ch3.pdf

21. Cost-volume-profit (CVP) analysis is a simple but powerful tool to assist management make operating decisions. Which of the following does not represent a potential use of CVP analysis? A. Ability to compute the break-even point.B. Ability to determine optimal sales volumes.C. Aids in evaluating tax planning alternatives.D. Aids in determining optimal pricing policies.

CVP addresses pricing and volume, it does not address tax planning

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Comprehension

Difficulty: EasyLanen - Chapter 03 #21

Learning Objective: 1Topic Area: Cost-Volume-Profit Analysis

22. Which of the following would not cause the break-even point to change? A. Sales price increases.B. Fixed cost decreases.C. Sales volume decreases.D. Variable costs per unit increases.E. Product mix shifts towards the cheaper products.

Volume is not a component of the break-even—it is what you are solving for.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Application

Difficulty: MediumLanen - Chapter 03 #22


23. If the fixed costs for a product decrease and the variable costs (as a percentage of sales dollars) decrease, what will be the effect on the contribution margin ratio and the break-even point respectively?

A. aB. bC. cD. d

If VC decreases, CM% increases, if FC decreases, the break-even will also decrease.

AACSB: Analytic




24. The Blue Company is currently selling its single product for $15. Variable costs are estimated to remain at 70% of the current selling price and fixed costs are estimated to be $4,800 per month. If Blue increases its selling price by 10%, its variable cost ratio will A. not changeB. decreaseC. increase

$15(.70) = $10.50$15(1.10) = $16.50$10.50/$16.50 = 63.6% (vs. 70%)

AACSB: Analytic




25. Expense A is a fixed cost expense, B is a variable cost. During the current year the volume of output has decreased. In terms of cost per unit of output, we would expect that A. expense A has remained unchanged.B. expense B has decreased.C. expense A has decreased.D. expense B has remained unchanged.

VC per unit does not change while FC per unit does change with volume changes.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Analysis



26. If both the variable cost per unit and the selling price per unit decrease, the new contribution margin ratio in relation to the old contribution margin ratio will be: A. Lower.B. Higher.C. Unchanged.D. Not enough information to tell.

Also need to know the relative size of the change—could either increase or decrease.

AACSB: Analytic


Difficulty: HardLanen - Chapter 03 #26


27. A company's break-even point will not be increased by: A. an increase in total fixed costs.B. a decrease in the selling price per unit.C. an increase in the variable cost per unit.D. a decrease in the contribution margin ratio.E. an increase in the number of units produced and sold.

Units sold does not affect break-even—it will affect the margin of safety.

AACSB: Analytic




28. Which of the following changes to a company's contribution income statement will always lower the break-even point (either in units or in dollars)? A. Sales price increases by 10%.B. Sales price decreases by 5%.C. Variable costs increase by 10% and fixed costs decrease by 5%.D. Variable costs decrease by 5% and fixed costs increase by 10%.

A sales price increase or a variable cost decrease will always lower the break-even point. Answer D will depend upon the relative size of the fixed costs.

AACSB: Analytic




29. Operating leverage refers to the extent to which an organization's cost structure is made up of: A. differential costs.B. opportunity costs.C. fixed costs.D. relevant costs.E. product costs.

This is a definition of operating leverage.

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Knowledge


Learning Objective: 2Topic Area: Use of CVP to Analyze the Effect of Different Cost Structures

30. A decrease in the margin of safety would be caused by a(n): A. increase in the total fixed costs.B. increase in total revenue (sales).C. decrease in the break-even point.D. decrease in the variable cost per unit.

An increase in fixed costs will increase the break-even point which lowers the margin of safety, all the others decrease the break-even point.

AACSB: Analytic



Learning Objective: 2Topic Area: Margin of Safety

31. At a break-even point of 400 units, variable costs were $400 and fixed costs were $200. What will the 401st unit sold contribute to operating profits before income taxes? A. $.50B. $1.00C. $1.50D. $2.00

Variable costs = $400/400 = $1.00400 = $200/(selling price - $1.00); selling price = $1.50$1.50 - 1.00 = $.50

AACSB: Analytic




32. Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.

The break-even point (rounded to the nearest dollar) for Barnes Corporation for the current year is A. $146,341.B. $636,364.C. $729,730.D. $181,818.E. $658,537.

$250,000 + 150,000 + 75,000 + 200,000 = $675,000($1,500,000 - 675,000)/1,500,000 = 55%($100,000 + 250,000)/.55 = $636,364

AACSB: Analytic




33. Barnes Corporation manufactures skateboards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.

For the coming year, the management of Barnes Corporation anticipates a 10 percent increase in sales, a 12 percent increase in variable costs, and a $45,000 increase in fixed expenses.The break-even point for next year would be A. $729,027.B. $862,103.C. $214,018.D. $474,000.E. $700,000.

($1,500,000 × 1.10) - ($675,000 × 1.12)/$1,650,000 = .541818($350,000 + 45,000)/.541818 = $729,027

AACSB: Analytic




34. You have been provided with the following information:

If sales decrease by 500 units, how much will fixed expenses have to be reduced by to maintain the current operating profit of $6,000? A. $9,000.B. $7,500.C. $6,000.D. $3,000.

