High sells helicopters. During the current year, 150 helicopters were sold resulting in $840,000 of sales revenue, $250,000 of variable costs, and $350,000 of fixed costs. The number of helicopters that must be sold to achieve $310,000 of operating income is: (Round intermediary calculations to two decimal places, and your final answer up to the nearest whole number.)
A) 168 units
B) 118 units
C) 89 units
D) 150 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
6) The controller at TellCo is examining her books. She determines that at the breakeven point of 5,000 units, variable costs total $5,000 and fixed costs total $6,000. Therefore, 5,001st unit sold will contribute ________ to profits. (Round the final answer to the nearest cent.)
A) $1.00
B) $0.20
C) $1.20
D) $2.20
Diff: 2
Objective: 2
AACSB: Application of knowledge
7) The breakeven point is the activity level where:
A) revenues equal fixed costs
B) revenues equal variable costs
C) contribution margin equals total costs
D) revenues equal the sum of variable and fixed costs
Diff: 1
Objective: 2
AACSB: Analytical thinking
8) Breakeven point in units is:
A) total costs divided by profit margin per unit
B) contribution margin per unit divided by total cost per unit
C) fixed costs divided by contribution margin per unit
D) the sum of fixed and variable costs divided by contribution margin per unit
Diff: 1
Objective: 2
AACSB: Analytical thinking
9) Sales total $430,000 when variable costs total $300,000 and fixed costs total $90,000. The breakeven point in sales dollars is: (Round interim calculations to two decimal places and the final answer to the nearest dollar.)
A) $300,000
B) $433,333
C) $1,000,000
D) $621,111
Diff: 3
Objective: 2
AACSB: Application of knowledge
10) The breakeven point revenues is calculated by dividing:
A) fixed costs by total revenues
B) fixed costs by contribution margin percentage
C) total revenues by fixed costs
D) contribution margin percentage by fixed costs
Diff: 2
Objective: 2
AACSB: Analytical thinking
11) At breakeven point:
A) operating income is equal to zero
B) contribution margin minus fixed costs is equal to profits earned
C) revenues equal fixed costs minus variable costs
D) breakeven revenues equal fixed costs divided by the variable cost per unit
Diff: 2
Objective: 2
AACSB: Analytical thinking
12) The breakeven point decreases if:
A) the variable cost per unit increases
B) the total fixed costs decrease
C) the contribution margin per unit decreases
D) the selling price per unit decreases
Diff: 2
Objective: 2
AACSB: Analytical thinking
13) Assume only the specified parameters change in a CVP analysis. The contribution margin percentage increases when:
A) total fixed costs increase
B) total fixed costs decrease
C) variable costs per unit increase
D) variable costs per unit decrease
Diff: 1
Objective: 2
AACSB: Analytical thinking
14) What is the breakeven point in units, assuming a product's selling price is $400, fixed costs are $22,000, unit variable costs are $100, and operating income is $5,200? (Do not round intermediary calculations, and round the final calculation up to the next whole number.)
A) 134 units
B) 91 units
C) 55 units
D) 74 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
15) Rosewood company sells wooden carvings for $390 each. The direct materials cost per unit is $150 and the direct labor is 2 hours at a rate of $30 per hour. Manufacturing overhead is applied on the basis of labor hours at a rate of $38 per hour. Rosewood makes and sells 1,900 units per period. How many units must Rosewood sell to breakeven?
A) 402 units
B) 963 units
C) 371 units
D) 803 units
Diff: 3
Objective: 2
AACSB: Application of knowledge
16) If unit outputs exceed the breakeven point:
A) there will be an increase in fixed costs
B) total sales revenue will exceed fixed costs
C) total sales revenue will exceed variable costs
D) there will be a profit
Diff: 2
Objective: 2
AACSB: Analytical thinking
17) Firebird Ltd. sells packaged birdseed for $5.50 per package. Variable product costs are $4.50 per package. Fixed costs are $12,000 per period. How many packages must Firebird sell to earn a target operating income of $7,700?
A) 12,000 packages
B) 7,700 packages
C) 19,700 packages
D) 3,582 packages
Diff: 3
Objective: 2
AACSB: Application of knowledge
18) How many units would have to be sold to yield a target operating income of $24,000, assuming variable costs are $26 per unit, total fixed costs are $4,000, and the unit selling price is $31?
A) 800 units
B) 1,077 units
C) 5,600 units
D) 1,334 units
Diff: 3
Objective: 2
AACSB: Application of knowledge
19) If the breakeven point is 1,300 units and each unit sells for $70, then:
A) selling 1,360 units will result in a loss
B) selling $111,000 will result in a loss
C) selling $91,000 will result in zero profit
D) selling $85,000 will result in profit
Diff: 2
Objective: 2
AACSB: Application of knowledge
20) Slickware sells porcelain cups. The breakeven point is 5,000 units. The variable cost per unit is $18 and the fixed costs are $20,000. What is the contribution margin at 5,000 units?
A) 20,000
B) 90,000
C) 110,000
D) 40,000
Diff: 3
Objective: 2
AACSB: Application of knowledge
21) Slickware sells porcelain cups. The breakeven point is 5,000 units. The variable cost per unit is $21 and the fixed costs are $20,000. What is the selling price?
A) $25
B) $42
C) $46
D) $29
Diff: 3
Objective: 2
AACSB: Application of knowledge
22) If breakeven point is 1,100 units, each unit sells for $32, and fixed costs are $20,000, then on a graph the:
A) total revenue line and the total cost line will intersect at $35,200 of revenue
B) total cost line will be zero at zero units sold
C) revenue line will start at $20,000
D) total revenue line and the total cost line will intersect at $55,200 of revenue
Diff: 3
Objective: 2
AACSB: Application of knowledge
23) When fixed costs are $90,000 and variable costs are 70% of the selling price, then breakeven sales are: (Round the final answer to the nearest dollar.)
A) $128,571
B) $300,000
C) $153,000
D) $117,000
Diff: 2
Objective: 2
AACSB: Application of knowledge
24) Ruben is a travel agent. He intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline for $150 each. The round-trip tickets will be sold for $240 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,100 in advertising costs. What is the contribution margin per ticket package?
A) $90
B) $390
C) $150
D) $240
Diff: 2
Objective: 2
AACSB: Application of knowledge
25) Ruben is a travel agent. He intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline for $160 each. The round-trip tickets will be sold for $240 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,500 in advertising costs. How many ticket packages will Ruben need to sell to break even? (Round the final calculation up to the next whole number.)
A) 23 packages
B) 80 packages
C) 69 packages
D) 160 packages
Diff: 2
Objective: 2
AACSB: Application of knowledge
26) Ruben is a travel agent. He intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline for $170 each. The round-trip tickets will be sold for $240 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,500 in advertising costs. How many ticket packages will Ruben need to sell in order to achieve $80,000 of operating income? (Round the final calculation up to the next whole number.)
A) 79 packages
B) 1,143 packages
C) 357 packages
D) 1,222 packages
Diff: 2
Objective: 2
AACSB: Application of knowledge
27) Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $140 each. The round-trip tickets will be sold for $210 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,255 in advertising costs. For every $28,000 of ticket packages sold, operating income will increase by: (Do not round intermediary calculations and round the final calculation to the nearest whole number.)
A) $9,333
B) $29,400
C) $18,667
D) $28,000
Diff: 3
Objective: 2
AACSB: Application of knowledge
28) Quality Stores, Inc., sells several products. Information of average revenue and costs is as follows:
Selling price per unit $20
Variable costs per unit:
Direct material $6
Direct manufacturing labor $1.80
Manufacturing overhead $0.5
Selling costs $3
Annual fixed costs $98,000
What is the contribution margin percentage? (Round your answer to the nearest whole percent.)
A) 44%
B) 59%
C) 34%
D) 38%
Diff: 2
Objective: 2
AACSB: Application of knowledge
29) Quality Stores, Inc., sells several products. Information of average revenue and costs is as follows:
Selling price per unit $22
Variable costs per unit:
Direct material $5
Direct manufacturing labor $1.90
Manufacturing overhead $0.40
Selling costs $3
Annual fixed costs $100,000
The revenues that the company must earn annually to make a profit of $145,000 are: (Round the final answer to the nearest dollar.)
A) $366,667
B) $356,954
C) $460,684
D) $317,059
Diff: 2
Objective: 2
AACSB: Application of knowledge
30) Frazer Corp sells several products. Information of average revenue and costs is as follows:
Selling price per unit $33
Variable costs per unit:
Direct material $7.00
Direct manufacturing labor $1.50
Manufacturing overhead $0.95
Selling costs $2.70
Annual fixed costs $130,000
What is the operating income earned if the company sells 20,000 units?
