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Accounting
Q:
A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and volume.
Q:
The high-low method can be used to derive an estimated line of cost behavior.
Q:
The high-low method of deriving an estimated cost line uses all the data points available.
Q:
Least-squares regression is a statistical method for deriving an estimated line of cost behavior.
Q:
Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.
Q:
The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.
Q:
The contribution margin per unit is equal to the sales price per unit minus the variable costs per unit.
Q:
Contribution margin is the amount of sales that exceeds total variable costs.
Q:
The method most likely to produce the most precise line of cost behavior is the scatter diagram.
Q:
The margin of safety can be expressed in units of product, in dollars, or as a percent of sales.
Q:
The dollar amount of sales needed to achieve a target after-tax income is computed by dividing the sum of fixed costs plus the desired after-tax income plus income taxes by the contribution margin ratio.
Q:
The margin of safety is the amount that sales can drop before the company incurs a loss.
Q:
Cost-volume-profit analysis can be used to predict the effects of reduced selling prices, increased fixed costs, and reduced variable costs on break-even points.
Q:
Cost-volume-profit analysis provides approximate, but not precise, answers to questions about costs, volumes, and profits.
Q:
Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes, price changes, and volume changes.
Q:
Cost-volume-profit analysis is frequently based on the assumption that the production level is the same as the sales level.
Q:
The relevant range of operations excludes extremely high and low levels of production that are not likely to occur.
Q:
The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.
Q:
A step-wise variable cost can be separated into a fixed component and a variable component.
Q:
As the level of output activity increases, the variable cost per unit remains constant.
Q:
As the level of output activity increases, fixed cost per unit remains constant.
Q:
Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to perform cost-volume-profit analysis.
Q:
The ratio of the volumes of the various products sold by a company is called the ______________________________.
Q:
A graphic presentation of cost-volume-profit data is known as a __________________ graph (or chart); this presentation is also sometimes called a ______________ chart.
Q:
The ______________________ is the sales level at which a company neither earns a profit nor incurs a loss.
Q:
_____________ is a statistical method of identifying an estimated line of cost behavior.
Q:
One aid in measuring cost behavior involves creating a display of the data about past costs in graphical form. Such a visual display is called a ______________________.
Q:
Examining strategies that impact several estimates in the CVP analysis is known as _______________________.
Q:
The difference between the unit sales price and the unit variable cost of an item is defined as the _________________________.
Q:
The unit contribution margin divided by the selling price per unit is the _____________.
Q:
There are at least three different methods to separate costs into fixed and variable. These methods are the _______________, _______________, and _______________ methods.
Q:
Solving problems to determine the relationship of cost, volume, and profit often commences with the measurement of the ________ point. Further analysis emphasizing profitability may be accomplished by measuring the __________ and _________________.
Q:
Three important assumptions in cost-volume-profit analysis is that (1) _______________ per unit is constant, (2) _____________ per unit is constant, and (3) ______________ are constant in total.
Q:
A __________ cost is one that includes both fixed and variable cost components; a ______________ cost is one that reflects a step pattern.
Q:
A _______________ cost is one that remains unchanged in amount when volume of activity varies from period to period within a relevant range. A ______________ cost is one that changes in proportion to changes in volume of activity.
Q:
Bristol Companys contribution margin income statement is presented below. Sales for the current period consisted of 7,500 units. Compute the companys break-even point in (a) units, and (b) dollars. Compute the margin of safety in (c) dollars and (d) percent. Bristol Company Contribution Margin Income Statement Sales
$225,000 Variable costs
135,000 Contribution margin
90,000 Fixed costs
48,000 Net income
$42,000
Q:
Q:
Spruce Company is considering the production and sale of a new product with the following sales and cost data: unit sales price, $350; unit variable costs, $180; total fixed costs, $399,500; and projected sales, $910,000. Round your answers to the nearest whole unit or dollar.
(a) Calculate break-even in units.
(b) Calculate break-even in dollars (use four decimal places when calculating the contribution margin ratio).
(c) Calculate number of units that would need to be sold to generate an after-tax profit of $420,000 assuming a 30% tax rate.
(d) Calculate dollar sales that would be needed to generate the same profit as above.
(e) Calculate the margin of safety stated as a percentage using the $910,000 projected sales level.
Be sure to label each calculation and show all calculations.
Q:
Wilton Company is analyzing two alternative methods of producing its product. The production manager indicates that variable costs can be reduced 40% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed. (a) Compute the break-even point in units and dollars for both alternatives. (b) Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income. Below the income statement, compute the degree of operating leverage. Which alternative would you recommend and why? Alternative 1
Alternative 2 Variable costs per unit...........................
$20
? Fixed costs...........................
$200,000
$274,400 Selling price per unit...........................
$40
$40 Income tax rate...........................
25%
25%
Q:
Browning Company sells a mix of three related products. Total fixed costs are $144,000. The following additional information is available for Browning Company.
Sales Mix Variable Sales
Cost/Unit Price/Unit X
4
$5
$9 Y
4
$8
$14 Z
2
$7
$15 Use the weighted average method to determine the company's break-even point for composite units.