$45,000/15 = 3,000 units[($15 - 9)(3,000 - 500)] - FC = $6,000FC = $9,000; thus FC will have to decrease by $3,000

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: AnalysisDifficulty: Hard

Lanen - Chapter 03 #34Learning Objective: 1

Topic Area: Cost-Volume-Profit Analysis

35. XYZ Company's sales are $750,000 with operating profits of $130,000. If the contribution margin ratio is 40%, what did the fixed costs amount to? A. $370,000.B. $300,000.C. $270,000.D. $170,000.E. $130,000.

($750,000 × .40) - FC = $130,000FC = $170,000

AACSB: Analytic




36. The following costs have been estimated based on sales of 30,000 units:

What selling price will yield a contribution margin of 40%? A. $59.38B. $43.75C. $39.58D. $33.25

($300,000 + $250,000 + $125,000 + $37,500)/30,000 = $23.75(SP - $23.75)/SP = .40SP = $39.58

AACSB: Analytic




37. Fowler Manufacturing Company has a fixed cost of $225,000 for the production of tubes. Estimated sales are 150,000 units. A before tax profit of $125,000 is desired by the controller. If the tubes sell for $5 each, what unit contribution margin is required to attain the profit target? A. $3.00.B. $2.33.C. $1.47.D. $.90.

(CM per unit × 150,000) - 225,000 = $125,000CM per unit = $2.33

AACSB: Analytic




38. JJ Motors Inc. employs 45 sales personnel to market their line of luxury automobiles. The average car sells for $23,000, and a 6 percent commission is paid to the salesperson. JJ Motors is considering a change to the commission arrangement where the company would pay each salesperson a salary of $2,000 per month plus a commission of 2 percent of the sales made by that salesperson. The amount of total monthly car sales at which JJ Motors would be indifferent as to which plan to select is A. $2,250,000.B. $3,000,000.C. $1,500,000.D. $1,250,000.E. $4,500,000.

($2,000 × 45) + (.02)(total revenue) = (.06)(total revenue); $90,000 + .02TR = .06TR; $90,000 = .04TR; TR = $90,000/.04 = $2,250,000

AACSB: Analytic



Topic Area: Alternative Cost Structures

39. Given the following information:

What would expected net income be if the company experienced a 10 percent increase in fixed costs and 10 percent increase in sales volume? A. $1,750.B. $1,550.C. $1,250.D. $1,375.

[($5,000 - $1,750)(1.10)] - [($2,000)(1.10)] = $1,375

AACSB: Analytic



Learning Objective: 4Topic Area: Alternative Cost Structures

40. Given the following data:

If sales decrease by 500 units, by what % would fixed expenses have to be reduced by to maintain current net income? A. 50.0%.B. 33.3%.C. 25.0%.D. 16.7%.

$45,000/15 = 3,000 units[($15 - 9) × (3,000 - 500)] - FC = $6,000FC = $9,000; thus FC will have to decrease by $3,000$3,000/12,000 = 25%

AACSB: Analytic




41. The Dooley Co. manufactures two products, Baubles and Trinkets. The following are projections for the coming year:

How many Baubles will be sold at the break-even point, assuming that the facilities are jointly used and the sales mix will remain constant? A. 9,900B. 8,800C. 6,600D. 5,000E. 3,300

Baubles CM: ($10,000 - 6,000)/10,000 units = $0.40/unit; Trinkets: ($10,000 - 4,000)/5,000 units = $1.20/unitSales mix 2 Bauble: 1 Trinket; CM per bundle = 2 × $0.40 + 1 × $1.20 = $2.00/bundleFixed cost = $2,000 + 4,600 = $6,600; Break-even: $6,600/$2 = 3,300 bundlesBaubles: 2 × 3,300 bundles = 6,600 units

AACSB: Analytic



Topic Area: Multiproduct CVP Analysis

42. Breakeven analysis assumes that over the relevant range (CPA adapted): A. Total Fixed Costs are nonlinear.B. Total Costs are unchanged.C. Unit Variable Costs are unchanged.D. Unit Revenues are nonlinear.

We assume linearity of fixed costs & revenues. Total costs will change since total variable costs change.

AACSB: Analytic



Learning Objective: 5Topic Area: Assumptions and Limitations of CVP Analysis

43. At the break-even point the total contribution margin equals total: (CPA adapted) A. Variable costsB. Sales revenuesC. Selling and administrative costsD. Fixed costs

This is the basic relationship.

AACSB: Analytic




44. On January 1, 2006, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake's budgeted break-even point and budgeted margin of safety? (CPA adapted)

A. aB. bC. cD. d

Direct labor is a variable cost, so the unit contribution margin will decrease, increasing the break-even point. Since break-even increases and sales are unchanged, the margin of safety decreases.

