Chapter-6.docx

CHAPTER 6COST-VOLUME-PROFIT SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Ite m SO BT Ite m SO BT Item 1. 2. 3. 4. 5. 6. 1 1 2 2 2 2 K K K K K K 7. 8. 9. 10. 11. 12. 3 3 3 5 4 2 K K AP K K K 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 2 3 3 3 2 2 2 1 1 1 1 1 1 2 2 2 2 2 3 3 AP AP AP AP AN AP AP K K C K C C K AP C AP AP AP AP 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 3 3 3 3 3 3 3 3 5 5 5 5 4 4 4 4 4 4 4 4 K C AP AP C K K K K AP C K AP AP K K AP AP AP C 125. 126. 127. 128. 2 3 3 2 AP AP AP AP 129. 130. 131. 132. 5 4 2 2 AP AP AN AP 142. 143. 144. 145. 1,2,3 2,3,6 2,3,4 3,4 147. 148. 149. 150. 4 3,4,6 2,3 2 E AN AP AP 146. 2,3 151. 3,4,6 AN SO BT Item SO BT Item SO BT 7 3 7 7 8 8 AP AP K K K K *25. 26. 8 5 K AP 87. 88. 89. 90. 91. 92. *93. *94. *95. *96. 97. *98. *99. *100. 101. 102. *103. *104. *105. *106. 3 2 6 4 3 2 7 7 7 7 3 7 2,7 3,7 4 4 7 7 3,7 3,7 AN AP AN AP AP C K AP AP AP AP K AP AP AP C AP AP AP AP *107. 108. *109. 110. 111. *112. *113. 114. 115. 116. 117. 118. 119. 120. 121. 122. *123. *124. 8 2 8 3 5 8 8 5 1 1,5 2 6 5 3,5 3,4 5,6 7 8 K AP AP AP AP C C K C K C C C C K C K C *137. *138. *139. 140. 7 7 8 4,6 AP AP AP AP *141. 8 AP True-False Statements 13. 14. 15. *16. *17. *18. 2 1 2 7 7 7 K K C K K K *19. 20. *21. *22. *23. *24. Multiple Choice Questions 67. 2 C 68. 2 AP 69. 2 K 70. 2 C 71. 2 AP 72. 2 AP 73. 3 AP 74. 4 AP 75. 3 AN 76. 4 AN 77. 5 K 78. 5 AP 79. 3 AP 80. 3 AN 81. 3 AN 82. 6 AP 83. 3 AP 84. 6 AP 85. 4 AP 86. 2 AP Brief Exercises 133. 3 AP 134. 5 AP 135. 4 AP 136. 5 AP Exercises AP E AP A N E 152. 153. 154. 155. 2,3,4 3,4 2 3,4 AN AP AP AP 157. 158. *159. *160. 3,4,6 4,6 7 7 AP AP AP AP 156. 3 C *161. 7 AP Completion Statements 166. 167. 2 3 K K 174. 1-6 K 175. 1,2 K 168. 169. 3 5 K K 170. *171. 2 7 K K *172. *173. 7 8 K K 8 K Matching Statements Short Answer Essay Questions 176. 2 C 177. 2,3 AN Multi Part Questions *178. *162. *163. 164. 165. 8 8 3,6 3,8 AP AP AP AP Cost–Volume–Profit 179. 3,4,6 AP 6-2 Cost–Volume–Profit * Denotes AppendixSUMMARY 6-3 OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type 1. 2. TF TF 14. 34. TF MC 35. 36. MC MC 3. 4. 5. 6. 12. 13. 15. TF TF TF TF TF TF TF 27. 31. 32. 33. 40. 41. 42. MC MC MC MC MC MC MC 43. 44. 67. 68. 69. 70. 71. MC MC MC MC MC MC MC 7. 8. 9. 20. 28. 29. 30. 45. TF TF TF TF MC MC MC MC 46. 47. 48. 49. 50. 51. 52. 53. MC MC MC MC MC MC MC MC 66. 73. 75. 79. 80. 81. 83. 87. MC MC MC MC MC MC MC MC 11. 59. 60. 61. 62. TF MC MC MC MC 63. 64. 65. 66. 74. MC MC MC MC MC 76. 85. 90. 101. 102. MC MC MC MC MC 10. 26. 55. TF TF MC 56. 57. 58. MC MC MC 77. 78. 111 MC MC MC 82. 84. MC MC 89. 118. MC MC 122. 140. MC BE Item Type Item Type Item Type Item Type MC MC 116. 142. MC Ex 174. 175. Ma Es BE BE BE BE Ex Ex Ex 146. 149. 150. 151. 152. 154. 166. Ex Ex Ex Ex Ex Ex C 170. 174. 175. 176. 177. 179. C Ma Es Es Es MP BE BE BE Ex Ex Ex Ex Ex 148. 149. 151. 152. 153. 155. 156. 157. Ex Ex Ex Ex Ex Ex Ex Ex 164. 165. 167. 168. 174. 177. 179. Ex Ex C C Ma Es MP Ex Ex Ex Ex Ex 153. 155. 157. 158. 174. Ex Ex Ex Ex Ma MC MC BE 134. 136. 169. BE BE C 174. Ma Ex Ex 158. 164. Ex Ex 174. 179. Ma MP MC MC BE BE 159. 160. 161. 171. Ex Ex Ex C 152. C Study Objective 1 37. 38. MC MC 39. 115. Study Objective 2 72. 86. 88. 92. 99. 108. 117. MC MC MC MC MC MC MC 125. 128. 131. 132. 142. 143. 144. Study Objective 3 91. 97. 100. 105. 106. 110. 120. 121. MC MC MC MC MC MC MC MC 126. 127. 133. 142. 143. 144. 145. 146. Study Objective 4 121. 130. 135. 140. 144. MC BE BE BE Ex 145. 147. 148. 151. 152. Study Objective 5 114. 116. 119. MC MC MC 120. 122. 129. Study Objective 6 143. 148. Ex Ex 151. 157. Study Objective 7 16. 17. 18. 19. TF TF TF TF 21. 22. 93. 94. TF TF MC MC 95. 96. 98. 99. MC MC MC MC 23. 24. 25. TF TF TF 107. 109. 112. MC MC MC 113. 124. 139. MC MC BE 100. 103. 104. 105. MC MC MC MC 106. 123. 137. 138. Study Objective 8 Note: TF = True-False MC = Multiple Choice 141. 162. 163. C = Completion BE = Brief Exercise BE Ex Ex 165. 173. 178. Ex C Es Ex = Exercise Ma = Matching MP = Multipart Es = Essay Test Bank for Managerial Accounting, Third Canadian Edition 6-4 CHAPTER STUDY OBJECTIVES 1. List the five components of cost-volume-profit analysis. The five components of CVP analysis are (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit, (d) total fixed costs, and (e) sales mix. 2. Explain what contribution margin is and how it can be expressed. Contribution margin is the amount of revenue remaining after deducting variable costs. It is identified in a CVP income statement, which classifies costs as variable or fixed. It can be expressed as a per unit amount or as a ratio. 3. Identify the three ways to determine the break-even point. The break-even point can be (a) calculated from a mathematical equation, (b) calculated by using a contribution margin technique, and (c) derived from a CVP graph. 4. State the formulas for determining sales required to earn target operating income before and after tax. Target NI before tax: One formula is: required sales = variable costs + fixed costs + target operating income. Another formula is: fixed costs + target operating income ÷ contribution margin ratio = required sales. Target NI after tax: One formula is: required sales + variable costs + fixed costs + target operating income before tax. Another formula is: fixed costs + target operating income before tax ÷ contribution margin ratio = required sales. 