Cost-Volume-Profit Analysis Full Test Bank Ch.12 - Accounting What Numbers Mean 12e Complete Test Bank by Marshall. DOCX document preview.
Accounting - What the Numbers Mean, 12e (Marshall)
Chapter 12 Managerial Accounting and Cost-Volume-Profit Relationships
1) Managerial accounting supports the management process least significantly by:
A) measuring and reporting financial results after the fact.
B) planning the goals and objectives of the entity.
C) helping management identify and measure the degree to which the goals have been accomplished.
D) establishing budget practices to be followed during a period of time.
2) Activities included in a generally accepted definition of management accounting include:
A) planning, organizing, controlling.
B) planning, operating, reporting.
C) preparing, operating, creating.
D) preparing, organizing, converting.
3) Which of the following activities is not part of the management planning and control cycle?
A) Data collection and performance feedback.
B) Implementation of plans.
C) Providing information to investors and creditors.
D) Revisiting plans.
4) Implementing plans in the planning and control cycle relates to the act of:
A) planning.
B) managing.
C) controlling.
D) revising plans.
5) Which of the following statements does not describe a characteristic of management accounting?
A) Management accounting must conform to GAAP.
B) Approximate amounts rather than accurate amounts or refined estimates are often used in management accounting.
C) Management accounting places a great deal of emphasis on the future.
D) Management accounting is more concerned with units of the organization rather than with the organization as a whole.
6) Managerial accounting, as compared to financial accounting:
A) must conform to GAAP.
B) places a great deal of emphasis on historical transactions.
C) uses frequent and prompt control reports.
D) focuses on information prepared for the investors and creditors.
7) Management accounting:
A) is a highly technical subject that people in personnel or engineering should not be expected to understand.
B) is performed by individuals who seldom work with people in other functional areas of the organization.
C) is the principal activity involved in determining the goals and objectives of the entity.
D) uses economic and financial information to plan and control many activities of the entity and to support the management decision-making process.
8) Managerial accounting, as opposed to financial accounting, is primarily concerned with:
A) preparing the current balance sheet of the company.
B) present and future planning and control.
C) providing information to investors and creditors.
D) historical results of operations.
9) Managerial accounting can best be described as:
A) the preparation and distribution of the financial statements.
B) the preparation and distribution of the corporate tax return.
C) the preparation and use of accounting information within the organization.
D) meeting the requirements of generally accepted accounting principles.
10) Simplifying assumptions identified for the use of cost behavior pattern data include:
A) relevant range and liquidity.
B) fixed activity and linearity.
C) linearity and relevant range.
D) fixed range and variability.
11) The relevant range concept refers to:
A) a firm's range of profitability.
B) a firm's range of sales.
C) a firm's range of rates of return.
D) a firm's range of activity.
12) Which of the following is another term for mixed costs?
A) Semifixed costs.
B) Semivariable costs.
C) Component costs.
D) None of the answers are correct.
13) As the total volume of activity changes:
A) the total of variable costs stays the same.
B) the total of fixed costs changes.
C) variable costs per unit change.
D) fixed costs per unit change.
14) Expressing fixed costs on a per unit basis of activity is misleading because:
A) total fixed costs decrease as activity decreases.
B) total fixed costs increase as activity increases.
C) fixed cost per unit increases as activity increases.
D) fixed cost per unit decreases as activity increases.
15) The formula for expressing the total of a fixed, variable, or mixed cost at any level of activity is:
A) total cost = fixed cost + (variable rate × volume of activity).
B) total cost = fixed cost × volume of activity.
C) total cost = fixed cost × variable rate.
D) total cost = fixed cost – variable cost.
16) When using a cost formula to determine total expected costs for cost items having a mixed (semi-variable) cost behavior pattern, total costs are expected to decrease and per unit variable costs are expected to:
A) increase as the level of activity increases.
B) decrease as the level of activity decreases.
C) decrease as the level of activity increases.
D) remain constant as the level of activity decreases.
17) Cost behavior refers to:
A) costs that are both good and bad.
B) costs that increase at a quicker rate than others.
C) costs that decrease at a quicker rate than others.
D) costs that are variable or fixed.
E) None of the answers are correct.