Q:
Thomas Co. produces and sells Ultra, Super, and Mega, and has total fixed costs of $52,000. Sales and cost data follow:
Ultra Super Mega
Sales price per unit.. $6 $8 $10
Variable costs per unit 4 6 7
Sales mix.... 3 2................................... 1
Calculate the break-even point in composite units.
Q:
Joseph Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows:
A B C Projected sales in dollars..
$192,000
$192,000
$64,000 Selling price per unit.
$40
$30
$40 Contribution margin ratio...
30%
35%
35% (a) Calculate the company's break-even point in composite units and sales dollars.
(b) Calculate the number of units of each individual product to be sold at the break-even point.
Q:
A firm sells two different products, A and B. For each unit of B, the firm sells two units of A. Total fixed costs for this firm are $1,260,000. Additional selling prices and cost information for both products follow: Product
Selling
Price per unit
Variable
Costs per unit A.
$72
$40 B.
48
28 Required:
(a) Calculate the contribution margin per composite unit.
(b) Calculate the break-even point in units of each individual product.
(c) If pretax income before taxes of $294,000 is desired, how many units of A and B must be sold?
Q:
Identify items a, b, and c in the cost-volume-profit graph shown below.
Q:
The following information describes a product expected to be produced and sold by Hadley Company:
Selling price............................................................. $80 per unit
Variable costs............................................................. $32 per unit
Total fixed costs............................................................. $630,000
Required:
(a) Calculate the contribution margin ratio.
(b) Calculate the break-even point in dollar sales.
(c) What dollar amount of sales would be necessary to achieve a pretax income of $120,000?
Q:
Wilson Co. is preparing next period's forecasts. Total fixed costs are expected to be $300,000 and the contribution margin ratio is expected to be 30%. The applicable income tax rate is 25%. (a) Calculate the company's break-even point in dollar sales.
(b) If sales are $1,800,000 above the break-even point, what will income be (i) pretax income and (ii) after-tax income?
Q:
A firm provides the following sales data:
Expected unit sales.. 5,000 Unit variable cost.. $10
Unit selling price. $16 Total fixed cost. $12,000 Required:
(a) Calculate the break-even point in dollar sales.
(b) Calculate the margin of safety in dollar sales.
Q:
A product has a contribution margin per unit of $17 and sells at $25 per unit. If the break-even point is 82,000 units, calculate (a) the variable costs per unit and (b) the total fixed costs.
Q:
A company manufactures a product and sells it for $120 per unit. The total fixed costs of manufacturing and selling the product are expected to be $155,250, and the variable costs are expected to be $75 per unit. What is the company's break-even point in (a) units and (b) dollar sales?
Q:
Torville Company's contribution margin income statement is presented below. Sales for the current period consisted of 5,000 units. Determine the company's break-even point in dollars.
Q:
Narrows Co. is considering the production and sale of a new product line with the following sales and cost data: unit sales price $125; unit variable costs $75; and total fixed costs of $140,000. Calculate the break-even point in units and in dollar sales.
Q:
Hess Co. manufactures a product that sells for $12 per unit. Total fixed costs are $96,000 and variable costs are $7 per unit. Hess can buy a newer production machine that will increase total fixed costs by $22,800 but variable costs will be decreased by $0.40 per unit. What effect would the purchase of the new machine have on Hess's break-even point in units?
Q:
A company sells a single product that has a contribution margin ratio of 24%. If the company's total fixed costs are $84,000, what is the break-even point in dollar sales?
Q:
Macleod Company's product has a contribution margin per unit of $62.50 and a contribution margin ratio of 25%. What is the per unit selling price of the product?
Q:
Q:
Outback Products reports the following information:
Total Contribution Margin.. $32,000
Total Fixed Costs. $28,000
Required:
(a) Calculate Outback Products' degree of operating leverage (DOL).
(b) Outback Products forecasts a 6% increase in sales. What is the expected effect in percent on pretax income?
Q:
Duxbury Co. reports the following data for the current year:
Units Sold............................................................. .................................................... 1,200
Unit Sales Price............................................................. .................................................... $30
Unit Variable Cost............................................................. .................................................... $10
Total Fixed Cost.. $18,000
Required:
(a) Calculate Duxbury's pretax income.
(b) Calculate Duxbury's degree of operating leverage.
Q:
The following information describes a product expected to be produced and sold by Pepin Corporation:
Selling price............................................................. $32 per unit
Variable costs............................................................. $27 per unit
Total Fixed costs............................................................. $850,000 per year
Required:
(a) Calculate the contribution margin per unit.
(b) Calculate the break-even point in units.
Q:
A company has total fixed costs of $360,000. Its product sells for $40 per unit and variable costs amount to $25 per unit. What is the break-even point in dollar sales?
Q:
Abington Corporation provides the following data from a recent period for its manufacture of shoes: variable manufacturing costs, $24,000; variable selling costs, $12,000; and total fixed costs, $40,000. Sales were $60,000 based on 12,000 units sold during the period. Calculate the contribution margin and the contribution margin ratio.