5. Define margin of safety, and state the formulas for calculating it. Margin of safety is the difference between actual or expected sales and sales at the break-even point. The formulas for margin of safety are Actual (expected) sales – Break-even sales = Margin of safety in dollars; Margin of safety in dollars ÷ Actual (expected) sales = Margin of safety ratio. 6. Understand how to apply basic cost-volume-profit concepts in a changing business environment. CVP can be used to respond to business changes by calculating the breakeven sales point, such as when deciding whether to match a competitor’s discount, whether to invest in new equipment, and when determining how many units must be sold in order to achieve a target operating income. 7. Explain the term “sales mix” and its effect on break-even sales (Appendix 6A). The sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a multi-product company, break-even sales in units are determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even sales in dollars are calculated using the weighted-average contribution margin ratio. Cost–Volume–Profit 6-5 8. Understand how operating leverage affects profitability (Appendix 6A). Operating leverage is how much a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have a high operating leverage. A company with a high operating leverage will experience a sharp increase (decrease) in net income with an increase (decrease) in sales. The degree of operating leverage can be measured by dividing the contribution margin by net income. 4. A CVP income statement shows contribution margin and gross profit. 13. 9. The break-even point is the point at which total sales equals total contribution margin. the term ‘cost’ includes only manufacturing costs. The contribution margin ratio is calculated by dividing the unit contribution margin by the unit sales price. 5. . At the break-even point. its net income will be $4. Contribution margin equals the total variable costs plus total fixed costs at the break-even point. its contribution margin per unit is $2. 7. A CVP income statement classifies costs into two sections based on behaviour. In CVP analysis. 11. 6. total revenue equals total fixed costs plus total variable costs. 12. One assumption of CVP analysis is that costs must be classified as either fixed. Max Company’s break-even point is 2. 10. Third Canadian Edition TRUE-FALSE STATEMENTS 1. Target net income is the income objective for a individual product line. The margin of safety is the difference between sales at break-even and sales at a determined activity level. An assumption of CVP analysis is that all costs can be classified as either variable or fixed. 3. The contribution margin per unit is the amount that each unit sold contributes towards covering fixed and variable costs. Contribution margin is the amount of profit remaining after deducting cost of goods sold. 8.000. If the company sell 10 more units. mixed. or variable. 14. 2.6-6 Test Bank for Managerial Accounting. and its selling price per unit is $12.000 units. *19. Net income can be increased or decreased by changing the sales mix. If Conan Corporation sells two products with a sales mix of 75%-25%. Sales mix is a measure of the percentage increase in sales from period to period. *24. The weighted–average contribution margin of all the products is calculated when determining the break-even sales for a multi-product firm. *16. The degree of operating leverage provides a measure of a company’s earnings volatility. the break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio. *21. then weighted-average unit contribution margin is $150. it could sustain a 60 percent decline in sales before it would be operating at a loss. *23. If O’Brien Company has a margin of safety ratio of . *22. 20. 26. For a company with multiple products. then the break-even point in units is 2.Cost–Volume–Profit 6-7 15.60. If fixed costs are $100.000 units. *18.000 and weighted-average unit contribution margin is $50. Sales mix is not important to managers when different products have substantially different contribution margins. and the respective contribution margins are $100 and $300. A CVP income statement separates costs based on behaviour. Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs. Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs. *25. . *17. 14. *18. *17. *23. T F F F T 6. *24. 3. 15.6-8 Test Bank for Managerial Accounting. F F T F T 11. F . 13. T F T F T *16. 5. 7. 9. Item Ans. 8. 4. Item Ans. Item Ans. T F T F T 26. Item Ans. Third Canadian Edition ANSWERS TO TRUE-FALSE STATEMENTS Item Ans. 20. 2. 10. *22. Item Ans. 1. F F T T T *21. 12. *25. *19. How much is the net profit. $68. 400 units 31.000 27. How much is the contribution margin per unit? a. $45. $45. standard and deluxe.000 c.000 b. If other factors are equal.000 d.000 d. NEKP Inc.000 23. which product should NEKP emphasize to its customers? a.000 11. $18 30. How much is total contribution margin for September? a. $20. How much is the break-even point. $9.000 c.000 29. $20. $50 units c. In September.000 28. $9.000 c. for September? a. $45.000 95. $90 d. The standard model b. The standard model has a 30 percent contribution margin and the deluxe has a 23 percent contribution margin.000 b. Smith Company had the following financial statement amounts related to producing 500 units: Direct materials Depreciation expense Sales revenue Direct labour Rent expense $27. The deluxe model .000 b. The standard model has a 15 percent profit margin and the deluxe model has a 17 percent profit margin. $122 units d. sells two versions of its product.000 25. $68.Cost–Volume–Profit 6-9 MULTIPLE CHOICE QUESTIONS Use the following information for questions 27 to 30. rounded to the nearest whole number? a. $9. $18 units b. (loss). Information is provided concerning the Zooglar product: Sales $ 60.000 Zooglars during 2012. b. 35. . the unit variable cost is $150. has one product with a selling price per unit of $250. 