18) When the cost behavior pattern has been identified as fixed at a certain volume of activity:
A) any change in volume will probably cause the cost to change.
B) it is appropriate to express the cost on a per unit of activity basis.
C) the total cost will not change even if the volume of activity changes substantially.
D) the total cost may change if the volume of activity changes substantially.
19) Knowing the behavior pattern of a cost is important to determine the effect on net income of a change in sales volume because as sales volume increases or decreases:
A) net income will change proportionately.
B) the effect on net income will depend on the behavior pattern of various costs.
C) fixed costs will rise proportionately.
D) variable costs will not change.
20) As the level of activity increases:
A) fixed cost per unit increases.
B) variable cost per unit increases.
C) variable cost per unit decreases.
D) fixed cost per unit decreases.
21) As the level of activity decreases:
A) fixed cost per unit decreases.
B) variable cost per unit decreases.
C) fixed cost remains constant in total.
D) variable cost remains constant in total.
22) An example of a cost that is likely to have a variable cost behavior pattern is:
A) salespersons' salaries.
B) depreciation of plant equipment.
C) property taxes.
D) materials used in production.
23) An example of a cost likely to have a fixed behavior pattern is:
A) sales force commission.
B) production labor wages.
C) advertising cost.
D) electricity cost for packaging equipment.
24) An example of a cost likely to have a mixed behavior pattern is:
A) sales force commission.
B) raw material cost.
C) depreciation of production equipment.
D) electricity cost for the manufacturing plant.
25) The term "relevant range" is used to describe:
A) the range of activity where costs will always fluctuate.
B) the range of activity where fixed costs change proportionately as activity changes.
C) the range of activity where total variable cost remains unchanged as activity changes.
D) the range of activity where a particular relationship between fixed and variable costs stays valid.
26) When the firm's activity requires it to operate at a level above the upper boundary of the relevant range, fixed expenses are likely to:
A) increase.
B) decrease.
C) remain the same.
D) be eliminated.
27) Which of the following is the correct calculation for the contribution margin ratio?
A) Sales revenue divided by variable costs.
B) Sales revenue divided by contribution margin.
C) Contribution margin divided by sales revenue.
D) Contribution margin divided by variable costs.
28) The cost of a single unit of product in excess of the product's breakeven point expressed in units is:
A) its fixed cost and variable cost.
B) its fixed cost only.
C) its variable cost only.
D) None of the answers are correct.
29) What percentage of the contribution margin is profit on units sold in excess of the breakeven point?
A) It's 50% of the contribution margin ratio.
B) It's equal to the variable cost ratio.
C) It's equal of the gross profit ratio.
D) It's 100%.
30) The concept of operating leverage refers to which of the following?
A) Operating income changes proportionately more than revenues for any given change in activity level.
B) Operating income changes proportionately less than revenues for any given change in activity level.
C) Operating income changes proportionately more than income for any given change in activity level.
D) Operating income changes proportionately less than income for any given change in activity level.
31) To which function of management is an understanding of Cost-Volume-Profit relationships most relevant?
A) Planning.
B) Organizing.
C) Directing.
D) Managing.
32) The scattergram allows cost-volume relationships to be visually scanned for outlier observations that should be:
A) included in the calculation of the cost formula of a mixed cost.
B) ignored in the calculation of the cost formula of a mixed cost.
C) included in the calculation of the fixed cost component of the mixed cost.
D) included in the calculation of the variable rate component of the mixed cost.
33) When the high-low method of estimating a cost behavior pattern is used:
A) cost and volume data must be reviewed for outliers.
B) the direct result of the high-low calculations is the fixed expense amount.
C) the highest and lowest sales price and volume amounts are used in the calculation.
D) the resulting cost formula will explain total cost accurately for every value between the high and low volumes.
34)
Month | Total Maintenance Cost |
| Production Volume (units) | ||||||
January | $ | 1,980 |
|
| 1,850 | units | |||
February | $ | 1,800 |
|
| 1,500 | units | |||
March | $ | 2,200 |
|
| 2,600 | units | |||
April | $ | 2,180 |
|
| 2,275 | units | |||
May | $ | 2,300 |
|
| 2,750 | units | |||
Using the high-low method, the variable rate for maintenance is:
A) $0.40.