AACSB: Analytic




45. During 2006, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor's 2007 liability insurance increased by $1,200,000 over 2006. Assuming the volume and other costs are unchanged, what should the 2007 price be if Thor is to make the same $200,000 profit before income taxes? (CPA adapted) A. $122.50B. $135.00C. $152.50D. $240.00

[($120 - VC) × 80,000] - $1,000,000 = $200,000VC = $105[($SP - $105) × 80,000] - $2,200,000 = $200,000SP = $135

AACSB: Analytic




46. The following information pertains to Syl Co.:

What is Syl's break-even point in sales dollars? (CPA adapted) A. $200,000B. $160,000C. $50,000D. $40,000

($800,000 - 160,000)/$800,000 = 80%$40,000/.80 = $50,000

AACSB: Analytic




47. The following pertains to Clove Co. for the year ending December 31, 2008:

Clove's margin of safety is: (CPA adapted) A. $300,000B. $400,000C. $500,000D. $800,000

$1,000,000 - $700,000 = $300,000

AACSB: Analytic




48. Kator Inc. manufactures industrial components. One of its products used as a subcomponent in auto manufacturing is KB-96. The selling price and cost per unit data for 9,000 units of KB-96 is as follows.

During the next year, sales of KB-96 are expected to be 10,000 units. All costs will remain the same except for fixed manufacturing overhead, which will increase 20%, and material, which will increase 10%. The selling price per unit for next year will be $160. Based on this data, Kator Inc.'s total contribution margin for next year will be: (CMA adapted) A. $882,000B. $980,000C. $972,000D. $1,080,000

[($160 - 22 -15 - 12 - 3)10,000 units] = $1,080,000

AACSB: Analytic




Donnelly Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break even. The after tax net income last year was $5,040. Donnelly's expectations for the coming year include the following: (CMA adapted)• The sales price of the T-shirts will be $9• Variable cost to manufacture will increase by one-third• Fixed costs will increase by 10%• The income tax rate of 40% will be unchanged.

Lanen - Chapter 03

49. The selling price that would maintain the same contribution margin ratio as last year is A. $9.00.B. $8.25.C. $10.00.D. $9.50.

If variable cost increases by 1/3, then the selling price must also increase by 1/3 to maintain the same contribution margin ratio. $7.50 = 1/3 × $7.50 = $10.00

AACSB: Analytic



Topic Area: Income Taxes

50. The number of T-shirts Donnelly Corporation must sell to break even in the coming year is A. 17,000 units.B. 19,250 units.C. 20,000 units.D. 22,000 units.

FC (last year) = ($7.50 - 2.25) × 20,000 units = $105,000FC (this year) = $105,000 × 1.10 = $115,500$115,500/(9 - 3) = 19,250

AACSB: Analytic



Learning Objective: 4Topic Area: Income Taxes

51. Sales for the coming year are expected to exceed last year's by 1,000 units. If this occurs, Donnelly's sales volume in the coming year will be A. 22,600 units.B. 21,960 units.C. 23,400 units.D. 21,000 units.

$5,040/(1 - .40) = $8,400($105,000 + $8,400)/($7.50 - 2.25) = 21,600 units sold last year21,600 + 1,000 = 22,600

AACSB: Analytic




52. If Donnelly Corporation wishes to earn $22,500 in after tax net income for the coming year, the company's sales volume in dollars must be A. $213,750.B. $257,625.C. $207,000.D. $229,500.

$22,500/(1 - .40) = $37,500($115,500 + $37,500)/($9 - 3) = 25,500 units25,500 × $9 = $229,500

AACSB: Analytic




53. Sanfran has the following data:

How many units must Sanfran produce and sell in order to break-even? A. 8,333 unitsB. 12,500 unitsC. 15,000 unitsD. 22,500 units

($150,000 + 120,000)/($40 - 22 - 6) = 22,500 units

AACSB: Analytic





How many units must Sanfran produce and sell in order to achieve a profit of $30,000 per month? A. 10,000 unitsB. 8,824 unitsC. 25,000 unitsD. 15,000 units

($150,000 + 120,000 + 30,000)/($40 - 22 - 6) = 25,000 units

AACSB: Analytic





If Sanfran produces and sells 30,000 units, what is the margin of safety? A. 5,000 unitsB. 7,500 unitsC. 22,500 unitsD. 30,000 units

30,000 - 22,500 = 7,500 units

AACSB: Analytic




56. RedTail Mfg has the following data:

What dollar sales volume does RedTail need to break-even? A. $822,222B. $833,333C. $900,000D. $1,233,333

($60 - 33 - 9)/$60 = 30%($250,000 + 120,000)/30% = $1,233,333

AACSB: Analytic





What dollar sales volume does RedTail need to achieve a $50,000 operating profit per month? A. $1,400,000B. $7,560,000C. $933,333D. $1,233,333

($60 - 33 - 9)/$60 = 30%($250,000 + 120,000 + 50,000)/30% = $1,400,000

AACSB: Analytic





If RedTail has actual monthly sales of $1,500,000 and desires an operating profit of $50,000 per month, what is the margin of safety? A. $100,000B. $266,667C. $50,000D. $1,130,000

($60 - 33 - 9)/$60 = 30%BE = ($250,000 + 120,000)/30% = $1,233,333$1,500,000 - 1,233,333 = $266,667

AACSB: Analytic




59. KR Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000. What is KR's break-even sales volume? A. $800,000B. $1,000,000C. $1,200,000D. $2,000,000

Fixed costs = $1,200,000 × (1 - .6) - 80,000 = $400,000$400,000/(1 - .6) = $1,000,000

AACSB: Analytic




60. KR Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000. What sales volume does KR's need to yield a $200,000 operating profit? A. $1,000,000B. $1,200,000C. $1,500,000D. $2,000,000

Fixed costs = $1,200,000 × (1 - .6) - 80,000 = $400,000($400,000 + 200,000)/(1 - .6) = $1,500,000

AACSB: Analytic




61. KR Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000. What is KR's margin of safety? A. $200,000B. $300,000C. $500,000D. Cannot determine with the information given.