75% 33. b. by how much will its profit increase? a $18 b.7% d. Hartley. The behaviour of costs and revenues are linear within the relevant range. 66. b. $390 d. Which one of the following is a consideration of CVP analysis? a. Selling either results in the same additional income for the company Not enough information is given 32. what does the term "cost" mean? a. Gift Gallery sold 2.000 If Gift Gallery sells 30 more units. c. It includes all manufacturing costs. d. Which one of the following is an assumption of CVP analysis? a.6-10 Test Bank for Managerial Accounting. Increases in inventories cause increase in total fixed costs. d. It includes all fixed and variable costs of products. c. b. Total fixed costs remain constant over the relevant range. The change in beginning and ending inventories is reflected in the analysis. Third Canadian Edition c. and the total monthly fixed costs are $750. Sales in units remain constant. Inc. Cost classifications are reasonably accurate. Factors other than changes in activity may affect costs. In CVP analysis. Total variable costs remain constant over the relevant range. It includes all costs which are part of cost of goods sold. 60% c. $540 c. How much is Hartley’s contribution margin ratio? a.000 Variable costs 24. Cost behaviour can change as long as total costs remain the same at all activity levels. d.000 Fixed costs 10. 36.000 Net income $ 26. 40% b.000. Which of the following is an underlying assumption of CVP analysis? a. $900 34. 37. It includes manufacturing costs plus selling and administrative expenses. All costs are variable. d. c. The level of activity must remain constant over the relevant range. c. 000 c. Setting selling prices c. $9 d. Unit selling price – Unit variable cost 41. Which of the following is the correct formula for the contribution margin per unit? a. 75% b. Controlling c.000 d. Which of the following is the correct formula for the contribution margin ratio? a. Sales – Total variable cost b. (Unit selling price – Unit variable cost) ÷ Unit selling price c. Cannot be determined without more information 44. Sarks Company has a contribution margin of $150. Sales – Total variable cost b. 6-11 Unit costs remain the same over the relevant range. (Unit selling price – Unit variable cost) ÷ Unit variable cost 43.000 b. In which one of the following calculations would CVP analysis be most important? a.000. Estimating units to be produced at capacity 39. Determining how many employees to hire d. $105. $500. 38. How much is the selling price of each unit? a. How much are total variable costs? a. Hardage Company has a contribution margin per unit of $15 and a contribution margin ratio of 60%.000 and a contribution margin ratio of 30%. 50% c. $45.000 42. Calculating depreciation expense b.000 and variable costs are $45. $25 b.50 c. (Unit selling price – Unit variable cost) ÷ Unit selling price d. How much is the contribution margin ratio? a. Unit selling price – Unit variable cost d. 25% . Directing b. Unit selling price ÷ Unit variable cost c.Cost–Volume–Profit d. Organizing 40. $350. Planning d. To which function of management is CVP analysis most applicable? a. Sales are $60. $37. 667 d. c.000 46.000. unit variable cost of $6 and total fixed costs of $60. A company has total fixed costs of $180. $126. b.000 d. d. It is the point where total sales equal total fixed costs.000 b. c. $600.000. It is the point where total variable costs equal total fixed costs. 180. 320. It will increase by the unit contribution margin. 49. How much sales are necessary to break-even? a. $540. Fixed costs are $400. What is the breakeven point? a.000 47. It is the point where total sales equal total variable plus total fixed costs. . $500. d. 10. A company sells a product which has a unit sales price of $9.6-12 Test Bank for Managerial Accounting.000 and the contribution margin per unit is $80.000 c. Third Canadian Edition d.000 and a contribution margin ratio of 30%. 20.000 b. Tykee Company has the following data: Variable costs are 75% of the unit selling price.000 units d. Which one of the following describes the break-even point? a.000 c. It will increase by the fixed cost divided by the unit contribution margin. It will increase by the unit selling price.000 c. $12. 5. How much sales will CopperZ report at its break-even point in dollars? a. $2. 6. It will decrease by the unit variable cost.000 d. CopperZ Company has variable costs which are 40% of its unit selling price and fixed costs of $30. $18. $54. How many units must the company sell to break-even? a.000 units 51. $50. It is the point where the contribution margin equals zero. $75. Cannot be determined without more information 45.000 50.000.000 b. what will happen to its operating profit? a. 48. and it sells one more unit. If a firm is currently at the break-even point.000 b.000 c. b. Total cost line b. Which one of the following is true? a. the lower the fixed costs. Which of the following expresses the break-even point? a. Tiny Tots Toys has actual sales of $400. Which one of the following calculates the break-even point in units? a. 53.8% 57. 