B) $0.75.
C) $1.50.
D) $2.00.
35)
Month | Total Maintenance Cost |
| Production Volume (units) | ||||||
January | $ | 1,980 |
|
| 1,850 | units | |||
February | $ | 1,800 |
|
| 1,500 | units | |||
March | $ | 2,200 |
|
| 2,600 | units | |||
April | $ | 2,180 |
|
| 2,275 | units | |||
May | $ | 2,300 |
|
| 2,750 | units | |||
Using the high-low method, the monthly fixed component of maintenance cost is:
A) $1,600.
B) $1,200.
C) $1,100.
D) $1,300.
36) The cost formula for monthly customer order processing cost has been established as $100 + $0.15 per order. It is expected that 5,600 orders will be processed in May and 6,400 in June. Total order processing costs for May and June combined will be estimated to be:
A) $940.
B) $1,060.
C) $2,000.
D) $2,500.
37) As compared to a traditional income statement format, an income statement organized by cost behavior does not include:
A) operating income.
B) cost of goods sold.
C) contribution margin.
D) revenues.
38) Operating income using the contribution margin format income statement is calculated as:
A) revenue – variable expenses = contribution margin – fixed expenses.
B) revenue – variable expenses = gross profit – fixed expenses.
C) revenue – cost of goods sold = contribution margin – fixed expenses.
D) revenue – cost of goods sold = contribution margin – operating expenses.
39) The contribution margin format income statement:
A) results in a larger amount of operating income than the traditional income statement format.
B) uses a behavior pattern classification for costs rather than a functional cost classification approach.
C) is most frequently used for financial statement reporting purposes.
D) emphasizes that all costs change in proportion to any change in revenues.
40) As compared to a traditional income statement format, which of the following terms do not appear on the contribution margin format income statement?
A) Operating expenses.
B) Contribution margin.
C) Operating income.
D) Variable expenses.
41) The contribution margin format income statement is organized by:
A) responsibility centers.
B) functional classifications.
C) sales territories.
D) cost behavior classifications.
42) A 10% change in a firm's revenues is likely to result in a change of more than 10% in the firm's operating income because:
A) not all of the firm's costs will change in proportion to the revenue change.
B) the firm has financial leverage.
C) the contribution margin ratio will change in proportion to the revenue change.
D) only fixed expenses will change in proportion to the revenue change.
43) A firm has revenues of $150,000, a contribution margin ratio of 35%, and fixed expenses that total $60,000. If revenues increase by $30,000, then:
A) operating income will increase by $10,500.
B) operating income will be 0.
C) fixed expenses will increase by $12,000.
D) the contribution margin ratio will increase by 20%.
44) A management decision that would have a long term influence on the operating leverage of a firm would be:
A) increasing the advertising budget.
B) substituting robots for hourly paid production workers.
C) increasing prices in proportion to raw material cost increases.
D) having a season-end sale of seasonal products.
45)
Selling price per unit | $ | 100 |
|
Variable expenses per unit | $ | 40 |
|
Fixed expenses per month | $ | 60,000 |
|
Operating income at a volume of 4,000 units per month is:
A) $240,000.
B) $200,000.
C) $180,000.
D) $120,000.
46)
Selling price per unit | $ | 100 |
|
Variable expenses per unit | $ | 40 |
|
Fixed expenses per month | $ | 60,000 |
|
The breakeven point in terms of volume of units per month is:
A) 360.
B) 600.
C) 1,000.
D) 1,500.
47)
Selling price per unit | $ | 100 |
|
Variable expenses per unit | $ | 40 |
|
Fixed expenses per month | $ | 60,000 |
|
The breakeven point in terms of total revenues per month is:
A) $30,000.
B) $60,000.
C) $75,000.
D) $100,000.
48)
Selling price per unit | $ | 100 |
|
Variable expenses per unit | $ | 40 |
|
Fixed expenses per month | $ | 60,000 |
|
The contribution margin ratio is:
A) 40%.
B) 60%.
C) 62.5%.
D) 70%.
49)
Selling price per unit | $ | 100 |
|
Variable expenses per unit | $ | 40 |
|
Fixed expenses per month | $ | 60,000 |
|
If sales volume were to decrease 15%, from 4,000 units per month to 3,400 units per month, operating income would:
A) not change.