Q:
Hanover Hats produces specialty logo baseball caps for a variety of customers. Selected cost data for Hanover follows: direct materials cost $8,000; sales commissions, $9,000; depreciation on factory equipment, $21,000; factory labor, $16,000; factory lease, $24,000. If Hanover Hats sells 6,100 caps at an average price of $12 for each cap, what is the company's contribution margin?
Q:
Plymouth Industries incurs the following costs during the current year: Depreciation of machinery ......................
$15,000 Direct labor...............................................
6,000 Direct materials.........................................
4,000 Executive salaries.....................................
20,000 Insurance...................................................
2,000 Rent on building.......................................
8,000 Sales commissions....................................
10,000 Vehicle lease cost.....................................
5,000 Sales for the year were $80,000 and Plymouth Industries determined that only the direct production costs (prime costs) and sales commissions are to be classified as variable costs; all other costs are classified as fixed costs. Plymouth sold 400 units. (a) Calculate the unit contribution margin and the contribution margin ratio for Plymouth
Industries.
(b) Plymouth Industries is considering plans that would increase the contribution margin ratio for next year. Should it pursue these plans? Explain.
Q:
A company is looking into two alternative methods of producing its product. The following information about the two alternatives is available. If the company's expected sales volume is 35,000 units, which alternative should be selected? Prepare forecasted income statements and compute degree of operating leverage to assess the alternatives. Alternative#1
Alternative #2 Variable costs per unit........
$8
$12 Fixed costs .........................
$240,000
$140,000 Selling price per unit..........
$20
$20
Q:
Abrams Co. has total fixed costs of $240,000 and a contribution margin ratio of 40%. If rent expense increases by $5,000, how much will sales have to increase to cover this increase in costs?
Q:
A firm produces and sells a product with a contribution margin of $32 per unit. The firm is presently selling 90,000 units and earning $240,000 in after-tax income. Taxes are $80,000 at a 25% tax rate. If the firm desires to increase its after-tax income to $300,000, how many more units must it sell?
Q:
The following data relate to a product sold by Nelson Company:
Total Variable costs ............. $90,000
Total fixed costs............................................................. .................................................. 27,000
Predicted after-tax income (30% tax)............................................................. .................................................. 12,600
Contribution margin per unit............................................................. .................................................. 5
(a) Calculate the number of units expected to be sold.
(b) Calculate the expected total dollar sales.
Q:
Thomas Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. Should Thomas reduce its per unit sales price and pay for the additional advertising? (Support your answer with calculations.)
Q:
Rudy Co. has total fixed costs of $520,000. A unit of product sells for $15 and variable costs per unit are $11. a) Prepare a contribution margin income statement showing predicted net income (loss) if Rudy Co. sells 100,000 units for the year ended December 31.
b) At a minimum, how many units must Rudy Co. sell in order not to incur a loss?
Q:
Herriot Co. has total fixed costs of $180,000 and a contribution margin ratio of 40%. Assume that an additional advertising expenditure of $4,000 would increase sales by $8,000. Should the company spend this additional amount on advertising? (Support your answer with calculations.)
Q:
Boston Co. is considering the production and sale of a new product with the following sales and cost data: unit sales price, $300; unit variable costs, $180; total fixed costs, $270,000; and projected sales, $900,000. What is the margin of safety: (a) In dollar sales? And (b) As a percent of sales?
Q:
Legacy Company is considering the production and sale of a new product with the following sales and cost data: unit sales price $18; unit variable costs $8.10; and total fixed costs of $8,250. Legacy is subject to a 25% tax rate. Determine the dollar sales needed to generate an after-tax income of $33,000.
Q:
Hiller Co. anticipates total fixed costs of $120,000 and variable costs equal to 40% of sales. What is the pretax income if sales are $650,000?
Q:
Davison Company has fixed costs of $315,000 and a contribution margin ratio of 24%. If sales are expected to be $1,500,000, what is the percentage of the margin of safety?
Q:
A company has total fixed costs of $200,000. Its product sells for $25 per unit and variable costs amount to $15 per unit. The company wishes to earn an after-tax income of $35,000. Assume that the company has a 30% tax rate. How many units must be sold to achieve this after-tax income level?
Q:
A company has a goal of earning $100,000 in after-tax income. The company must pay $28,000 in income tax if it achieves the goal. The contribution margin ratio is 30%. What dollar amount of sales must be achieved to reach the goal if fixed costs are $64,000?
Q:
Describe how a cost-volume-profit analysis would be performed for a company that sells more than one product. (Assume that the sales mix is known.)
Q:
What is a scatter diagram? How is a scatter diagram used to estimate cost behavior?
Q:
What is operating leverage? How can the degree of operating leverage be used in analyzing changes in sales?
Q:
What are the unit contribution margin and the contribution margin ratio? What do these measures reveal about a company's cost structure?
Q:
What is an important feature that must be remembered when using cost identifying and behavior methods?