Fixed costs = $1,200,000 × (1 - .6) - 80,000 = $400,000$400,000/(1 - .6) = $1,000,000$1,200,000 - 1,000,000 = $200,000

AACSB: Analytic




62. Acme Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. At what sales volume would the two stores have equal profits? A. $250,000B. $325,000C. $361,111D. Cannot determine with the information given.

(1 - .6)TR - 125,000 = (1 - .3)TR - 200,000; TR = $250,000

AACSB: Analytic




63. Acme Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. What is the break-even sales volume for Store B? A. $666,667B. $325,000C. $285,714D. Cannot determine with the information given.

$200,000/(1 - .3) = $285,714

AACSB: Analytic




64. Acme Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. What is the break-even sales volume for Store A? A. $208,333B. $312,500C. $325,000D. Cannot determine with the information given.

$125,000/(1 - .6) = $312,500

AACSB: Analytic




65. Genco Sales has two store locations. Carslberg has fixed costs of $250,000 per month and a contribution margin ratio of 35%. Tuborg has fixed costs of $400,000 per month and a contribution margin ratio of 65%. At what sales volume would the two stores have equal profits? A. $500,000B. $650,000C. $1,300,000D. Cannot determine with the information given.

.35TR - 250,000 = .65TR - 400,000; TR = $500,000

AACSB: Analytic




66. Which of the following would not cause the break-even point to change? A. Sales price increases.B. Sales volume increases.C. Fixed cost increases.D. Variable costs per unit decreases.E. Product mix shifts towards the cheaper products.

Volume changes do not affect the break-even.

AACSB: Analytic




67. Which of the following would not cause the break-even point to change? A. Variable costs per unit increases.B. Fixed costs increases.C. Product mix shifts towards the more expensive products.D. Sales volume decreases.


AACSB: Analytic




68. If the fixed costs for a product increase and the variable costs (as a percentage of sales dollars) increase, what will be the effect on the contribution margin ratio and the break-even point respectively?

A. aB. bC. cD. d

A variable cost increase will decrease CM%; a fixed cost increase will increase the break-even point.

AACSB: Analytic




69. A company's break-even point will not be increased by: A. an increase in the number of units produced and sold.B. a decrease in the selling price per unit.C. an increase in the variable cost per unit.D. an increase in the variable cost ratio.E. an increase in total fixed costs.


AACSB: Analytic




70. A company's break-even point will not be changed by: A. a change in total fixed costs.B. a change in the selling price per unit.C. a change in the variable cost per unit.D. a change in the contribution margin ratio.E. a change in the income tax rate.

Income taxes do not affect break-even; taxes are based on before tax profit.

AACSB: Analytic




71. A company's break-even point will not be changed by: A. a change in total fixed costs.B. a change in the number of units produced and sold.C. a change in the variable cost ratio.D. a change in the contribution margin ratio.E. a change in the product mix.


AACSB: Analytic




72. If both the variable cost per unit and the selling price per unit increase, the new contribution margin ratio in relation to the old contribution margin ratio will be: A. Lower.B. Higher.C. Unchanged.D. Not enough information to tell.

Need to know size of increase of each.

AACSB: Analytic




73. Misa Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below.

The contribution margin ratio for the current year is A. 53.6%B. 49.3%C. 46.4%D. 25%

$500,000 + 250,000 + 275,000 + 750,000 = $1,775,000($3,500,000 - 1775,000)/3,500,000 = 49.3%

AACSB: Analytic





The break-even point (rounded to the nearest dollar) for Misa Corporation for the current year is A. $2,625,000.B. $1,865,672.C. $1,724,138.D. $2,155,172.

$500,000 + 250,000 + 275,000 + 750,000 = $1,775,000($3,500,000 - 1775,000)/3,500,000 = 49.3%($600,000 + 250,000)/.493 = $1,724,138

AACSB: Analytic





For the coming year, the management of Misa Corporation anticipates a 5 percent decrease in sales, a 10 percent increase in all variable costs, and a $45,000 increase in fixed expenses.The operating profit for next year would be A. $477,500.B. $492,500.C. $552,500.D. $831,250.

($3,500,000 × .95) - ($1,775,000 × 1.10) - ($850,000 + 45,000) = $477,500

AACSB: Analytic




Topic Area: EMPTY


For the coming year, the management of Misa Corporation anticipates a 5 percent decrease in sales, a 10 percent increase in variable costs, and a $45,000 increase in fixed expenses. The break-even point for next year would be A. $3,022,500.B. $2,947,500.C. $2,668,750.D. $2,168,225.

($3,500,000 × .95) - ($1,775,000 × 1.10)/($3,500,000 × .95) = .41278($850,000 + 45,000)/.41278 = $2,168,225

AACSB: Analytic





If unit sales decrease by 10%, how much will fixed expenses have to be reduced by to maintain the current operating profit? A. $12,000.B. $4,500.C. $6,000.D. $1,800.

$45,000/15 = 3,000 units[($15 - 9)(3,000 × .9)] - FC = $6,000FC = $10,200; thus FC will have to decrease by $1,800

AACSB: Analytic





If sales decrease by 10%, what level of fixed expenses will maintain the current operating profit? A. $12,000.B. $20,400.C. $21,600.D. $24,000.