B) decrease $24,000.
C) decrease $36,000.
D) decrease $40,000.
50)
Selling price per unit | $ | 100 |
|
Variable expenses per unit | $ | 40 |
|
Fixed expenses per month | $ | 60,000 |
|
If the selling price per unit were to drop $2, from $100 to $98, the sales volume were to increase 500 units to 4,500 units per month, and advertising expense were to increase by $1,000:
A) the breakeven point would increase.
B) the breakeven point would decrease.
C) the contribution margin ratio would increase.
D) operating income would decrease.
51) The contribution margin ratio always decreases when the:
A) breakeven point decreases.
B) fixed expenses increase.
C) selling price increases and the variable costs remain constant.
D) variable cost increase and the selling price remains constant.
52) If a firm's fixed costs were increased by $12,000 and the contribution margin ratio remained at 40 percent, then sales must increase by $________ in order to cover the additional fixed expenses:
A) $24,000
B) $30,000
C) $36,000
D) $48,000
53) ABU Co. has several products, each with a different contribution margin ratio. If the same number of units were sold in July as in June, but the sales mix changed:
A) operating income would be the same in June and July.
B) fixed expenses in July would be in a different relevant range than in June.
C) the company's overall contribution margin ratio would be the same in June and July.
D) total contribution margin in July would be different from that in June.
54) A firm's products have an average contribution margin ratio of 40%, which will be maintained for the next month even though fixed expenses are expected to rise by $20,000. In order to keep operating income for the month from being affected, revenues will have to increase by:
A) $8,000.
B) $12,000.
C) $20,000.
D) $50,000.
55) Each of a company's two product lines has a different contribution margin ratio. If the company's total sales remain the same but the sales mix shifts toward selling more of the product with the lower contribution ratio, which of the following is true?
A) Operating income will decrease.
B) The average contribution margin ratio will decrease.
C) The breakeven point will increase.
D) All of the answers are true.
56) Each of a company's several product lines has a different contribution margin ratio. Total sales in 2020 were 20% higher than total sales in 2019. Total contribution margin for 2020 will be:
A) the same as it was in 2019, regardless of changes in sales mix.
B) 20% higher than it was in 2019, regardless of changes in sales mix.
C) more than 20% higher than it was in 2019, if the sales mix changes and proportionately more high contribution margin ratio products are sold in 2020 than in 2019.
D) less than 20% higher than it was in 2019, if the sales mix changes and proportionately more high contribution margin ratio products are sold in 2020 than in 2019.
57) Which activity of the management planning and control process occurs in each phase of the cycle?
A) Planning.
B) Managing.
C) Controlling.
D) Decision making.
58) Production labor wages are an example of a ________ cost behavior pattern.
A) variable
B) semivariable
C) fixed
D) mixed
59) ABC Company's sales are $100,000, fixed costs are $50,000, and variable costs are $30,000. ABC Company's contribution margin and operating income are ________ and ________ respectively.
A) $50,000; $20,000
B) $20,000; $70,000
C) $70,000; $50,000
D) $70,000; $20,000
60) ABC Company's sales are $100,000, fixed costs are $50,000, and variable costs are $30,000. ABC Company's contribution margin ratio is:
A) 20%.
B) 30%.
C) 50%.
D) 70%.
61) If a firm's variable costs are 40% of sales and sales increase by $60,000 this month because of a special promotion, by how much will contribution margin increase?
A) $24,000.
B) $30,000.
C) $36,000.
D) $60,000.
62) A firm's current products have sales of $100,000 and an average contribution margin ratio of 40%. If the firm add a new product with sales of $40,000 and variable costs of $20,000, the firm's new average contribution margin ration will be:
A) 37.8%.
B) 42.9%.
C) 45.0%.
D) 48.7%.
63) XYZ Company has a variable cost ratio of 40%, fixed expenses of $200,000, and desires to earn operating income of $100,000. Total sales revenue required to achieve XYZ Company's desired operating income is:
A) $340,000.
B) $380,000.
C) $420,000.
D) $500,000.