A) $341,000
B) $360,000
C) $390,000
D) $287,000
Diff: 2
Objective: 2
AACSB: Application of knowledge
31) Frazer Corp sells several products. Information of average revenue and costs is as follows:
Selling price per unit $31.00
Variable costs per unit:
Direct material $7.00
Direct manufacturing labor $1.35
Manufacturing overhead $0.95
Selling costs $2.60
Annual fixed costs $140,000
If the company decides to lower its selling price by 15.00%, but continues to sell 17,000 units, the operating income is reduced by:
A) $79,050
B) $140,000
C) $44,700
D) $17,000
Diff: 3
Objective: 2
AACSB: Application of knowledge
32) The following information is for High Corp:
Selling price $90 per unit
Variable costs $38 per unit
Total fixed costs $140,000
The number of units that High Corp must sell to reach targeted operating income of $25,000 is: (Round up to the nearest unit.)
A) 2,693 units
B) 3,174 units
C) 481 units
D) 1,834 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
33) The following information is for High Corp:
Selling price $90 per unit
Variable costs $37 per unit
Total fixed costs $135,000
If targeted operating income is $50,000, then targeted sales revenue is: (Round the final answer to the nearest dollar.)
A) $314,151
B) $229,245
C) $84,906
D) $185,000
Diff: 2
Objective: 2
AACSB: Application of knowledge
34) Katrina's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,300, variable costs are $600, and fixed costs are $100,000. What is Katrina's operating income when 500 dresses are sold?
A) $250,000
B) $650,000
C) $300,000
D) $550,000
Diff: 2
Objective: 2
AACSB: Application of knowledge
35) Katrina's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,500, variable costs are $400, and fixed costs are $110,000. How many dresses are sold when operating income is zero? (Round the final calculation up to the next whole number.)
A) 275 dresses
B) 100 dresses
C) 427 dresses
D) 74 dresses
Diff: 3
Objective: 2
AACSB: Application of knowledge
36) Dr. Charles Hunter, MD, performs a certain outpatient procedure for $1,100. His fixed costs are $26,000 per month and his variable costs are $500 per procedure. Dr. Hunter currently plans to perform 200 procedures this month. What is the breakeven point for the month assuming that Dr. Hunter plans to perform the procedure 200 times? (Round the final calculation up to the next whole number.)
A) 44 times
B) 24 times
C) 36 times
D) 12 times
Diff: 3
Objective: 2
AACSB: Application of knowledge
37) Zirconia Fantasy sells only necklaces. 9,000 units were sold resulting in $280,000 of sales revenue, $60,000 of variable costs, and $40,000 of fixed costs. The breakeven point in total sales dollars is: (Do not round intermediary calculations and round the final calculation up to the nearest dollar.)
A) $40,000
B) $50,910
C) $100,000
D) $62,223
Diff: 2
Objective: 2
AACSB: Application of knowledge
38) Burgandy Manufacturing produces a single product that sells for $100. Variable costs per unit equal $40. The company expects total fixed costs to be $80,000 for the next month at the projected sales level of 2,300 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. What is the current breakeven point in terms of number of units? (Round the final calculation up to the next whole number.)
A) 1,334 units
B) 800 units
C) 2,000 units
D) 1,227 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
39) Lights Manufacturing produces a single product that sells for $140. Variable costs per unit equal $60. The company expects total fixed costs to be $90,000 for the next month at the projected sales level of 1,000 units. What is the current breakeven point in terms of number of units? (Round the final calculation up to the next whole number.)
A) 643 units
B) 1,500 units
C) 450 units
D) 1,125 units
Diff: 2
Objective: 2
AACSB: Application of knowledge
40) Which of the following will increase a company's breakeven point?
A) increasing variable cost per unit
B) increasing contribution margin per unit
C) reducing its total fixed costs
D) increasing the selling price per unit
Diff: 1
Objective: 2
AACSB: Analytical thinking
41) The breakeven point is:
A) where selling one more unit will not increase income
B) where contribution margin equals fixed costs
C) where total revenues equal contribution margin
D) fixed costs divided by revenues equals zero
Diff: 2
Objective: 2
AACSB: Analytical thinking
42) You can find the breakeven revenues using total revenues, total variable costs, and total fixed costs; you don't need unit prices and costs.
Diff: 2
Objective: 2
AACSB: Analytical thinking
43) In the graph method of CVP analysis, the horizontal line above the x-axis represents the total cost line.
Diff: 2
Objective: 2
AACSB: Analytical thinking
44) A profit-volume graph shows the impact on operating income from changes in the output level.
Diff: 1
Objective: 2
AACSB: Analytical thinking
45) In the profit-volume graph the point at which the profit-volume line and x-axis intersect is the breakeven point.
Diff: 1
Objective: 2
AACSB: Analytical thinking
46) If the fixed costs are $50,000, targeted operating profits is $10, 000, selling price per unit is $4, and the variable cost per unit is $1.00, then the required sales volume is 80,000 units.
Diff: 2
Objective: 2
AACSB: Analytical thinking
47) MyArt sells framed art prints for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500.
Required:
a. What is the contribution margin per print?
b. What is the breakeven point in prints?
c. How many prints must be sold to earn pretax income of $7,500?
a. CM per print = $100 - $50 - 0.1($100) = $40
b. N = Breakeven in prints
$100N - $50N - $10N - $1,250 - $2,500 = 0
$40N - $3,750 = 0
N = $3,750 / $40 = 93.75 prints
Breakeven is 94 prints
c. N = Prints to be sold
$100N - $50N - $10N - $1,250 - $2,500 = $7,500
$40N = $11,250
N = $11,250 / $40 = 281.25 prints
282 prints must be sold
Diff: 3
Objective: 2
AACSB: Application of knowledge
48) What is meant by the term breakeven point? Why should a manager be concerned about the breakeven point and what helps them study the breakeven analysis?
Diff: 2
Objective: 2
AACSB: Analytical thinking
Objective 3.3
1) Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000, variable costs are $500, and fixed costs are $120,000. How many dresses must the Bridal Shoppe sell to yield after-tax net income of $20,000, assuming the tax rate is 40%? (Round the final calculation up to the next whole number.)
A) 307 dresses
B) 280 dresses
C) 240 dresses
D) 467 dresses
Diff: 3
Objective: 3
AACSB: Analytical thinking
2) Anglico's most recent income statement is given below.
Sales (8,000 units) $160,000
Less variable expenses (68,000)
Contribution margin 92,000
Less fixed expenses (50,000)
Net income $42,000
Required:
a. Contribution margin per unit is $ ________ per unit
b. If sales are doubled total variable costs will equal $ ________
c. If sales are doubled total fixed costs will equal $ ________
d. If 20 more units are sold, profits will increase by $ ________
e. Compute how many units must be sold to break even. # ________
f. Compute how many units must be sold to achieve
operating income of $60,000. # ________
g. Compute the revenue needed to achieve an after tax
income of $30,000 given a tax rate of 30%. $ ________
a. Contribution margin per unit is $92,000 / 8,000 = $11.5
b. Variable cost = $68,000 × 2 = $136,000
c. Fixed cost = $50,000
d. Contribution margin of $11.50 × 20 units = $230
e. Breakeven point in units = Fixed costs of $50,000 / Contribution margin per unit $11.50 = 4,348 units (rounded up)
f. Desired sales = (Fixed costs of $50,000 + Desired operating income $60,000) / $11.50 = 9,566 units (rounded up)
g. After tax income of $35,000 / (1-30%) = operating income of $50,000. Contribution margin ratio = $92,000 / $160,000 = 56.25%. Desired sales = (fixed costs of $50,000 + desired operating income of $50,000) / 56.25% = $177,778 (rounded up)
Diff: 3
Objective: 3
AACSB: Application of knowledge
3) Black Pearl, Inc., sells a single product. The company's most recent income statement is given below.