$36,000 × .9 - 12,000 = $20,400

AACSB: Analytic





If sales increase by 10%, what level of fixed expenses will yield a 20% increase in profits? A. $14,400.B. $19,200.C. $25,200.D. $26,400.

($36,000 × 1.1) - (12,000 × 1.2) = $25,200

AACSB: Analytic




80. EM Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and operating profits were $180,000. What is EM's break-even sales volume? A. $660,000B. $1,540,000C. $1,600,000D. $2,020,000

Fixed costs = $2,200,000 × .3 - 180,000 = $480,000$480,000/.3 = $1,600,000

AACSB: Analytic




81. EM Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and operating profits were $180,000. What sales volume does EM's need to yield a $240,000 operating profit? A. $600,000B. $2,020,000C. $2,400,000D. $2,440,000

Fixed costs = $2,200,000 × .3 - 180,000 = $480,000($480,000 + 240,000)/.3 = $2,400,000

AACSB: Analytic




82. EM Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and operating profits were $180,000. What is EM's margin of safety? A. $480,000B. $600,000C. $2,020,000D. Cannot determine with the information given.

Fixed costs = $2,200,000 × .3 - 180,000 = $480,000$480,000/.3 = $1,600,000$2,200,000 - 1,600,000 = $600,000

AACSB: Analytic




83. Kanmore produces and sells three products. Last month's results are as follows:

Fixed costs total $200,000. What is Kanmore's break-even sales volume? (Assume the current product mix) A. $500,000B. $416,667C. $384,615D. $460,000

CM = (100,000 - 40,000) + (200,000 - 140,000) + (200,000 - 80,000) = $240,000CM% = 240,000/500,000 = 48%BE = $200,000/.48 = $416,667

AACSB: Analytic



Learning Objective: 4Topic Area: Multiproduct CVP Analysis


Fixed costs total $200,000. What is Kanmore's margin of safety? (Assume the current product mix) A. $83,333B. $40,000C. $460,000D. $115,385

CM = (100,000 - 40,000) + (200,000 - 140,000) + (200,000 - 80,000) = $240,000CM% = 240,000/500,000 = 48%BE = $200,000/.48 = $416,667$500,000 - 416,667 = $83,333

AACSB: Analytic





Fixed costs total $200,000. What sales volume would generate an operating profit of $150,000? (Assume the current prodcut mix) A. $650,000B. $610,000C. $729,167D. $850,000

CM = (100,000 - 40,000) + (200,000 - 140,000) + (200,000 - 80,000) = $240,000CM% = 240,000/500,000 = 48%($200,000 + 150,000)/.48 = $729,167

AACSB: Analytic




86. The Katie Corporation has budgeted fixed costs of $125,000 and an estimated selling price of $16.50 per unit. The contribution margin ratio is 40% and the company plans to sell 25,000 units in 2011.Required:(a) Compute the break-even point in dollars. (b) Compute the margin of safety for 2011.(c) Compute the expected operating profit for 2011. (a) BE = $125,000/.40 = $312,500(b) Estimated sales = 25,000 units × $16.50 = $412,500Margin of safety = $412,500 - 312,500 = $100,000(c) $412,500 × 40% - $125,000 = $40,000

AACSB: Analytic




87. The president of AMG Enterprises is considering expanding sales by producing three different versions of their product. Each will be targeted by the marketing department to different income levels and hence will be produced from three different qualities of materials. After reviewing the sales forecasts, the sales department feels that for every item of A sold, 4 of M can be sold and 8 of G can be sold. The following information has been assembled by the sales department and the production department.

The fixed costs associated with the manufacture of these three products are $75,000 per year.Required:Determine the number of units of each product that would be sold at the break-even point. Weighted average CM = [(15 - 9)(1) + (10 - 7)(4) + (5 - 4.50)(8)]/(1 + 4 + 8) = $1.69231BE = $75,000/1.69231 = 44,319 total unitsA = 44,319 × (1/13) = 3,410M = 44,319 × (4/13) = 13,637G = 44,319 × (8/13) = 27,274

AACSB: Analytic




88. Stanley Clipper, now retired, owns the Campus Barber Shop. He employs five (5) barbers and pays each a base rate of $500 per month. One of the barbers serves as the manager and receives an extra $300 per month. In addition to the base rate, each barber also receives a commission of $3 per haircut. A barber can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Campus Barber Shop is open 24 days a month. You can safely ignore income taxes. Other costs are incurred as follows:

Stanley currently charges $8 per haircut.Required:(a) Compute the break-even point in (1) number of haircuts, (2) total sales dollars, and (3) as a percentage of capacity.(b) In March, 1,400 haircuts were given. Compute the operating profits for the month.(c) Stanley wants a $2,160 operating profit in April. Compute the number of haircuts that must be given in order to achieve this goal.(d) If 1,500 haircuts are given in April, compute the selling price that would have to be charged in order to have $2,160 in operating profits. Fixed costs = 5($500) + $300 + $200 + $400 + $175 + $25 = $3,600Variable costs = $3.00 + $0.90 + $0.35 + $0.15 = $4.40 per haircut(a) (1) $3,600/($8 - 4.40) = 1,000 haircuts(2) 1,000 × $8.00 = $8,000(3) 1,000/(5 × 14 × 24) = 59.2%(b) [($8.00 - 4.40) × 1,400] - $3,600 = $1,440(c) ($3,600 + $2,160)/($8.00 - 4.40) = 1,600 haircuts(d) [($SP - 4.40) × 1,500] - 3,600 = 2,160; SP = $8.24 per haircut.