64) Company A has fixed expenses of $150,000 and variable expenses of $75 per unit. Company B has fixed expenses of $300,000 and variable expenses of $50 per unit. The volume of unit sales necessary to produce exactly the same operating income for Company A and Company B is:
A) 2,000.
B) 6,000.
C) 4,000.
D) 8,000.
65) Using the high-low method, Company X has determined the variable portion of its cost formula for electricity to be $2 per unit. For the month of July Company X estimates that total electricity cost will amount to $66,000 based on producing 30,000 units. The amount of fixed electricity cost estimated for July is:
A) $0.
B) $6,000.
C) $18,000.
D) $33,000.
66) Janson Company prepares an income statement for financial accounting purposes using the traditional income statement format, as well as an income statement for managerial accounting purposes using the contribution margin format. Selected information from both income statement formats are as follows:
Revenues | $ | 200,000 |
|
Cost of goods sold | $ | 40,000 |
|
Contribution margin ratio |
| 50 | % |
Operating expenses | $ | 120,000 |
|
Fixed expenses | $ | 60,000 |
|
Using the traditional income statement format, the gross profit ratio is:
A) 20%.
B) 50%.
C) 70%.
D) 80%.
67) Janson Company prepares an income statement for financial accounting purposes using the traditional income statement format, as well as an income statement for managerial accounting purposes using the contribution margin format. Selected information from both income statement formats are as follows:
Revenues | $ | 200,000 |
|
Cost of goods sold | $ | 40,000 |
|
Contribution margin ratio |
| 50 | % |
Operating expenses | $ | 120,000 |
|
Fixed expenses | $ | 60,000 |
|
Using the traditional income statement format, operating income is:
A) $40,000.
B) $80,000.
C) $140,000.
D) $180,000.
68) Janson Company prepares an income statement for financial accounting purposes using the traditional income statement format, as well as an income statement for managerial accounting purposes using the contribution margin format. Selected information from both income statement formats are as follows:
Revenues | $ | 200,000 |
|
Cost of goods sold | $ | 40,000 |
|
Contribution margin ratio |
| 50 | % |
Operating expenses | $ | 120,000 |
|
Fixed expenses | $ | 60,000 |
|
Using the contribution margin format, variable expenses are:
A) $40,000.
B) $60,000.
C) $80,000.
D) $100,000.
69) Janson Company prepares an income statement for financial accounting purposes using the traditional income statement format, as well as an income statement for managerial accounting purposes using the contribution margin format. Selected information from both income statement formats are as follows:
Revenues | $ | 200,000 |
|
Cost of goods sold | $ | 40,000 |
|
Contribution margin ratio |
| 50 | % |
Operating expenses | $ | 120,000 |
|
Fixed expenses | $ | 60,000 |
|
Using the contribution margin format, operating income is:
A) $40,000.
B) $80,000.
C) $140,000.
D) $180,000.
70) Mix Masters, Inc., currently sells Product A and Product B in the following annual sales mix. For the coming year the company expects that sales of Product A will increase by 50% and sales of Product B will decrease by 33.3%. Current contribution margin ratios will remain unchanged for next year as will total fixed costs of $700,000.
| Current Sales Mix | Sales Mix Shift | CM Ratio |
| |||||||||
Product A | $ | 40,000 |
| $ | 60,000 |
| 25 | % |
| ||||
Product B | $ | 60,000 |
| $ | 40,000 |
| 50 | % |
| ||||
Total Sales | $ | 100,000 |
| $ | 100,000 |
|
|
|
| ||||
The breakeven sales for Mix Masters, Inc., before and after the shift in sales mix is:
A) Before $2,800,000; After $1,400,000.
B) Before $2,000,000; After $1,750,000.
C) Before $1,750,000; After $2,000,000.
D) Before $1,400,000; After $2,800,000.
71) Mix Masters, Inc., currently sells Product A and Product B in the following annual sales mix. For the coming year the company expects that sales of Product A will increase by 50% and sales of Product B will decrease by 33.3%. Current contribution margin ratios will remain unchanged for next year as will total fixed costs of $700,000.
| Current Sales Mix | Sales Mix Shift | CM Ratio |
| |||||||||
Product A | $ | 40,000 |
| $ | 60,000 |
| 25 | % |
| ||||
Product B | $ | 60,000 |
| $ | 40,000 |
| 50 | % |
| ||||
Total Sales | $ | 100,000 |
| $ | 100,000 |
|
|
|
| ||||
The impact on operating income for Mix Masters, Inc., because of the shift in sales mix is:
A) $5,000 decrease.