Sales $50,000
Less variable expenses (30,000)
Contribution margin $20,000
Less fixed expenses (12,500)
Net income $ 7,500
Required:
a. Contribution margin ratio is ________%
b. Breakeven point in total sales dollars is $ ________
c. To achieve $40,000 in operating income, sales must total $ ________
d. If sales increase by $50,000, operating income will increase
by $ ________
e. To achieve a $40,000 after tax income, given a tax rate of
20%, sales must total $________
a. Contribution margin ratio is $20,000 / $50,000 = 40%
b. Fixed costs $12,500 / 0.40 CM% = $31,250 in sales
c. [Fixed costs $12,500 + operating income $40,000] / 0.40 CM% = $131,250 in sales
d. $50,000 × 0.40 CM% = $20,000 increase in net income
e. After tax income of $40,000 / (1-20%) = operating income of $50,000. Desired sales = (fixed costs of $12,500 + desired operating income of $50,000) / CM% of 40% = $156,250)
Diff: 3
Objective: 3
AACSB: Application of knowledge
4) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4 when sales are 10,000 units. If one more unit is sold, operating income will increase by $6.
Diff: 2
Objective: 3
AACSB: Application of knowledge
5) A company with sales of $50,000, a contribution margin ratio of 30%, and fixed costs of $25,000 will earn a net income of $10,000.
Diff: 2
Objective: 3
AACSB: Application of knowledge
6) Which of the following statements about net income (NI) is true?
A) NI = operating income plus nonoperating revenue.
B) NI = operating income plus operating costs.
C) NI = operating income less income taxes.
D) NI = operating income less cost of goods sold.
Diff: 1
Objective: 3
AACSB: Analytical thinking
7) Assume the following cost information for Fernandez Company:
Selling price $190 per unit
Variable costs $80 per unit
Total fixed costs $95,000
Tax rate 35%
What minimum volume of sales dollars is required to earn an after-tax net income of $40,000? (Do not round interim calculations and round the final answer to the nearest dollar.)
A) $164,091
B) $106,294
C) $270,385
D) $252,448
Diff: 3
Objective: 3
AACSB: Application of knowledge
8) Assume the following cost information for Fernandez Company:
Selling price $190 per unit
Variable costs $80 per unit
Total fixed costs $95,000
Tax rate 35%
What is the number of units that must be sold to earn an after-tax net income of $30,000? (Do not round interim calculations and round the final answer to the nearest unit.)
A) 1,284 units
B) 1,137 units
C) 658 units
D) 1,329 units
Diff: 3
Objective: 3
AACSB: Application of knowledge
9) In CVP analysis, focusing on target net income rather than operating income:
A) will increase the breakeven point
B) will decrease the breakeven point
C) will not change the breakeven point
D) will help managers construct a better capital policy
Diff: 2
Objective: 3
AACSB: Analytical thinking
10) Which of the following is true of net income?
A) Net income is operating income divided by income tax rate.
B) Net income is operating income plus operating revenues minus operating costs minus income taxes.
C) Net income is operating income plus nonoperating revenues minus nonoperating costs minus income taxes.
D) Net income is operating income minus nonoperating revenues minus nonoperating costs minus sales taxes.
Diff: 2
Objective: 3
AACSB: Analytical thinking
11) If selling price per unit is $40, variable costs per unit are $26, total fixed costs are $24,000, the tax rate is 30%, and the company sells 8,000 units, net income is:
A) $88,000
B) $16,000
C) $78,400
D) $61,600
Diff: 2
Objective: 3
AACSB: Application of knowledge
12) The planned operating income is calculated by:
A) dividing net income by tax rate
B) dividing net income by 1 − tax rate
C) multiplying net income by tax rate
D) multiplying net income by 1 − tax rate
Diff: 2
Objective: 3
AACSB: Analytical thinking
13) If Beta Corp's net income is $240,000 and the tax rate is 40%, then the company's planned operating income is:
A) $336,000
B) $400,000
C) $201,600
D) $576,000
Diff: 2
Objective: 3
AACSB: Application of knowledge
14) The Marietta Company has fixed costs of $75,000 and variable costs are 75% of the selling price. To realize operating income of $14,000 from sales of 70,000 units, the selling price per unit: (Round the answer to the nearest cent.)
A) must be $1.27
B) must be $1.70
C) must be $5.09
D) must be $4.29
Diff: 3
Objective: 3
AACSB: Application of knowledge
15) If a company's target net income is $1,600,000 and the tax rate is 28%, what is the target operating income?
A) $1,152,000
B) $1,600,000
C) $2,222,222
D) $2,048,000
Diff: 2
Objective: 3
AACSB: Application of knowledge
16) An increase in the tax rate will increase the breakeven point.
Diff: 2
Objective: 3
AACSB: Application of knowledge
17) A firm operating at breakeven point will pay an income tax of 10%.
Diff: 2
Objective: 3
AACSB: Analytical thinking
18) All else being constant, an increase in operating income will result in an increase in net income.
Diff: 1
Objective: 3
AACSB: Application of knowledge
19) If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $39,000.
Diff: 1
Objective: 3
AACSB: Application of knowledge
20) CVP analysis ignores the impact of income taxes.
Diff: 2
Objective: 3
AACSB: Application of knowledge
21) The Holiday Card Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information:
Income tax rate 30%
Selling price per unit $6.60
Variable cost per unit $5.28
Total fixed costs $46,200.00
Required:
a. What is the breakeven point in cards?
b. What sales volume is needed to earn an after-tax net income of $13,028.40?
c. How many cards must be sold to earn an after-tax net income of $18,480?
a. Breakeven point in units = $46,200/($6.60 − $5.28) = 35,000 units
b. Operating income = $13,028.40 / 0.70 = $18,612
$18,612 + $46,200 = $64,812
Contribution per unit = $6.60 − $5.28 = $1.32
Breakeven sales in units = $64,812 / $1.32 = 49,100 units
Breakeven sales = 49,100 units × $6.60 = $324,060
c. Operating income = $18,480/0.70 = $26,400
$26,400 + $46,200 = $72,600
Breakeven sales in units = $72,600 / $1.32 = 55,000 units
Diff: 2
Objective: 3
AACSB: Application of knowledge
22) James Corporation gathered the following information:
Variable costs $550,000
Income tax rate 40%
Contribution-margin ratio 30%
Required:
a. Calculate the fixed costs, assuming breakeven revenue is $2,000,000.
b. Calculate sales volume in dollars to produce an after-tax net income of $150,000.
a. $2,000,000 revenue × CM% 30% = CM of $600,000 so FC must be $600,000 for operating income to be zero.
b. $150,000 / (1- 0.40) = $250,000 desired operating income. $250,000 + $600,000 FC / 0.30 = $2,833,333 (rounded).
Diff: 3
Objective: 3
AACSB: Application of knowledge
23) Explain what net income and what taxes can have on a manager's decision?
Diff: 2
Objective: 3
AACSB: Analytical thinking
Objective 3.4
1) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $6 per unit, then:
A) fixed costs increases by $6 per unit
B) operating income decreases by $6 per unit
C) fixed costs decreases by $6 per unit
D) operating income increases by $6 per unit
Diff: 2
Objective: 4
AACSB: Application of knowledge
2) If a company is planning to reduce the selling price per unit but not reduce expectations of revenues, they must believe that:
A) variable costs will decline as well
B) the fixed costs will cover the lower sales price
C) more units will be sold
D) increased collections will increase income
Diff: 1
Objective: 4
AACSB: Analytical thinking
3) All else being equal, a reduction in selling price will:
A) increase contribution margin
B) reduce fixed costs
C) increase variable costs
D) reduce operating income
Diff: 2
Objective: 4
AACSB: Application of knowledge
4) All else being equal, an increase in advertising expenditures will:
A) reduce operating income
B) reduce contribution margin
C) increase variable costs
D) increase selling price
Diff: 2
Objective: 4
AACSB: Application of knowledge
5) Blistre Company operates on a contribution margin of 40% and currently has fixed costs of $510,000. Next year, sales are projected to be $3,100,000. An advertising campaign is being evaluated that costs an additional $110,000. How much would sales have to increase to justify the additional expenditure?
A) $165,000
B) $1,240,000
C) $275,000
D) $510,000
Diff: 2
Objective: 4
AACSB: Application of knowledge
6) Tony Manufacturing produces a single product that sells for $100. Variable costs per unit equal $35. The company expects total fixed costs to be $82,000 for the next month at the projected sales level of 2,800 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose management believes that a $90,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure? (Round the final answer up to nearest whole unit.)
A) 900 units
B) 1,385 units
C) 1,256 units
D) 1,262 units
Diff: 3
Objective: 4
AACSB: Application of knowledge
7) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $40. The company expects total fixed costs to be $82,000 for the next month at the projected sales level of 2,700 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a 11% reduction in the selling price will result in a 11% increase in sales. If this proposed reduction in selling price is implemented: (Do not round intermediary calculations and round the final answer to the nearest whole number.)