54. b. How far variable costs can rise before the firm has an operating loss 56. Sales line d. c. 65% c.000 ÷ . What does the margin of safety measure? a. Divide fixed cost per unit by the contribution margin per unit. At the intersection of the total cost line and the sales line d. c. d. The higher the dollar amount. Divide total contribution margin by the number of units sold. How much sales can drop before the firm has an operating loss c.75 = X d.Cost–Volume–Profit 6-13 The contribution margin per unit is $400. The higher the ratio. At the intersection of the sales line and the fixed cost line b. ($600. Needles.000. Divide total fixed costs by the contribution margin per unit. The higher the ratio.75 = X c. 35% b. . b.000 = X b. The fixed costs are $600.25 = X 52. the greater the margin of safety. Which one of the following lines is not drawn separately on a CVP graph? a. Inc. At the intersection of the variable cost line and the fixed cost line c.000.25 x 600. $600. Divide total fixed costs by the contribution margin ratio. d. Fixed cost line c. the lower the margin of safety. Variable cost line 53. . 286% d. The break-even point is not relevant. 600. Where is the break-even point located in a CVP graph? a. At the intersection of the mixed cost line and the sales line 55. How far prices can be changed before the CVP analysis is no longer valid b. was evaluating its margin of safety.000 and a break-even point of $260.000 ÷. How far fixed costs can drop before the firm has an operating loss d. How much is its margin of safety ratio? a.000 ÷ $400) x . It calculated its contribution margin. $250. If the unit sales price is $10.000 units d. how many units must be sold to earn income of $40. $6. A company requires $600. How much is the target net income.000 b.750/1+tax rate)] ÷ contribution margin ratio c. What did the company do? a.000. Inc.000.750 for the month. b. $400. Third Canadian Edition 58.000 before M&H have an operating loss.000 in sales to meet its target net income after-tax.000 c. What calculation did Sulingo perform? a. calculated how many units it needed in order to earn net income totalling $67.000 61.000.000. 59. d.000. Sales can increase by $50.000 units 60. 18. $1. [Fixed costs + ($67. If M&H Ltd. unit variable cost is $8. 73. d. b. [Variable costs +($67. has a margin of safety of $100. and total fixed costs are $80. 62. c. Its contribution margin is 40%. 90.000 d. Sales can increase by $100. Fixed costs can increase by $100.750/1-tax rate)] ÷ contribution margin per unit d. [Fixed costs + ($67.050.000. given that its after-tax rate is 70%? a. Forms.000 before M&H have an operating loss. Sulingo.000 if total fixed costs are $100. c. [Variable costs + ($67. How much sales are required to earn a target net income of $80.667 d.334 units c. wants to sell a sufficient quantity of products to earn an after-tax profit of $40. It established its desired annual income for its product lines.6-14 Test Bank for Managerial Accounting.000? Forms.750/tax rate)] ÷ contribution margin per unit 63. and fixed costs are $80. and fixed costs can decrease by $50.000 c. 40. Inc has a tax rate of 40%.000. the contribution margin ratio is 40% and the tax rate is 25%? a. Sales can decrease by $50. $160. a. $112.750/1-tax rate)] ÷ contribution margin ratio b. Goose Bay Sync’s management established its target net income for the year. Inc.000 and fixed costs can increase by $40.000 b.000 before M&H have an operating loss. $516.000 . It determined the behaviour of its costs. It estimated its break-even income level for the year. which of the following statements is correct? a.334 units b.000 before M&H have an operating loss. $48. 000 to cover its fixed costs of $100. Which one of the following is true of the CVP income statement? . What percent are variable costs of sales? a.77% c. Gross profit of $230. determined its unit variable cost increased by 15%. b. The break-even point 67.000 b. Costs and expenses are classified only by function. 68.000 b.000 d.000 Total fixed expenses Total variable expenses $60. Costs and expenses are classified as product or period. Total variable costs c. 64% 66.000 and to earn net income of $80. Sales – Cost of goods sold – Operating expenses = Net income d.000 c. Which one of the following will not increase as a direct result? a. Contribution margin of $190. Contribution margin d. $550. 2. It shows contribution margin instead of gross profit. How much will Organizer Company report as sales when its net income equals $20. $132. Which one of the following is the format of a CVP income statement? a.000 65.000 d. Sales – Variable costs – Fixed costs = Net income 70. Sample. $366. Organizer Company has fixed costs of $200. c.000. It is prepared for both internal and external use. $520.667 c. Sales – Fixed costs – Variable costs – Operating expenses = Net income c.000 Which amount would you find on Chap’s CVP income statement? a. Contribution margin of $250. Stacker requires sales of $500. Which one of the following is true concerning a CVP income statement? a.Cost–Volume–Profit 6-15 64. Total costs b.000 69.000 120. 20% d. Gross profit of $190. Inc.000 100.000? a. Sales – Variable costs = Fixed costs + Net income b. 36% b. The following information is available for Chap Company: Sales Cost of goods sold $350. d.000 and variable costs are 60% of sales. 000 c.600.00 c. During April. 