AACSB: Analytic


Lanen - Chapter 03 #88Learning Objective: 1Learning Objective: 2Learning Objective: 4


89. Stanley Clipper, now retired, owns the Campus Barber Shop. He employs five (5) barbers and pays each a base rate of $500 per month. One of the barbers serves as the manager and receives an extra $300 per month. In addition to the base rate, each barber also receives a commission of $3 per haircut. A barber can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Campus Barber Shop is a corporation with a 30% tax rate and is open 24 days a month. Other costs are incurred as follows:

Stanley currently charges $8 per haircut.Required:(a) Stanley wants to earn $2,160 in after-tax operating profits. Compute the number of haircuts that must be given to reach this goal in July.(b) In July, only 1,500 haircuts were given. Compute the price per haircut that Stanley should have charged in July to earn $2,160 in after-tax operating profits. Fixed costs = 5($500) + $300 + $200 + $400 + $175 + $25 = $3,600Variable costs = $3.00 + $0.90 + $0.35 + $0.15 = $4.40 per haircut(a) [($8 - 4.4) × number of haircuts] - 3,600 = $2,160/(1 - .3); number of haircuts = 1,858(b) [($SP - 4.40)1,500] - 3,600 = 2,160/(1 - .30); SP = $8.86 per haircut.

AACSB: Analytic




90. You have been provided with the following information regarding the ALG Manufacturing Company:

This information is based on forecasted sales of 25,000 units.Required:(a) What are the expected operating profits for the upcoming year? (b) What is the break-even point in units?(c) What is the break-even point in dollars?(d) If $80,000 of operating profits is desired, how many units must be sold?(e) How much in sales dollars is required to generate an operating profit of $75,000? (a) [($25 - 12 - 3) × 25,000] - (180,000 + 40,000) = $30,000(b) $220,000/$10 = 22,000 units(c) 22,000 × $25 = $550,000(d) ($220,000 + 80,000)/10 = 30,000 units(e) ($220,000 + 75,000)/10 = 29,500 units × $25 = $737,500

AACSB: Analytic




91. Almo Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new unit purchasers as well as replacement canopies. Almo developed its 2011 business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected to be $200, and the annual fixed costs were budgeted at $100,000. The goal for Almo's after-tax operating profits was $240,000; the company's effective tax rate is 40%While Almo's sales usually rise during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of 2011, only 350 units had been sold at the established price, with variable costs as planned. It was clear that the 2011 after-tax operating profit goal would not be reached unless some corrective actions were taken. Almo's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following mutually exclusive alternatives were presented to the president:(1) Reduce the sales price by $40. The sales department predicts that with the significantly reduced price, 2,700 units can be sold during the remainder of 2011. Total fixed and variable unit costs will stay as budgeted.(2) Lower variable costs per unit by $25 through the use of less expensive materials and lightly modified manufacturing techniques. The sales price will also be reduced by $30. These changes will yield sales of 2,200 for the remainder of 2011.(3) Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be unchanged. Sales of 2,000 units can be expected for the remainder of 2011.Required:(a) If no changes are made to the selling price or cost structure, determine the number of units that Almo must sell in order to break-even. (b) If no changes are made to the selling price or cost structure, determine the number of units that Almo must sell in order to achieve its after-tax operating profit objective.(c) Determine which one of the alternatives Almo should select to achieve its after-tax operating profit objective. Be sure to support your selection with appropriate computations. (a) (1) $100,000/($400 - 200) = 500 units(b) [$100,000 + 240,000/(1 - .40)]/(400 - 200) = 2,500 units(c) Only alternative 1 achieves the targeted operating profit objective of $240,000, although alternative 2 is close.(1) {[(400 - 200)350] + [(360 - 200)2,700] - 100,000}(1 - .40) = $241,200(2) {[(400 - 200)350] + [(370 - 175)2,200] - 100,000}(1 - .40) = $239,400(3) {[(400 - 200)350] + [(380 - 200)2,000] - 90,000}(1 - .40) = $204,000

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: Synthesis


Learning Objective: 1Learning Objective: 2Learning Objective: 4


92. T-Tunes, Inc. is considering the introduction of a new music player with the following price and cost characteristics:

Required(a) How many units must T-Tunes sell to break even? (b) How many units must T-Tunes sell to make an operating profit of $120,000 for the year?(c) If projected sales are 7,500 units, what is the margin of safety in units? (a) $180,000/(125 - 75) = 3,600 units(b) ($180,000 + 120,000)/(125 - 75) = 6,000 units(c) 7,500 - 3,600 = 3,900 units