A) operating income will decrease by $14,494
B) operating income will increase by $9,266
C) operating income will decrease by $23,760
D) operating income will increase by $14,494
Diff: 3
Objective: 4
AACSB: Application of knowledge
8) Craylon Manufacturing produces a single product that sells for $140. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,300 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a $12,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure. (Round the final answer up to the nearest whole unit.)
A) 86 units
B) 105 units
C) 480 units
D) 1,068 units
Diff: 2
Objective: 4
AACSB: Application of knowledge
9) Craylon Manufacturing produces a single product that sells for $140. Variable costs per unit equal $35. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,300 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. One alternative is to increase advertising expenses by $14,000. What is the effect on operating income with the increase of advertising expenses?
A) Operating income will decrease by $14,000.
B) Operating income will increase by $14,000.
C) Operating income will decrease by $62,500.
D) Operating income will increase by $62,500.
Diff: 3
Objective: 4
AACSB: Application of knowledge
10) Kmax Inc. wants to make a $1,500,000 operating income during the upcoming period. The forecast is for sales of 15,000 units. The variable cost per unit is $55 and the total fixed costs are $1,875,000. What is the target selling price per unit?
A) $280
B) $273
C) $225
D) $325
Diff: 3
Objective: 4
AACSB: Application of knowledge
11) If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit.
Diff: 1
Objective: 4
AACSB: Application of knowledge
12) If variable costs per unit increase, then the breakeven point will decrease.
Diff: 2
Objective: 4
AACSB: Application of knowledge
13) A planned increase in advertising would be considered an increase in variable costs in CVP analysis.
Diff: 1
Objective: 4
AACSB: Analytical thinking
14) A planned decrease in selling price would be expected to cause an increase in the quantity sold.
Diff: 1
Objective: 4
AACSB: Analytical thinking
15) In 2020, Craylon Company has sales of $1,000,000, variable costs of $250,000, and fixed costs of $200,000. In 2020, the company expects annual property taxes to decrease by $15,000.
Required:
a. Calculate operating income and the breakeven point for 2020.
b. Calculate the breakeven point for 2020.
a. In 2020, operating income is $1,000,000 sales revenue − $250,000 variable costs − $200,000 fixed costs = $550,000.
The breakeven point for 2020 is $266,667 in total sales dollars.
Contribution margin ratio = ($1,000,000 - $250,000) / $1,000,000 = 0.75.
Breakeven sales = $200,000 / 0.75 = $266,667.
b. The breakeven point for 2020 is $246,667 in total sales dollars.
Estimated fixed costs for 2020 = $200,000 − $15,000 = $185,000.
Breakeven sales = $185,000 total fixed costs / 75% CM ratio = $246,667.
Diff: 3
Objective: 4
AACSB: Application of knowledge
16) Furniture, Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9,600.
Required:
a. What is the contribution margin per lamp?
b. What is the breakeven point in lamps?
c. How many lamps must be sold to earn a pretax income of $8,000?
d. What is the margin of safety, assuming 1,500 lamps are sold?
a. Contribution margin per lamp = $30 - $22 = $8
b. N = Breakeven point in lamps
$30N - $22N - $9,600 = 0
$8N - $9,600 = 0
N = $9,600/$8 = 1,200 lamps
c. N = Target sales in lamps
$30N - $22N - $9,600 - $8,000 = 0
$8N - $17,600 = 0
N = $17,600/$8 = 2,200 lamps
d. Margin of safety = Sales - Breakeven sales
= ($30.00 × 1,500) - $36,000 = $9,000
Diff: 3
Objective: 4
AACSB: Application of knowledge
17) Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs total $475,000.
Required:
a. What is the contribution margin per tire?
b. What is the breakeven point in tires?
c. How many tires must be sold to earn a pretax income of $450,000?
d. What is the margin of safety, assuming 33,000 tires are sold?
a. Contribution margin per tire = $110 - $85 = $25
b. N = Breakeven point in tires
$110N - $85N - $475,000 = 0
$25N - $475,000 = 0
N = $475,000/$25 = 19,000 tires
c. N = Target sales in tires
$110N - $85N - $450,000 -$ 475,000 = 0
$25N - $925,000 = 0
N = $925,000/$25 = 37,000 tires
d. Margin of safety = Sales - Breakeven sales
= ($110 × 33,000) - ($110 × 19,000) = $1,540,000
Diff: 3
Objective: 4
AACSB: Application of knowledge
Objective 3.5
1) The margin of safety is the difference between:
A) budgeted expenses and breakeven expenses
B) budgeted revenues and breakeven revenues
C) actual operating income and budgeted operating income
D) actual sales margin and budgeted sales margin
Diff: 1
Objective: 5
AACSB: Analytical thinking
2) Sensitivity analysis is:
A) a way of determining what will happen if assumptions change
B) a way of seeing how employees will be affected by changes
C) a way of determining how customers will react to new products
D) a way of seeing how far from budget actual results are
Diff: 2
Objective: 5
AACSB: Application of knowledge
3) Stones Manufacturing sells a marble slab for $1,100. Fixed costs are $34,000, while the variable costs are $500 per slab. The company currently plans to sell 240 slabs this month. What is the margin of safety assuming 80 slabs are actually sold? (Round all unit calculations up to the nearest whole number.)
A) $201,300
B) $81,300
C) $25,300
D) $34,000
Diff: 3
Objective: 5
AACSB: Application of knowledge
4) Globus Autos sells a single product. 8,300 units were sold resulting in $83,000 of sales revenue, $20,000 of variable costs, and $14,000 of fixed costs. If variable costs decrease by $1.00 per unit, the new margin of safety is: (Round intermediate calculations to the nearest cent.)
A) $83,000
B) $20,000
C) $66,721
D) $69,000
Diff: 3
Objective: 5
AACSB: Application of knowledge
5) Globus Autos sells a single product. 8,100 units were sold resulting in $84,000 of sales revenue, $25,000 of variable costs, and $14,000 of fixed costs. If Globus reduces the selling price by $1.10 per unit, the new margin of safety is: (Round any intermediary calculations to the nearest cent.)
A) 5,835 units
B) 2,621 units
C) 5,479 units
D) 8,100 units
Diff: 1
Objective: 5
AACSB: Analytical thinking
6) The margin of safety refers to how many more sales are needed in order to breakeven,
Diff: 1
Objective: 5
AACSB: Analytical thinking
7) If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety percentage is 20%.
Diff: 2
Objective: 5
AACSB: Analytical thinking
8) Sensitivity analysis is a simple approach to recognizing uncertainty.
Diff: 1
Objective: 5
AACSB: Analytical thinking
9) The margin of safety may be expressed in units, dollars, or as a percentage.
Diff: 1
Objective: 5
AACSB: Analytical thinking
10) The margin of safety measures of how much sales can decline and still meet a target net income.
Diff: 2
Objective: 5
AACSB: Analytical thinking
11) Dental Comfort Services provides dental cleanings to its patients. The selling price of a cleaning is $150 and the variable costs associated are $85. The monthly relevant fixed costs are $10,000.
Required:
a. What is the breakeven point in cleanings?
b. What is the margin of safety in dollars, assuming sales total $30,000?
c. What is the breakeven level in cleanings, assuming variable costs decrease by 20%?
d. What is the breakeven level in dollars, assuming the selling price goes down by 10% and fixed costs increase $1,000 per month?
a. N = Breakeven units
$150N - $85N - $10,000 = 0
$65N = $10,000
N = $10,000/$65 = 153.8 or 154 cleanings.
b. Margin of safety = $30,000 - ($150 × 154) = $6,900
c. N = Breakeven units
$150N - ($85N × 80%) - $10,000 = 0
$150N - $68N = $10,000
N = $10,000/$68 = 147.06 or 148 (rounded up) cleanings.
d. N = Breakeven dollars
CM% = [($150 × 90%) - 85] / ($150 × 90%) = 35.04%
N = ($10,000 + $1,000) / 35.04%
N = $31,393 (rounded)
Diff: 3
Objective: 5
AACSB: Application of knowledge
12) Explain sensitivity analysis and how do managers use sensitivity analysis to evaluate its implications?
Diff: 2
Objective: 5
AACSB: Analytical thinking
13) ________ is the process of varying key estimates to identify those estimates that are the most critical to a decision.
A) The graph method
B) A sensitivity analysis
C) The degree of operating leverage
D) Sales mix
Diff: 1
Objective: 5
AACSB: Analytical thinking
14) What is sensitivity analysis and how is the CVP model used to examine how actions by management can impact results of operations?