70% 73. How much do Clark’s operating income increase for each $1. How much is the contribution margin ratio? a. How much is the monthly break-even level of sales in dollars for Sutton Company? a. A division sold 280. which it sells for $20 each.6-16 Test Bank for Managerial Accounting.32 b.000 How much is the contribution margin per unit. During April. $7. which it sells for $20 each. 30% b. c.00 0 $1.00 0 280.400. During April. d. 700 drives were sold. 1. Third Canadian Edition a.000 750.000 drives were sold. $2.000 560. Fixed costs for April were $4 per unit for a total of $2.000 for the month. Each flash drive costs $6 of variable costs to make. $15.120.00 72. Sutton Company produces flash drives for computers.000 calculators during 2012: Sales Variable costs: Materials Order processing Billing labour Delivery costs Selling expenses Total variable costs Fixed costs $5. b.200. 71. $5. Each flash drive costs $6 of variable costs to make. $17.00 d. Fixed costs for April were $2 per unit for a total of $2. $100 b. 700 drives were sold.000 increase in revenue per month? a. Sutton Company produces flash drives for computers. 60% d. $700 .400 for the month. which it sells for $20 each.000 4.800 for the month. Sutton Company produces flash drives for computers. It provides the amount of gross profit of a company. It is part of accounting information provided to all financial statement users. It is used internally by management. It separates manufacturing from non-manufacturing costs. The variable cost to make each flash drive is $6. Fixed costs for April were $2 per unit for a total of $1.000 840. rounded to the nearest cent? a. $7. 40% c.000 d.000 1. $4.200 74. 4. b. $63.600 increase d. which produces only one product: Selling price per unit. $2. Margin of safety 78. Sutton Company produces flash drives for computers. c. $42. $50. If variable costs decrease by 10%. During April. $70. It decreases about 12 units.000 drives were sold.000 units.500 d. $2. Which concept answers the following question: ‘If budgeted revenues are above breakeven and decline.000 per year. Niagara Winery fixed costs are $10. Contribution margin b. Actual sales for the month of June.000 Not enough information to determine the answer. Each flash drive costs $6 of variable costs to make.200 for the month. $1. d.Cost–Volume–Profit b. 76. Relevant range of operations c. d.000 .750 increase c. Total fixed expenses.000 b. Model 26 has sales of 75 units with a contribution margin of $37 each. 6-17 $500 $14. $12. how far can they fall before the break-even point is reached? a. c. how much will profit change? a. $105. 75. How much is the margin of safety for the company for June? a. $1. $3. $8. $14. Inc. If sales of Model 26 increase by 50 units.000 c. 1. The following monthly data are available for Wackadoos.500 79. what happens to the break-even level of units per month for Sutton Company? a. $42.20 per unit for a total of $4. It decreases about 30 units. Unit variable expenses. How much in sales does Sonoma need to break-even per year if wine is its only product? a. Fixed costs for April were $4.400 increase 77. It is 10% higher than the original break-even point.850 increase b. $7.000 d.000 b. which it sells for $20 each. Operating leverage d.000. Its warehouse sells wine with a contribution margin of 20%.000 c. It depends on the number of units the company expects to produce and sell. Barcelona Bagpipes produces two models: Model 24 has sales of 200 units with a contribution margin of $35 each. d. It will increase. Test Bank for Managerial Accounting. It will remain unchanged. The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5. d. c. Which of the following is true about the break-even point in units? a. Line D is the variable cost line.6-18 80. 81.000. At point B. Fixed costs are $16. . The point identified by ‘A’ is the break-even point. Line F is the variable cost line. Line F is the break-even line. The point identified by ‘B’ is the break-even point. 82. c. Line F is the break-even line. The variable costs are $18 per unit. b. b.000 in fixed costs. It cannot be determined from the information provided. b. It will decrease. Select the correct statement concerning the cost volume-profit graph that follows: a. Wardley Corporation sells its product for $40. Third Canadian Edition Select the correct statement concerning the cost volume-profit graph that follows: a. profits equal total costs. Line E is the total cost line. c. d. 000 c. Croc Catchers calculates its contribution margin to be less than zero.00 85.000 88. Martin Worldwide sells a single product with a contribution margin of $12 per unit and fixed costs of $24. $12.000.Cost–Volume–Profit 6-19 83. and fixed costs are $32. Its profits are greater than its total costs. d.200 d. How much is the selling price per unit? a. . How much is Martin’s break-even point? a. $0 d. Not enough information 87. $24. Fallow-Hawke is funded by a local philanthropy in the amount of $32. How many deer can Fallow-Hawke capture during 2012? a. Inc.75 c. how much will profit increase? a. $380. Fallow-Hawke is a non-profit organization that captures stray deer from residential communities. variable costs are 25% of sales. variable costs are $55.50 d. Its fixed costs are less than the variable cost per unit. $4. and the unit contribution margin is $7.500 b.000. $71. Its selling price is $95 per unit. $23.200 b. Monthly fixed expenses are $20. The variable cost of capturing deer is $10. Which statement is true? a.50 b. Saver Company produces only one product. 2. The company should sell more units.500 units b. 4.000 units. c.000 d.25 b. $44. 2.000 for 2012. $32. 3. If Weed sells one unit more than break-even units. $11.500. $16 d.000.000.000 units 84.200 c. $43. 