AACSB: Analytic



Learning Objective: 1Learning Objective: 2


93. Zuma, Inc. is considering the introduction of a new music player with the following price and cost characteristics:

Projected sales are 7,500 units per year.Required (consider each question independent of each other):(a) What will the operating profit be? (b) What is the impact on operating profit if the selling price per unit decreases by 15%?(c) What is the net income if variable costs per unit increase by 15% and Zuma has a 38% tax rate? (a) [($125 - 75)7,500] - 180,000 = $195,000(b) [($106.25 - 75)7,500] - 180,000 = $54,375,a decrease of 72%(c) {[($125 - 86.25)7,500] - 180,000]}(1 - .38) = $68,587.50

AACSB: Analytic





94. You have been provided with the following information regarding the VLCD Manufacturing Company:

This information is based on forecasted sales of 30,000 units.Required:(a) What are the expected operating profits for the upcoming year? (b) What is the break-even point in units?(c) If $180,000 of operating profits is desired, how many units must be sold? (a) [($50 - 24 - 6) × 30,000] - (360,000 + 80,000) = $160,000(b) $440,000/$20 = 22,000 units(c) ($440,000 + 180,000)/20 = 31,000 units

AACSB: Analytic





95. You have been provided with the following information regarding the VLCD Manufacturing Company:

This information is based on forecasted sales of 33,000 units.Required:(a) What are the expected operating profits for the upcoming year? (b) What is the break-even point in dollars?(c) How much in sales dollars is required to generate an operating profit of $275,000? (a) [($50 - 24 - 6) × 33,000] - (360,000 + 80,000) = $220,000(b) $440,000/(($50 - $30)/$50) = $1,100,000(c) ($440,000 + 275,000)/.4 = $1,787,500

AACSB: Analytic





96. You have been provided with the following information regarding the York Manufacturing Company:

This information is based on forecasted sales of 30,000 units.Required:(a) What are the expected operating profits for the upcoming year? (b) What is the break-even point in units?(c) If $160,000 of operating profits is desired, how many units must be sold? (a) [($50 - 24 - 6) × 30,000] - ((12 + 3) × 30,000) = $150,000(b) $450,000/$20 = 22,500 units(c) ($450,000 + 160,000)/20 = 30,500 units

AACSB: Analytic





97. You have been provided with the following information regarding the York Manufacturing Company:

This information is based on forecasted sales of 33,000 units.Required:(a) What are the expected operating profits for the upcoming year? (b) What is the break-even point in dollars?(c) How much in sales dollars is required to generate an operating profit of $275,000? (a) [($50 - 24 - 6) × 33,000] - ((12 + 3) × 33,000) = $165,000(b) $495,000/(($50 - $30)/$50) = $1,237,500(c) ($495,000 + 275,000)/.4 = $1,925,000

AACSB: Analytic





98. Craddock sells three products. Last month's results are as follows:

Total fixed costs are $100,000 marketing and $125,000 administrative.Required:(a) What was the operating profit last month? (b) What is Craddock's break-even sales volume (at the given mix)?(c) What is Craddock's margin of safety? (a) $800,000 - 520,000 - 225,000 = $55,000(b) $225,000/(280,000/800,000) = $642,857(c) $800,000 - $642,857 = $157,143

AACSB: Analytic





99. Craddock sells three products. Last month's results are as follows:

Total fixed costs are $100,000 marketing and $125,000 administrative.Required:(a) What was the contribution margin ratio? (b) What sales volume does Craddock need to achieve a $100,000 monthly profit?(c) What will profits be if Craddock increases sales by 20%? (a) ($600,000 - 390,000)/600,000 = 35%(b) ($225,000 + 100,000)/35% = $928,571(c) ($600,000 - 390,000) × 1.2 = $252,000 - 225,000 = $27,000

AACSB: Analytic


Lanen - Chapter 03 #99Learning Objective: 1Learning Objective: 4


100. The Scottso Corporation has budgeted fixed costs of $225,000 and an estimated selling price of $24 per unit. The variable cost ratio is 40% and the company plans to sell 48,000 units in 2010.Required:(a) Compute the break-even point in units. (b) Compute the margin of safety (in units) for 2010.(c) Compute the expected operating profit for 2010. (a) BE = $225,000/($24 - .40 × $24) = 15,625 units(b) Margin of safety = 48,000 - 15,625 = 32,375 units(c) 48,000 × ($24 × .6) - $225,000 = $466,200

AACSB: Analytic




101. Rosy's Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost ratio of 60%.Required:(a) Compute Rosy's break-even point. (b) Compute Rosy's margin of safety if she expects to have revenues of $800,000.(c) Compute Rosy's expected operating profit at the $800,000 revenue. (a) BE = $240,000/(1 - .60) = $600,000(b) Margin of safety = $800,000 - $600,000 = $200,000(c) $800,000 × .4 - $240,000 = $80,000

AACSB: Analytic




102. The sales manager of Acme Enterprises is considering expanding sales by producing three different versions of their product. Each will be targeted by the marketing department to different income levels and will be produced from three different qualities of materials. After reviewing the sales forecasts, the sales department feels that 40% of units sold will be the original product, 35% will be new model #1 and the remainder will be new model #2.The following information has been assembled by the sales department and the production department.