Diff: 2
Objective: 5
AACSB: Analytical thinking
Objective 3.6
Answer the following questions using the information below:
Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet:
OPTION one: Crestview Country Club
a. Fixed rental cost of $1,000
b. $12 per person for food
OPTION two: Tallgrass Country Club
a. Fixed rental cost of $3,000
b. $8.00 per person for food
Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event.
1) Which option provides the least amount of risk?
A) Option one.
B) Option two.
C) Both options provide the same amount of risk.
D) It depends on how many donations it receives.
Diff: 1
Objective: 6
AACSB: Analytical thinking
2) Which option has the lowest breakeven point?
A) Option one.
B) Option two.
C) Both options have the same breakeven point.
D) The lowest breakeven point cannot be determined.
Diff: 2
Objective: 6
AACSB: Analytical thinking
3) Which option provides the greatest operating income if 600 people attend?
A) Option one.
B) Option two.
C) Operating incomes are identical.
D) It depends on how many donations it receives.
Diff: 3
Objective: 6
AACSB: Application of knowledge
4) Which option provides the greatest degree of operating leverage if 600 people attend?
A) Option one.
B) Option two.
C) Both options provide equal degrees of operating leverage.
D) Operating leverage is indeterminable.
Diff: 3
Objective: 6
AACSB: Application of knowledge
5) Kanga Company is considering two different production plans.
Option one: Fixed costs of $10,000 and a breakeven point of 500 units.
Option two: Fixed costs of $20,000 and a breakeven point of 700 units.
Which option should Kanga choose if it is expecting to produce 600 units?
A) Option one.
B) Option two.
C) Both options are equally good.
D) It isn't possible to determine from the information given.
Diff: 2
Objective: 6
AACSB: Application of knowledge
6) Sales of Blistre Autos are 400,000, variable cost is 230,000, fixed cost is 90,000 tax rate is 40%. Calculate the operating leverage of the company.
A) 1.13 times
B) 3.54 times
C) 1.35 times
D) 2.13 times
Diff: 2
Objective: 6
AACSB: Application of knowledge
7) In a company with low operating leverage:
A) fixed costs are more than the contribution margin
B) contribution margin and operating income are inversely related
C) there is a higher possibility of net loss than a higher-leveraged firm
D) less risk is assumed than in a highly leveraged firm
Diff: 1
Objective: 6
AACSB: Analytical thinking
8) If the contribution margin ratio is 0.55, targeted operating income is $100,000, and targeted sales volume in dollars is $500,000, then the degree of operating leverage is:
A) 0.36 times
B) 0.82 times
C) 2.75 times
D) 2.25 times
Diff: 3
Objective: 6
AACSB: Application of knowledge
9) If the contribution margin ratio is 0.55, targeted operating income is $55,000, and fixed costs are $90,000, then sales volume in dollars is: (Round the final answer to the nearest dollar.)
A) $322,222
B) $263,636
C) $163,636
D) $100,000
Diff: 2
Objective: 6
AACSB: Application of knowledge
10) If the contribution margin ratio is 0.3, targeted operating income is $65,000, and targeted sales volume in dollars is $300,000, then total fixed costs are:
A) $40,000
B) $235,000
C) $164,500
D) $25,000
Diff: 3
Objective: 6
AACSB: Application of knowledge
11) Which of the following statements is true?
A) Managers can lower operating risk by changing fixed costs to variable costs in the long-term.
B) Managers can lower operating risk by changing variable costs to fixed costs in the long-term.
C) Managers can lower operating risk by reducing the selling price and increasing volume.
D) Managers can lower operating risk by increasing the selling price and reducing volume.
Diff: 2
Objective: 6
AACSB: Analytical thinking
12) When a greater proportion of costs are fixed costs, then:
A) a small increase in sales results in a small decrease in operating income
B) when demand is low the risk of loss is high
C) a decrease in sales reduces the total fixed cost per unit
D) a decrease in sales reduces the cost per unit
Diff: 2
Objective: 6
AACSB: Analytical thinking
13) Companies with a greater proportion of direct costs have a greater risk of loss than companies with a greater proportion of indirect costs.
Diff: 2
Objective: 6
AACSB: Analytical thinking
14) The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income.
Diff: 1
Objective: 6
AACSB: Analytical thinking
15) If a company increases fixed costs, then the breakeven point will be lower.
Diff: 2
Objective: 6
AACSB: Analytical thinking
16) Companies that are substituting variable costs for fixed costs receive a greater per unit return above the breakeven point.
Diff: 2
Objective: 6
AACSB: Analytical thinking
17) A company with a higher degree of operating leverage is at greater risk during economic downturns because of its higher fixed costs.
Diff: 2
Objective: 6
AACSB: Analytical thinking
18) The risk-return tradeoff across alternative cost structures can be measured as operating leverage.
Diff: 1
Objective: 6
AACSB: Analytical thinking
19) If a company has a degree of operating leverage of 4.0, that means a 10% increase in sales will result in a 40% increase in operating income.
Diff: 2
Objective: 6
AACSB: Application of knowledge
20) When a company has the least fixed costs, the company is operating at a very high operating leverage.
Diff: 1
Objective: 6
AACSB: Analytical thinking
21) Query Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth for both display and selling purposes at the annual crafts and art convention. The convention coordinator allows three options for each participating company. They are:
1. paying a fixed booth fee of $5,010, or
2. paying an $4,000 fee plus 10% of revenue made at the convention, or
3. paying 20% of revenue made at the convention.
Required:
a. Compute the breakeven sales in pillows of each option.
b. Which option should Query Company choose, assuming sales are expected to be 800 pillows?
a. Option 1 N = Breakeven in pillows
$25N - $10N - $5,010 = 0
$15N - $5,010 = 0
N = $5,010/$15 = 334 pillows
Option 2 N = Breakeven in pillows
$25N - $10N - 0.10($25N) - $4,000 = 0
$12.5N - $4,000 = 0
N = $4,000/$12.5 = 320 pillows
Option 3 N = Breakeven in pillows
$25N - $10N - 0.20($25N) = 0
$10N - $0 = 0
N = $0/$10 = 0 pillows
b. Option 1 profit for 800 pillows = $15 × 800 - $5,010 = $6,990
Option 2 profit for 800 pillows = $12.5 × 800 - 4,000 = $6,000
Option 3 profit for 800 pillows = $10 × 800 = $8,000
Option 3 is the best choice.
Diff: 3
Objective: 6
AACSB: Application of knowledge
22) Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April-June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season.
Selling prices per tire average $75 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $60.
The president of Auto Tires is somewhat displeased with the company's management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the breakeven point.
Required:
a. Why might it be difficult to use CVP in this situation?
b. How can the information be presented in a better format for the president?
a. The accounting system includes some assumptions about the CVP model that does not hold for Auto Tire. The CVP model requires cost and revenue to be linear. During the busy months, the company has costs and revenues which behave differently than during the other months of the year. The revenue line turns down (less slope) with the average selling price per tire decreasing from $75 to $60. The variable costs line probably turns upward (increasing slope) with the additional hourly workers being added to the work force.
b. The accountant may want to present two sets of information regarding the revenue and cost behaviors of the company: one for the busy season and one for the other months of the year. It would show that while the breakeven point actually increases during the busy months (a negative), the marginal income increases because of increased sales (a positive).
Diff: 3
Objective: 6
AACSB: Analytical thinking
23) Dolph and Evan started the DE Restaurant in 2018. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month.
During the past two years, the business has grown with average sales increasing 1% a month. This situation pleases both Dolph and Evan, but they do not understand how sales can grow by 1% a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits.
Required:
Explain why the profits have increased at a faster rate than sales. Use the terms variable costs and fixed costs in your response.
Diff: 3
Objective: 6
AACSB: Analytical thinking
24) Freddie's Company has mostly fixed costs and Valerie's Company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why.
Diff: 2
Objective: 6
AACSB: Analytical thinking
25) Suppose a company decided to automate a production line. Explain what effects this would have on a company's cost structure using CVP terminology. Could these changes have any possible negative effect on the firm?