2.50 c. At the break-even point of 2.00 each. Weed. 2. How much is monthly net profit? a.000.500 c. Fixed costs are $10. b. monthly unit sales are 3. $24. Its selling price is less than its variable costs.500 86. 000 per year.000 and $8 per person for books Tickets will be $5 per student. $150.000 92. Both companies will report the same profits since total costs are the same. d. Fixed costs per month are $4.000 d. Neither option has risks. *93.000 91.000 and $30.6-20 Test Bank for Managerial Accounting. Other items will be donated by recruiters wishing to network with students. Phi Kappa is planning to hold a seminar for students at the University Centre.000 respectively. ABC Bread sells a box of bagels with a contribution margin of 62. Both options provide the same amount of risk.000 and $60. . If both companies experience an increase in sales. 90. $240.750 b. $600 d. If Swashbuckler sells 10 more units beyond break-even. Both companies have the same net income. $12. Option 1 b. Company B c. c. Sales mix is important to managers because different products often have substantially different contribution margins. how much does profit increase as a result? a. Which is not true concerning sales mix? a. Company B’s variable and fixed costs at break-even total $30. $90. Which option will cause the biggest loss if very few students attend? a. Swashbuckler. produces buckets. Both have the same annual fixed costs. Company A’s variable and fixed costs at break-even total $60. $120 b. More information is needed to determine the answer. d.000 c. $93. b. How much sales dollars does ABC Bread need to break-even per year if bagels are its only product? a. Option 2 c. Inc. which company will have the higher net income? a. $400 c. It has two options: OPTION 1: or OPTION 2: Fixed rental cost of $1.000 and $12 per person for books Fixed rental cost of $3. The selling price is $20 per unit and the variable costs are $8 per bucket. Sales mix is the relative percentage in which each product is sold when a company sells more than one product. Sales mix does not affect break-even analysis.5%. Company A b.000 respectively. Company A and Company B sell their products for exactly the same sales price. Its fixed costs are $150. Third Canadian Edition 89.800. In a sales mix situation. weighted-average unit contribution margin decreases. at any level of units sold. *96. *95.100 $ 400 75% Video computer $1. 800. d. $375. 686. c.Cost–Volume–Profit d. 172 c. The break-even point in units is a. b. .750 1.00. b.125 d. 515 d. $300. $276.125.125 in fixed costs.00. d. How many audio computers will be sold at the break-even point? a. $225. more fixed expenses are incurred.50. 477 b.00.000 b. c. $1. 267. $372. b. $475. net income will be higher if a. Sherwood incurs $300. more higher contribution margin units are sold than lower contribution margin units.000 c. d.500 1. $437. 632. Per unit data on the two products is presented blow: Unit data Selling price Variable costs Contribution margin Sales mix Audio computer $1. 6-21 The computation of weighted-average unit contribution margin is useful in sales mix analysis. 158 97. more lower contribution margin units are sold than higher contribution margin units c. one is designed for audio applications and the other for video applications. Use the following information for items 94-97: Brad Sherwood Corporation sells two types of computers.250 *98. The weighted-average contribution margin is a. What will be the total contribution margin at the break-even point? a.200 $550 25% *94. definitely increase net income. *103. Third Canadian Edition Estes Company sells two types of computer chips. either increase.00. not change net income. Use the following information for items 103-106: Ed Green Corporation has two divisions. The weighted-average unit contribution margin for Estes is a. 24. 46%. $1. How many Drews would Proops sell at the break-even point? a.000 in fixed costs. The sales mix is 30% (Chip A) and 70% (Chip B). Drew and Carey.000 b. Refer to the information in 100 above. 44%. b. decrease or not affect net income.420. c. 102.to low-margin sales.000.000 d. T’pol Corporation is considering a plan that will increase total units sold. b. c.800. The weighted-average contribution margin ratio is a. d. $23. The plan will a. d. Chip A has variable costs per unit of $20 and a selling price of $40. definitely decrease net income. b. Proops Company has a weighted-average unit contribution margin of $30 for its two products.6-22 *99. $(300. $27. . $3. 50%.000 Drews and 60. Expected sales for Proops are 40. *100.200.000. b. c.0 -. 40. Fixed expenses are $1.000. The sales mix is 60% for Outdoor Sports and 40% for Indoor Sports.50. Test Bank for Managerial Accounting.000 c. $25.00. 45%.000. Chip B has variable costs per unit of $25 and a selling price of $55. $50.000 Careys.000 101. At the expected sales level. more information is needed. while for the Indoor Sports Division it is 50%. 60. The contribution margin ratio for the Outdoor Sports Division is 40%.00. Outdoor Sports and Indoor Sports. d.000). Proops’ net income will be: a. The plan will cause a shift from high. c. d. $ . Green incurs $2. 36. 750.300.565.000. 6.420. 110.000.000. b. c.000 b.000. gross margin versus sales.85. d. $985.960. $5. and fixed costs of $250. $1.869. 15%.000 d. . c. Old Canadian’s contribution margin ratio is a.000 *106. $4. *105. The break-even point in dollars is a. c. $166. $2.739 d.50. 