The fixed costs associated with the manufacture of these three products are $175,000 per year.Required:Determine the number of units of each product that would be sold at the break-even point. Weighted average CM = (100 - 80)(.4) + (70 - 56.25)(.35) + (50 - 37.50)(.25) = $15.9375BE = $175,000/15.9375 = 10,980 total unitsOriginal = 10,980 × 40% = 4,392 unitsModel #1 = 10,980 × 35% = 3,843 unitsModel #2 = 10,980 × 25% = 2,745 units

AACSB: Analytic




103. The sales manager of Jorgensen Sales is considering expanding sales by producing three different versions of their product. Each will be targeted by the marketing department to different income levels and will be produced from three different qualities of materials. After reviewing the sales forecasts, the sales department feels that 70% of units sold will be the original product, 20% will be new model #1 and the remainder will be new model #2.The following information has been assembled by the sales department and the production department.

The fixed costs associated with the manufacture of these three products are $250,000 per year.Required:(a) Determine the number of units of each product that would be sold at the break-even point. (b) Determine the break-even point if the sales estimates are instead 50% original product, 30% model #1 and the remainder model #2. (a) Weighted average CM = (50 - 39.50)(.7) + (35 - 27.75)(.2) + (25 - 18.50)(.1) = $9.45BE = $250,000/9.45 = 26,455 total unitsOriginal = 26,455 × 70% = 18,519 unitsModel #1 = 26,455 × 20% = 5,291 unitsModel #2 = 26,455 × 10% = 2,646 units(b) Weighted average CM = (50 - 39.50)(.5) + (35 - 27.75)(.3) + (25 - 18.50)(.2) = $8.725BE = $250,000/8.725 = 28,653 total unitsOriginal = 28,653 × 50% = 14,327 unitsModel #1 = 28,653 × 30% = 8,596 unitsModel #2 = 28,653 × 20% = 5,731 units

AACSB: Analytic




104. The Ciao Line Buffet is a new buffet-style restaurant offering pizza and Italian dishes. The buffet has a fixed price of $8.50 per person. The estimated food costs are $2.00 per person, regardless of volume. Fixed costs are related to the number of buffet lines that are maintained, with the estimated costs as follows:

Required:Determine the break-even point(s). 1 line = $30,000/(8.50 - 2) = 4,615 customers: not a feasible break-even because it exceeds volume capability for 1 line2 line = $37,000/6.50 = 5,692 customers: break-even3 line = $40,000/6.50 = 6,154 customers: break-evenCiao will break-even with 2 or 3 lines. Ciao will not break-even operating just one line.

AACSB: Analytic




105. The Spice House packages horseradish and mustards in a factory that can operate one, two or three shifts. The product sells for $10 a case and has variable costs of $4 per case. Fixed costs are related to the number of shifts that are operated, with the estimated costs as follows:

Required:(a) Determine the break-even point(s). (b) If Spice House can sell all it can produce, how many shifts should be operated? 1 shift = $3,000/(10 - 4) = 500 cases: break-even2 shifts = $5,700/6 = 950 cases: break-even3 shifts = $8,200/6 = 1,367 cases: break-evenSpice House will break-even at any shift level(b) 1 shift: 2,000 × 6 - 3,000 = $9,0002 shift: 4,000 × 6 - 5,700 = $18,3003 shift: 6,000 × 6 - 8,200 = $27,800Spice House will maximize profits by operating 3 shifts

AACSB: Analytic




106. Explain the difference between the break-even point, the margin of safety, and operating leverage. Break-even is the point where the organization will make zero profit; the margin of safety is the difference between the actual sales level and the break-even sales level; operating leverage describes the extent to which the organization's cost structure is made up of fixed costs.

AACSB: Analytic





107. Explain the difference between total contribution margin and gross margin. Total contribution margin recognizes the distinction between fixed and variable costs and is defined as total revenues minus total variable costs. Contribution margin does not make a distinction between production costs and selling or administrative costs. Gross margin is total revenues minus cost of goods sold. Gross margin recognizes the functional breakdown between production costs and selling/adminstrative costs, but ignores the fixed/variable cost.

AACSB: Analytic




108. Why is it important for the profit equation to make a distinction between fixed and variable costs? Fixed costs will not change as volume changes, while variable costs will change.

AACSB: Analytic




109. Why is the time period so important for the definition of fixed costs? Over a short time period fixed costs do not change while over a long time period all costs become variable. The time period is important to make this distinction.

AACSB: Analytic




110. Present the profit equation and define all of the terms. Profits = Total revenues - total costs. Total revenues = selling price × units sold. Total costs = fixed costs + variable cost per unit × units sold

AACSB: Analytic

AICPA: FN-Decision MakingBlooms: KnowledgeDifficulty: Medium



ch3 Summary

Category # of Questions

AACSB: Analytic 110

AICPA: FN-Decision Making 110

Blooms: Analysis 21

Blooms: Application 66

Blooms: Comprehension 16

Blooms: Knowledge 4

Blooms: Synthesis 3

Difficulty: Easy 40

Difficulty: Hard 32

Difficulty: Medium 38

Lanen - Chapter 03 111

Learning Objective: 1 71




Topic Area: Alternative Cost Structures 6

Topic Area: Assumptions and Limitations of CVP Analysis 1

Topic Area: Cost-Volume-Profit Analysis 63

Topic Area: Income Taxes 9

Topic Area: Margin of Safety 6

Topic Area: Multiproduct CVP Analysis 12

Topic Area: Profit Equation 9

Topic Area: Use of CVP to Analyze the Effect of Different Cost Structures 4

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