Diff: 2
Objective: 6
AACSB: Analytical thinking
26) If a company has a degree of operating leverage of 4 and sales increase by 25%, then:
A) total fixed costs will increase by 100%
B) total costs will increase by 100%
C) profit will increase by 75%
D) profit will increase by 100%
Diff: 3
Objective: 6
AACSB: Application of knowledge
27) If a company would like to increase its degree of operating leverage it should:
A) increase its sales relative to its fixed costs
B) increase its sales relative to its variable costs
C) increase its variable costs relative to its fixed costs
D) increase its fixed costs relative to its variable costs
Diff: 2
Objective: 6
AACSB: Analytical thinking
28) The risk/return tradeoff across alternative cost structures can be measured as:
A) sensitivity analysis
B) operating leverage
C) break-even point
D) margin of safety
Diff: 2
Objective: 6
AACSB: Analytical thinking
Objective 3.7
1) The following information is for Alex Corp:
Product X: Revenue $25.00
Variable Cost $5.00
Product Y: Revenue $20.00
Variable Cost $10.00
Total fixed costs $57,500
What is the breakeven point assuming the sales mix consists of two units of Product X and one unit of Product Y?
A) 1,437.5 units of Y and 2,875 units of X
B) 2,300 units of Y and 1,150 units of X
C) 1 units of Y and 2,875 units of X
D) 1,150 units of Y and 2,300 units of X
Diff: 3
Objective: 7
AACSB: Application of knowledge
2) The following information is for Alex Corp:
Product X: Revenue $17.50
Variable Cost $5.00
Product Y: Revenue $36.50
Variable Cost $11.50
Total fixed costs $67,500
What is the operating income, assuming actual sales total 60,000 units, and the sales mix is two units of Product X and one unit of Product Y?
A) $932,500
B) $1,000,000
C) $1,430,000
D) $1,067,500
Diff: 3
Objective: 7
AACSB: Application of knowledge
Answer the following questions using the information below:
The following information is for Alex Corp:
Product X: Revenue $15.00
Variable Cost $2.50
Product Y: Revenue $25.00
Variable Cost $10.00
Total fixed costs $50,000
3) Assume the sales mix consists of one unit of Product X and one unit of Product Y. If the sales mix shifts to one unit of Product X and two units of Product Y, then the weighted-average contribution margin will:
A) increase per unit
B) stay the same
C) decrease per unit
D) decrease by $0.50 per unit
Diff: 3
Objective: 7
AACSB: Application of knowledge
4) Assume the sales mix consists of one unit of Product X and one unit of Product Y. If the sales mix shifts to one unit of Product X and two units of Product Y, then the breakeven point will:
A) increase
B) stay the same
C) decrease
D) will be greater than the original breakeven point
Diff: 2
Objective: 7
AACSB: Application of knowledge
5) The following information is for the Jeffries Corporation:
Product A: Selling price per unit $17.00
Variable cost per unit $12.00
Product B: Selling price per unit $42.00
Variable cost per unit $17.00
Total fixed costs $554,000
What is the breakeven point, assuming the sales mix consists of three units of Product A and one unit of 
A) 13,190 units of A and 4,397 units of B
B) 41,550 units of A and 13,850 units of B
C) 110,800 units of A and 0 units of B
D) 13,850 units of A and 41,550 units of B
Diff: 3
Objective: 7
AACSB: Application of knowledge
6) The following information is for the Jeffries Corporation:
Product A: Revenue $12.00
Variable Cost $8.00
Product B: Revenue $36.00
Variable Cost $18.00
Total fixed costs $226,500
What is the operating income of Jeffries Corporation, assuming actual sales total 33,000 units, and the sales mix is three units of Product A and one unit of Product B?
A) $21,000
B) $247,500
C) $594,000
D) $474,000
Diff: 3
Objective: 7
AACSB: Application of knowledge
Answer the following questions using the information below:
The following information is for the Jeffries Corporation:
Product A: Revenue $16.00
Variable Cost $12.00
Product B: Revenue $24.00
Variable Cost $16.00
Total fixed costs $75,000
7) Assume the sales mix consists of three units of Product A and one unit of Product B. If the sales mix shifts to four units of Product A and one unit of Product B, then the weighted-average contribution margin will:
A) increase per unit
B) stay the same
C) decrease per unit
D) cannot be determined from this information
Diff: 2
Objective: 7
AACSB: Application of knowledge
8) Assume the sales mix consists of three units of Product A and one unit of Product B. If the sales mix shifts to four units of Product A and one unit of Product B, then the breakeven point will:
A) increase
B) stay the same
C) decrease
D) cannot be determined from this information
Diff: 2
Objective: 7
AACSB: Application of knowledge
9) Assuming a constant mix of 3 units of X for every 1 unit of Y.
X Y Total
Sales $25 $44
VC 19 24
Total fixed costs $82,000
The breakeven point in units would be:
A) 6,474 units of X and 2,158 units of Y
B) 2,158 units of X and 2,158 units of Y
C) 4,316 units of X and 12,948 units of Y
D) 2,158 units of X and 6,474 units of Y
Diff: 3
Objective: 7
AACSB: Application of knowledge
10) In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin then:
A) total revenues will increase
B) interest cost will decrease
C) total contribution margin will increase
D) operating income will decrease
Diff: 3
Objective: 7
AACSB: Analytical thinking
11) The quantity or number of units of different types of products that together make up total sales or the projected total sales of a company is called:
A) sales mix
B) product mix
C) unit mix
D) quantity mix
Diff: 1
Objective: 7
AACSB: Analytical thinking
12) Sales mix is the quantities or proportion of various products or services that constitute a company's total unit sales.
Diff: 1
Objective: 7
AACSB: Analytical thinking
13) If the sales mix shifts toward the lower-contribution-margin product, the breakeven quantity will decrease.
Diff: 1
Objective: 7
AACSB: Application of knowledge
14) In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin, the operating income will be lower.
Diff: 1
Objective: 7
AACSB: Application of knowledge
15) In most multiproduct situations when sales mix shifts toward the product with the highest contribution margin, operating income will be higher.
Diff: 2
Objective: 7
AACSB: Application of knowledge
16) To calculate the breakeven point in a multiproduct situation, one must assume that the sales mix of the various products remains constant.
Diff: 2
Objective: 7
AACSB: Application of knowledge
17) If a company's sales mix is 2 units of product A for every 3 units of product B, and the company sells 3,000 units in total of both products, only 2,000 units of product A will be sold.
Diff: 2
Objective: 7
AACSB: Analytical thinking
18) Ken's Beer Emporium sells beer and ale in both pint and quart sizes. If Ken's sells twice as many pints as it sells quarts, and sells 2,400 items total, it will sell 800 quarts of ale.
Diff: 2
Objective: 7
AACSB: Analytical thinking
19) All other factors being equal, for any given total quantity of units sold, the breakeven point increases and operating income increases if the sales mix shifts toward products with higher contribution margins.
Diff: 2
Objective: 7
AACSB: Analytical thinking
20) Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $30 and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals:
1. paying a fixed rent of $15,000 a month, or
2. paying a base rent of $9,000 plus 10% of revenue received, or
3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000.
Required:
a. For each option, compute the breakeven sales and the monthly rent paid at break-even.
b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000 units.
a. Option 1 N = Breakeven units
$30N - $18N - $15,000 = 0
$12N - $15,000 = 0
N = $15,000/$12 = 1,250 units
Rent at breakeven = $15,000
Option 2 N = Breakeven units
$30N - $18N - 0.10($30N) - $9,000 = 0
$9N - $9,000 = 0
N = $9,000/$9 = 1,000 units
Rent at breakeven = $9,000 + (0.10 × $30 × 1,000) = $12,000
Option 3 N = Breakeven units
$30N - $18N - 0.20($30N) - $4,800 = 0
$6N - $4,800 = 0
N = $4,800/$6 = 800 units
Rent at breakeven = $4,800 + (0.20 × $30 × 800) = $9,600
b. Option 3 from 0 to 1,400 units for $4,800 plus $6 per unit.
Option 2 from 1,401 to 2,000 for $9,000 plus $3 per unit.
Option 1 above 2,000 for $15,000.
Option 1 equals Option 2 when sales are 2,000 and favors Option 1 above 2,000 units.
$15,000 = $9,000 + 0.10($30N); $6,000 = $3N; N = 2,000
Option 1 equals Option 3 when sales are 1,700 and favors Option 1 above 1,700 units.
$15,000 = $4,800 + 0.20($30N); $10,200 = $6N; N = 1,700 units
Diff: 3
Objective: 7
AACSB: Application of knowledge
21) Carylon Manufacturing Company produces two products, X and Y. The following information is presented for both products:
X Y
Selling price per unit $40 $25
Variable cost per unit 25 15
Total fixed costs are $275,000.