1. *109. variable costs of $200. d. Use the following information for items 108-111: Old Canadian Company has sales of $500.200. d. variable costs of $425. b. b.600.000.000 b. d.00. c. $4. $4.667.977. New World’s degree of operating leverage is a. $2.000.000 c.000. and fixed costs of $25. 6.000 c. $3.921. . 60%. New World Company has sales of $500. $2. 95%. 108. Old Canadian break-even point in dollars is a. fixed costs versus variable costs.67.500.000 *107. selling expenses versus administrative expenses. selling and administrative expenses versus cost of goods sold. What will be the total contribution margin at the break-even point? a. $2. b. $ 960. 85%.600.Cost–Volume–Profit 6-23 *104. Cost structure refers to the relative proportion of a.777. What will sales be for the Outdoor Sports Division at the break-even point? a. 33. It indicates the sales mix of the company’s products or services. Manuel Company’s degree of operating leverage is 2. c. c. . 116. Techno’s earnings would go up (or down) by ________ as much as Manual’s with an equal increase (or decrease) in sales. Companies that have higher fixed costs relative to variable costs have higher operating leverage. 111. $450. d. Operating leverage refers to the extent to which a company’s net income reacts to a given change in sales.83.0. 3 times d. It separates variable and fixed cost components.67. A major reason for using the contribution format income statement is that: a. It increases information available to management. c. b. $466.17. b. 115. New World’s margin of safety ratio is a. The margin of safety ratio a.0. Third Canadian Edition b. *113. c.6-24 Test Bank for Managerial Accounting. b. c. a.000. d. When a company’s sales revenue is decreasing. d. *112. is used to determine the break-even point. When a company’s sales revenue is increasing. d. 6 times 114. d. high operating leverage is a good thing because it means that profits will decrease at a slower pace than revenues decrease. . high operating leverage is a good thing because it means that profits will increase rapidly. A major benefit of using a contribution ratio format is that: a. It allows management to establish what sales level is necessary to cover fixed costs. 2 times c. b. Which of the following statements is not true? a. . $400. is calculated as actual sales divided by break-even sales. . Techno Corporation’s degree of operating leverage is 6. measures the ratio of fixed costs to variable costs.667. indicates what percent decline in sales could be sustained before the company would operate at a loss. It supports management’s decision on its sales mix.000. 1/3 b. . It assists in determining the effect of sales on operating income. b. Every unit of product sold will decrease income by the contribution margin. Management can assess if its targets are reasonable in order to cover fixed costs. In a competitive business environment. management will not suffer the consequences. c. Variable costs may fluctuate and this will affect the break-even calculation. *123. The target profit should be shown after the break-even analysis indicates zero profit or loss. Annual increases in fixed costs such as power c. Changing the mix of its products offered. If sales do not reach the targeted number. 119. d. d. d. In making new agreements with its unions at contract time. d. When changing its advertising program to emphasize its new product line. It will show the operating profit if sales are not as expected. A target profit is added to variable costs. What aspect of business would have the greatest impact of a break-even analysis calculation? a. In adjusting the company’s prices on its products or services. Assists in planning for new equipment if sales can be reached. Annual decreases due to overall corporate cost savings d. Companies generally set sales targets higher than break-even figures because: a. 121. In using the contribution margin technique: a. c. Fixed costs must always be shown separate from other costs and the target. d. An income objective is set that can be communicated throughout the company. b. 6-25 Variable costs are isolated and can be easily reduced. Break-even analysis may not be effective in all situations. b.Cost–Volume–Profit c. 117. c. using break-even analysis would be least effective: a. Every unit of product sold will increase income by the contribution margin. It is critical for management to understand its overall sales mix when using contribution margin income statements because: . It shows the impact of fixed costs on the sales mix. A key reason for management to build in a margin of safety in its projections is: a. 122. It indicates the sales needed to attain a certain level of profit. c. Using the contribution margin format income statement. Variable costs will increase in direct relation to the contribution margin ratio. 118. which of the following will result from an increase of one unit sold? a. Variable costs will decrease in direct relation to the contribution margin ratio. b. b. Highly fluctuating costs from suppliers b. c. A target profit is added to fixed costs. d. Changes in sales estimates from management 120. b. Overhead allocation must be spread evenly across all product lines. . b. Its contribution margin will increase yet may result in less profits in high sales years. Its contribution margin will increase yet may result in higher profits in high sales years. Variable cost allocations between products may be difficult to determine. d.6-26 Test Bank for Managerial Accounting. it recognizes that: a. Its contribution margin will decrease yet may result in less profits in high sales years. c. Third Canadian Edition a. When a company decides to change its cost structure to reduce variable costs by increasing fixed costs. Its contribution margin will decrease yet may result in higher profits in high sales years. Fixed cost allocations between products may be difficult to determine. b. Different products can have widely differing contribution margins even with the same level of sales. *124. d. c. 35. *99. 