B) $10,000 decrease.
C) $5,000 increase.
D) $10,000 increase.
72) The current cost structure for the production department of Performance, Inc., has fixed expenses of $500,000 and variable expenses of $200 per unit. Unit sales volume is 6,000 units. Performance, Inc., can reduce variable expenses to $100 per unit with automated manufacturing technology. What is the new fixed expense amount after automation that will produce the same current operating income on sales volume of 6,000 units?
A) $500,000.
B) $1,100,000.
C) $1,200,000.
D) $1,700,000.
73) The current cost structure for the production department of Performance, Inc., has fixed expenses of $500,000 and variable expenses of $200 per unit. Unit sales volume is 6,000 units. Performance, Inc., can invest in automated production equipment which will increase its fixed expenses to $980,000. What is the new variable expense per unit after automation that will produce the same current operating income on sales volume of 6,000 units?
A) $80.
B) $100.
C) $120.
D) $200.
74) For each of the following costs, identify the cost behavior as variable, mixed, or fixed:
1. Wages of assembly line workers ________
2. President's salary ________
3. Plant utilities ________
4. Sales force commissions ________
5. Shipping costs ________
6. Factory rent ________
7. Research and development expenses ________
8. Property taxes ________
9. Advertising ________
10. Supplies used in production ________
75) XYZ Company incurred the following costs for the month of August when it observed an activity level of 10,000 units.
Activity level in units |
| 10,000 |
|
Variable costs | $ | 30,000 |
|
Fixed costs |
| 50,000 |
|
Mixed costs |
| 40,000 |
|
Total costs | $ | 120,000 |
|
During October, the activity level was 16,000 units, and the total costs incurred were $150,000.
a. Calculate the variable costs, fixed costs, and mixed costs incurred during October.
b. Use the high-low method to calculate the cost formula for mixed costs.
c. If the activity level were expected to be 13,800 units for the month of December, what amount of total costs would be expected?
76) During the months of January through June, the following total utility costs were paid at various production volumes:
Month | Total Utility Cost |
| Total Production Volume | |||
January | $ | 10,000 |
|
| 32,000 | units |
February |
| 14,000 |
|
| 52,000 | units |
March |
| 16,000 |
|
| 64,000 | units |
April |
| 12,000 |
|
| 40,000 | units |
May |
| 8,000 |
|
| 24,000 | units |
June |
| 20,000 |
|
| 72,000 | units |
a. Use the high-low method to calculate the cost formula utility costs.
b. If the production volume were expected to be 50,000 units for the month of July, what amount of total costs would be expected?
77) Preppy Co. makes and sells a single product. The current selling price is $30 per unit. Variable costs are $21 per unit, and fixed expenses total $90,000 per month. Sales volume for July totaled 12,000 units.
a. Calculate the operating income for July.
b. Calculate the breakeven point in units sold and total revenues.
c. Management is considering the use of automated production equipment. If this were done, variable costs would drop to $15.00 per unit, but fixed expenses would increase to $100,000 per month.
1. Calculate operating income at a volume of 12,000 units per month with the new cost structure.
2. Calculate the breakeven point in units with the new cost structure.
78) Presented below is the income statement for Ackee Food Center for the month of July:
Sales | $ | 1,280,000 |
|
Cost of goods sold |
| 1,180,000 |
|
Gross profit | $ | 100,000 |
|
Operating expenses |
| 64,000 |
|
Operating income | $ | 36,000 |
|
Based on an analysis of cost behavior patterns, it has been determined that the company's contribution margin ratio is 15 percent.
(a.) Rearrange the above income statement to the contribution margin format.
(b.) If sales increase by 10 percent, what will be the firm's operating income?
(c.) Calculate the amount of revenue required for Ackee's Food Center to break even.