Required:
a. Calculate the contribution margin for each product.
b. Calculate breakeven point in units of both X and Y if the sales mix is 3 units of X for every unit of Y.
c. Calculate breakeven volume in total dollars if the sales mix is 2 units of X for every 3 units of Y.
a. X: Contribution margin $40 − $25 = $15
Y: Contribution margin $25 − $15 = $10
b. Contribution margin (3 × $15) + (1 × $10) = $55
Breakeven point in units $275,000 / $55 = 5,000 units
X: 5,000 × 3 = 15,000 units
Y: 5,000 × 1 = 5,000 units
c. Contribution margin (2 × $15) + (3 × $10) = $60
Breakeven point in units $275,000 / $60 = 4,583.33 units
X: Dollar sales = 4,583.33 × 2 = 9,167 × $40 = $366,680 (rounded)
Y: Dollar sales = 4,583 × 3 = 13,750 × $25 = $343,750
Total dollar sales = $710,430
Diff: 3
Objective: 7
AACSB: Application of knowledge
22) Stadium EATS Inc. currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of $0.64 per hot dog.
Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a variable cost of $0.72 and new equipment and personnel to produce nachos will increase monthly fixed costs by $8,808. Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs are expected to decline to $20,000.
After the first year of nacho sales, the company president believes that hot dog sales will increase to $33,750 a month and nacho sales will increase to 7,500 units a month.
Required:
a. Determine the monthly breakeven sales in dollars before adding nachos.
b. Determine the monthly breakeven sales during the first year of nachos sales, assuming a constant sales mix of 1 hotdog and 2 units of nachos.
a. Contribution margin = Fixed costs + Profit
= $21,000 + $9,000 = $30,000
Variable costs = Sales - Contribution margin
= $50,000 - $30,000
= $20,000
Units sold = $20,000/$0.64 = 31,250 units
Selling price = $50,000/31,250 = $1.60 per unit
Unit Variable costs = $20,000/31,250= $0.64
N = Breakeven units
$1.60N - $0.64N - $21,000 = 0
$0.96N - $21,000 = 0
N = $21,000/$0.96 = 21,875 units
b. Ratio equal to 1 hot dog to 2 units of nachos.
N = Breakeven number of units of hot dogs
2N = Breakeven number of units of nachos
$3(2)N + $1.60N - $0.72(2N) - $0.64N - $29,808 = 0
$7.60N - $2.08N - $29,808 = 0
N = $29,808/$5.52 = 5,400 hot dogs
Therefore, 5,400 hot dogs and 10,800 units of nachos need to be sold to break even.
Diff: 3
Objective: 7
AACSB: Application of knowledge
23) Fine Suiting Company sells shirts for men and boys. The average selling price and variable cost for each product are as follows:
Men's Boys'
Selling Price $25.00 Selling Price $24.00
Variable Cost $15.40 Variable Cost $16.00
Fixed costs are $35,200.
Required:
a. What is the breakeven point in units for each type of shirt, assuming the sales mix is 1:1?
b. What is the operating leverage, assuming the sales mix is 2:1 in favor of men's shirts, and sales total 5,000 shirts?
a. N = breakeven in boys' shirts N = breakeven in men's shirts
Contribution for men = $25 - $15.40 = $9.60
Contribution for boys = $24 - $16.00 = $8.00.
Total = $9.60 + $8.00 = $17.60
B.E.P = $35,200 / $17.60 = 2,000 units.
b. Total sales = 6,000 units in 2:1 ratio gives $4,000 units for men and 2,000 units for boys. $148,000
Contribution for men = 4,000 × $9.60 = $38,400; Contribution for boys = 2,000 × $8.00 = $16,000.
Total contribution = $54,400
Operating leverage = 454,400 / $148,000 = 0.368
Diff: 3
Objective: 7
AACSB: Application of knowledge
24) Mount Carmel Company sells only two products, Product A and Product B.
Product A | Product B | Total | |
Selling price | $40 | $50 | |
Variable cost per unit | $24 | $40 | |
Total fixed costs | $840,000 |
Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax rate of 30%.
Required:
a. What is the breakeven point in units for each product assuming the sales mix is 2 units of Product A for each unit of Product B?
b. What is the breakeven point if Mount Carmel's tax rate is reduced to 25%, assuming the sales mix is 2 units of Product A for each unit of Product B?
c. How many units of each product would be sold if Mount Carmel desired an after-tax net income of $73,500, facing a tax rate of 30%?
a. N = breakeven in product B 2N = breakeven in product A
($40 × 2N) + ($50 × N) - ($24 × 2N) - ($40 × N) - $840,000 = 0
($130 × N) - ($88 × N) - $840,000 = 0
$42N - $840,000 = 0
N = $840,000 / $42 = 20,000
Therefore, to break even, 40,000 units of Product A and 20,000 units of Product B need to be sold.
b. The breakeven point would be the same. At the breakeven point there is no pre-tax income, so the tax rate change is irrelevant in this situation.
c. N = number of units of product B 2N = number of units of product A
($40 × 2N) + ($50 × N) - ($24 × 2N) - ($40 × N) - $840,000 =
$73,500 / (1 - .3)
($130 × N) - ($88 × N) - $840,000 = $105,000
$42N - $945,000 = 0
N = $945,000 / $42 =22,500
Therefore, to meet the profit goal, 2 × N = 45,000 units of Product A and N = 22,500 units of Product B need to be sold.
Diff: 3
Objective: 7
AACSB: Application of knowledge
25) Atlanta Radio Supply sells only two products, Product X and Product Y.
Product X | Product Y | Total | |
Selling price | $25 | $45 | |
Variable cost per unit | $20 | $35 | |
Total fixed costs | $350,000 |
Atlanta Radio Supply sells three units of Product X for each two units it sells of Product Y. Atlanta Radio Supply has a tax rate of 25%.
Required:
a. What is the breakeven point in units for each product, assuming the sales mix is 3 units of Product X for each two units of Product Y?
b. How many units of each product would be sold if Atlanta Radio Supply desired an after-tax net income of $210,000, using its tax rate of 25%?
a. 3N = breakeven in product X 2N = breakeven in product Y
($25 - $20) × 3N + ($45 - $35) × 2N - $350,000 = 0
$15N + $20N- $350,000 = 0
$35N - $350,000 = 0
N = $350,000 / $35 = 10,000
Therefore, to break even, 30,000 (10,000 × 3) units of Product X and 20,000 (10,000 × 2) units of Product Y need to be sold.
b. 3N = number of units of product X 2N = number of units of product Y
($25 - $20) × 3N + ($45 - $35) × 2N - $350,000 = $210,000 / (1 - .25)
$15N + $20N- $350,000 = $280,000
$35N- $350,000 = $280,000
$35N - $630,000 = 0
N = $630000 / $35 = 18,000
Therefore, to meet the profit goal, 3 × N = 54,000 units of Product X and 2 × N = 36,000 units of Product Y need to be sold.
Diff: 3
Objective: 7
AACSB: Application of knowledge
26) What is sales mix? How do companies choose their sales mix?
Diff: 2
Objective: 7
AACSB: Analytical thinking
27) Stella Company sells only two products, Product A and Product B.
Product A | Product B | Total | |
Selling price | $50 | $20 | |
Variable cost per unit | $17 | $4 | |
Total fixed costs | $2,042,000 |
Stella sells two units of Product A for each unit it sells of Product B. Stella faces a tax rate of 30%. Stella desires a net after-tax income of $63,000. The breakeven point in units would be:
A) 23,805 units of Product A and 47,610 units of Product B
B) 26,000 units of Product A and 52,000 units of product B
C) 47,610 units of Product A and 23,805 units of Product B
D) 52,000 units of Product A and 26,000 units of Product B
Diff: 3
Objective: 7
AACSB: Application of knowledge
Objective 3.8
1) Service companies and not-for-profit organizations:
A) cannot use CVP because they don't manufacture a product
B) cannot use CVP because there is no way to distinguish fixed and variable costs
C) can use CVP by focusing on measuring the organization's output
D) can use CVP by treating all costs as variable
Diff: 2
Objective: 8
AACSB: Analytical thinking
2) While-You-Train is a not-for-profit organization that aids the unemployed by supplementing their incomes by $7,000 annually, while they seek new employment skills. The organization has fixed costs of $230,000 and the budgeted appropriation for the year totals $720,000. How many individuals can receive financial assistance this year?
A) 33 people
B) 103 people
C) 70 people
D) 136 people
Diff: 2
Objective: 8
AACSB: Application of knowledge
3) Helping Hands is a nonprofit organization that supplies electric fans during summer for individuals in need. Fixed costs are $225,000. The fans cost $28 each. The organization has a budgeted appropriation of $690,000. How many people can receive a fan during summer?
A) 8,036 people
B) 16,608 people
C) 24,643 people
D) 32,679 people
Diff: 2
Objective: 8
AACSB: Application of knowledge
4) To apply CVP analysis in a not-for profit organization:
A) managers need to focus on the customer base rather than the cost drivers
B) managers need to focus on measuring their output, which is the same as tangible units sold by manufacturing and merchandising companies
C) managers need to focus on measuring their input, which is different from the tangible units consumed by manufacturing and merchandising companies
D) managers need to focus on measuring their output, which is different from the tangible units sold by manufacturing and merchandising companies
Diff: 2
Objective: 8
AACSB: Analytical thinking
5) Which of the following is an output measure for a hospital?
A) number of doctors needed to cater to patients
B) number of patients admitted every day in a hospital
C) number of days spent by a patient in a hospital
D) charges applicable on the number of days spent by a patient in a hospital
Diff: 2
Objective: 8
AACSB: Analytical thinking
6) A manager of government agency uses CVP to analyze a proposed reduction in an appropriation and most likely arrives at all of the following conclusions except:
A) other factors remain unchanged, maintaining current services levels will be difficult
B) a reduction in variable costs per output (services) might help maintain service levels
C) a reduction in fixed costs might help maintain service levels
D) an improvement in the contribution margin will help maintain service levels
Diff: 1
Objective: 8
AACSB: Analytical thinking
7) The CVP for a not-for-profit organization most likely focuses on outputs related to programs that serve as opposed to tangible outputs.
Diff: 2
Objective: 8
AACSB: Analytical thinking
8) Helping Hands is a nonprofit organization that supplies electric fans during summer for individuals in need. Fixed costs are $290,000. The fans cost $26 each. The organization has a budgeted appropriation of $675,000 however, there is an opportunity to write a grant and receive an additional $50,000 of funding without an increase in fixed costs. How many more people can receive a fan during summer if the grant is received?
Diff: 2
Objective: 8
AACSB: Analytical thinking
Objective 3.9
1) Gross margin is:
A) sales revenue less variable costs
B) sales revenue less cost of goods sold
C) contribution margin less fixed costs
D) contribution margin less variable costs
Diff: 1
Objective: 9
AACSB: Analytical thinking
2) In the merchandising sector:
A) only variable costs are subtracted to determine gross margin
B) fixed overhead costs are subtracted to determine gross margin
C) fixed overhead costs are subtracted to determine contribution margin
D) all operating costs are subtracted to determine contribution margin
Diff: 1
Objective: 9
AACSB: Analytical thinking
3) In the manufacturing sector:
A) only variable costs are subtracted to determine gross margin
B) fixed overhead costs are subtracted to determine gross margin
C) fixed overhead costs are subtracted to determine contribution margin
D) all operating costs are subtracted to determine contribution margin
Diff: 2
Objective: 9
AACSB: Analytical thinking
4) Contribution margin is:
A) sales revenue less cost of goods sold
B) sales revenue less variable costs
C) contribution margin less fixed costs
D) contribution margin less variable costs
Diff: 1
Objective: 9
AACSB: Analytical thinking
5) Contribution margin and gross margin are terms that can be used interchangeably.
Diff: 1
Objective: 9
AACSB: Analytical thinking
6) Gross Margin will always be greater than contribution margin.
Diff: 1
Objective: 9
AACSB: Analytical thinking
7) Jacob's Manufacturing sales is equal to production.If Jacob's Manufacturing presented a Financial Accounting Income Statement emphasizing gross margin showing operating income of $180,000. A Contribution Income Statement emphasizing contribution margin would show a different operating income.
Diff: 2
Objective: 9
AACSB: Analytical thinking
8) Beta Corp reported the following:
Revenues $2,500
Variable manufacturing costs $ 300
Variable nonmanufacturing costs $ 480
Fixed manufacturing costs $ 350
Fixed nonmanufacturing costs $ 270
Required:
a. Compute contribution margin.
b. Compute gross margin.
c. Compute operating income.
a. Contribution margin $2,500 − $300 − $480 = $1,720
b. Gross margin $2,500 − $300 − $350 = $1,850
c. Operating income $2,500 − $300 − $480 − $350 − $270 = $1,100
Diff: 3
Objective: 9
AACSB: Application of knowledge
Objective 3.A
1) What would be the expected monetary value for Avalia Corp using the probability method?
Probability Cash Inflows
0.20 $260,000
0.30 $190,000
0.15 $140,000
0.35 $65,000
A) $655,000
B) $163,750
C) $152,750
D) $52,000
Diff: 2
Objective: Appendix
AACSB: Analytical thinking
2) Lobster Liquidators will make $520,000 if the fishing season weather is good, $230,000 if the weather is fair, and would actually lose $50,000 if the weather is poor during the season. If the weather service gives a 45% probability of good weather, a 20% probability of fair weather, and a 35% probability of poor weather, what is the expected monetary value for Lobster Liquidators?
A) $234,000
B) $262,500
C) $700,000
D) $233,333
Diff: 2
Objective: Appendix
AACSB: Application of knowledge
Answer the following questions using the information below:
Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The booth rental options are:
Option 1: $1,000 fixed fee, or
Option 2: $750 fixed fee + 5% of all revenues generated at the fair, or
Option 3: 20% of all revenues generated at the fair.
The product sells for $37.50 per unit. He is able to purchase the units for $12.50 each.
3) How many actions and events will a decision table contain?
A) 1 action and 3 events
B) 1 action and 6 events
C) 2 actions and 3 events
D) 3 actions and 6 events
Diff: 2
Objective: Appendix
AACSB: Application of knowledge
4) Which option should Patrick choose to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold?
A) Option 1
B) Option 2
C) Option 3
D) All options maximize income equally.
Diff: 3
Objective: Appendix
AACSB: Application of knowledge
5) When there are multiple cost drivers the simple CVP formula of Q = (FC + OI)/CMU can still be used.
Diff: 1
Objective: Appendix
AACSB: Analytical thinking
6) There is a difference between a good decision and a good outcome and one can exist without the other.
Diff: 1
Objective: Appendix
AACSB: Analytical thinking
7) A decision table is a summary of the alternative actions, events, outcomes, and probabilities of events.
Diff: 1
Objective: Appendix
AACSB: Analytical thinking
8) Maria makes tortillas and sells them from her house. She is concerned about purchasing too many ingredients and having to throw away unsold tortillas at the end of the day. It costs her $5.00 to make 100 tortillas and she sells them for $20.00 per 100. She has kept track of sales and discovered that she can sell 1,500 tortillas about 25% of the time, 1,000 tortillas about 50% of the time and only 500 tortillas the rest of the time. What is the minimum number of tortillas should she make daily to maximize profit? Round to the nearest 100 tortillas.
She cannot sell more than she makes, so if she makes 500 she has a 100% probability of selling them all for a profit of $75.
If she makes 600, she is likely to sell 575 (500 × 25% + 600 × 50% + 600 × 25%) and so her revenue is $115 (575 × 20/100) and costs are $30 (600 × 5/100) yielding a profit of $85.
Following this logic, at 1,000 tortillas, she is likely to sell 875 with revenue of $175 and costs of $50. This is the minimum number of tortillas she can make to earn $125 profit. At any level above this, up to 1,500 tortillas, her profit will remain $125. Above 1,500 tortillas, her profit will decline due to production exceeding maximum likely sales.
Diff: 3
Objective: Appendix
AACSB: Application of knowledge
9) Lauren had been a manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Lauren was offered the opportunity to purchase a hotel near a vacation area she had often visited. It was a great place surrounded by mountains and known for its scenic beauty. After obtaining a lawyer and an accountant to assist her, Lauren did an analysis of the business and evaluated several contingencies relating to various scenarios. Since the expected monetary value of the various scenarios was much higher than the price of the hotel, she decided to purchase the hotel. She resigned her position, obtained a loan, and purchased the hotel. The following year, there was a severe economic downturn and also a very bad weather season that reduced the number of guests and also caused a resulting mold situation in the hotel building that required expensive repair work. Lauren ran short of cash, became emotionally distraught, and eventually had to sell the hotel at a significant loss. Was it a bad decision for her to purchase the hotel instead of keeping her other managerial position? Explain.
Diff: 3
Objective: Appendix
AACSB: Application of knowledge
Document Information
Connected Book
Horngrens Cost Accounting 17th Global Edition | Test Bank with Answer Key
By Srikant M. Datar, Madhav V. Rajan