79) Presented below is the income statement for Breckenridge Farms for the month of October:
Sales | $ | 220,000 |
|
Cost of goods sold |
| (114,000 | ) |
Gross profit | $ | 106,000 |
|
Operating expenses |
| (76,000 | ) |
Operating income | $ | 30,000 |
|
Based on an analysis of cost behavior patterns, it has been determined that the company's contribution margin ratio is 30%.
(a.) Rearrange the income statement to the contribution margin format.
(b.) If sales increase by 20 percent, what will be the firm's operating income?
(c.) Calculate the amount of revenue required for Breckenridge Farms to break even.
80) Krultz Corp. has annual revenues of $760,000, an average contribution margin ratio of 30 percent, and fixed expenses of $75,000.
(a.) Management is considering adding a new product to the company's product line. The new item will have $21 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio.
(b.) If the new product adds an additional $36,000 to Krultz's fixed expenses, how many units of the new product must be sold to break even on the new product?
(c.) If 12,000 units of the new product could be sold at a price of $32 per unit, and the company's other business did not change, calculate Krultz's total operating income and average contribution margin ratio.
81) SoundPro, Inc. produces amplifiers for electric guitars. The firm's income statement showed the following:
Revenues (16,000 units) | $ | 960,000 |
|
| 100 | % |
Variable expenses |
| (672,000 | ) |
| 70 | % |
Contribution margin | $ | 288,000 |
|
| 30 | % |
Fixed expenses |
| (225,000 | ) |
|
|
|
Operating income | $ | 63,000 |
|
|
|
|
An automated machine has been developed that can produce several components of the amplifiers. If the machine is purchased, fixed expenses will increase to $526,500 per year. The firm's production capacity will increase, which is expected to result in a 10 percent increase in sales volume. It is also estimated that the variable expense ratio will be reduced to half of what it is now.
(a.) Calculate the firm's current contribution margin per unit and breakeven point in units.
(b.) Calculate the firm's contribution margin per unit and breakeven point in terms of units if the new machine is purchased.
(c.) Calculate the firm's operating income assuming that the new machine is purchased.
(d.) Do you believe that management of SoundPro, Inc. should purchase the new machine? Explain your answer.
82) Obed Corp. makes three models of high performance cross country ski machines. Current operating data are summarized below:
| MySki |
| YourSki |
| OurSki | |||||||||||
Selling Price/Unit | $ | 400 |
|
| $ | 500 |
|
| $ | 250 |
| |||||
Variable Cost/Unit | $ | 100 |
|
| $ | 200 |
|
| $ | 150 |
| |||||
Monthly Sales Volume |
| 600 |
|
|
| 400 |
|
|
| 500 |
| |||||
Fixed expenses per month total $185,820.
(a) Calculate the contribution margin ratio for each product.
(b) Calculate the firm's overall contribution margin ratio.
(c) Calculate the firm's breakeven point in sales dollar.
(d) Calculate the firm's operating income.
(e) Management is considering the elimination of the OurSki model due to low sales volume. As a result, total fixed expenses can be reduced by $60,000 per month. Assuming that this change would not affect the other models, would you recommend the elimination of the OurSki model?
83) Management of ABC Company is considering new production robotics to replace some current manual labor operations for one of their product lines. ABC's current cost structure for this product line consists of variable expenses of $40 per unit and fixed expenses totaling $86,400 per month. If the robotics were installed, variable expenses would drop to $28 per unit, but fixed expenses would increase to $135,600 per month.
(a.) | Define the term indifference point. |
(b.) | Calculate the indifference point between the alternative cost structures for ABC Company's product line. |
(c.) | Explain how ABC's management would use the indifference point in the decision to replace the manual operations with the new production robotics. |
84) Pineapple Corp. has annual revenues of $600,000, fixed expenses of $200,000, and an average contribution margin ratio of 30%.
(a) Management is considering adding a new product to the company's product line. The new item will have $14.00 of variable costs per unit. Calculate the selling price that will be required for this product to maintain the 30% average contribution margin ratio on current sales.
(b) If the new product adds an additional $63,000 to Pineapple's fixed expenses, how many units of the new product must be sold at the price calculated in part (a) in order to break even on the new product?
(c) If 25,000 units of the new product could be sold at a price of $18.00 per unit, and the company's other business did not change, calculate Pineapple's total operating income and average contribution margin ratio.