85. 62. 114. 115. *109. Ans d a c a a d c b c b d d a c b d d d 6-27 . 46. 44. *112. 119. 38. 31. 82. 45. *98. 50. 84. 81. 63. 48. 64. 122. 41.Cost–Volume–Profit ANSWERS TO MULTIPLE CHOICE QUESTIONS Item 27. *105. *113. *104. 74. 42. 39. 72. 28. *100. 51. 110. 49. *95. 57. 55. Ans c a d b d d b a b a d b d a d c d a d a Item 87. 52. 70. 54. 102. 91. 92. *124. 40. *103. *106. 77. 73. 78. 88. Ans a c a d d d a c b a b b a c d c d a d c Item 67. 61. 75. Ans a b c d a a b c d b b b c d b b a c b b Item 47. 116. 80. 33. 30. 58. 53. 97. Ans a d b a c b c a c c c a c a c d a d d c Item *107. 37. 120. 111. 86. *123. 76. 36. *96. 43. 59. 32. 66. 117. 89. 60. 83. 69. 79. 90. *93. 121. 29. 118. 108. 68. *94. 65. 56. 71. 34. 101. No change in fixed costs.500 $11.600)/700 = $2 per unit For 4 units: $2 x 4 units = $8.55x . and the selling price is $7.000 700 1. Third Canadian Edition BRIEF EXERCISES Brief Exercise 125 Holiday Company produces two models.$60. by how much will profit increase? b.00 per unit.700 Net Income $ 400 $ 200 $ 600 a.000 ÷ $2. has fixed costs totalling $75. Red and Green.600 9. b.000 Sales revenue $7. by how much will profit increase? Solution Brief Exercise 125 a.500 per year.500 = 0 X = $$110.500 .000 of sales dollars Brief Exercise 128 Deighan Company had the following income statement: . If Holiday sells 4 more red units.50. Its fixed costs are $60. If Holiday sells 9 more green units.6-28 Test Bank for Managerial Accounting.$3.50 = 30. Information regarding the products is summarized for the month of April in the following table: Red Green Total Number of units 700 300 1. CM per green units: ($4.200 Fixed costs 1. No change in fixed costs.500 Variable costs 5.600 3.000 Brief Exercise 127 Diaz Donuts sells boxes of donuts each with a variable cost percentage of 45%.00 = $210.600)/300 = $3 per unit For 9 units: $3 x 9 units = $27.000.$5. Brief Exercise 126 MCL Inc.45% = 55% . Its contribution margin per unit is $2.000 $4. CM per red units: ($7. What is the break-even point in units and in dollars? Solution Brief Exercise 126 Break-even in units Break-even in dollars = Fixed costs ÷ Unit contribution margin = $75.000 units = Break-even in units X Selling price per unit = 30.000 units X $7.000 . How much sales dollars does Diaz need to break-even per year if donuts are its only product? Solution Brief Exercise 127 Contribution margin ratio = 100% . 000 Net income $15.000 = $6.000 1.000 Variable costs 36.000 $9.200 Incremental profit = 50 x ($8 .000 Margin of safety = (4.fixed Operating expenses . If it sells 50 additional widgets. footballs and baseballs.000 $2.000 Profit per unit $3.400 widgets.000 $25.000 9.60 If Sam has unlimited demand for both products.000 17.000 Brief Exercise 129 The following monthly data are available for Marketplace.000 units.$9 x – $9. which produces only one product which it sells for $22 each. Inc.$5) = $150 Brief Exercise 131 Sam Company makes 2 products.000 Fixed costs 9. Its unit variable costs are $9.000 .600 Sales can drop.$2. or fixed costs can rise. and its total fixed expenses are $9.000 .100 = 0 BEP in units = 700 units Units at current sales level = 4.400) .000 3.000 2.250 units) Cost of goods sold -fixed Cost of goods sold -variable Operating expenses .700) x $22 = $72.100. Additional information follows: Footballs Baseballs Units 4.75 $3.600 before the company incurs a loss Brief Exercise 130 At break-even point a company sells 2.$5(2. which product should Sam tell his sales people to emphasize? .000 Solution Brief Exercise 128 Sales – variable costs = contribution margin $25.400) – x = 0 Total fixed costs = $7. by $72. How much is the margin of safety for the company for May? Solution Brief Exercise 129 BEP in units: $22 x .000 2. how much is incremental profit? Solution Brief Exercise 130 $8(2.000 .Cost–Volume–Profit Sales revenue (1. variable cost is $5 per widget. Actual sales for the month of May totalled 4.000 7. and its fixed cost is $3 per widget.variable Net income How much is Deighan's contribution margin? 6-29 $25.500 Sales $60.$17. Its selling price is $8 per widget. then 60% = variable cost percentage. f.000 per month.3% c. Third Canadian Edition 6-30 Solution Brief Exercise 131 Contribution margin per unit: Footballs = [$60. 3 .$200 = $100 b. Brief Exercise 132 Determine the missing amounts. Unit Selling Price Unit Variable Costs Contribution Margin per Unit Contribution Margin Ratio $300 $200 a. Solution Brief Exercise 133 $500 x − $300 x − $170.000 last year. $100/$600 = 16. will Erin’s Tires still make a profit? Solution Brief Exercise 134 BEP in dollars: $300.000 Margin of safety in dollars: $775.7% e. $100/$300 = 33. $400 40% Solution Brief Exercise 132 a. variable cost per unit $300.000 = $6 Baseballs = [$25. 1 . and fixed costs of $170.$36.$7. Total fixed costs were $300.000 . Calculate the break-even point in units and in sales dollars.000 . and the contribution margin ratio was 40%. 2 . $600 c. $1.000/40% = $750.000 = 0 BEP in units = x = 850 units BEP in dollars = 850 units x $500 = $425.000 x 60% = $600 Or $1.500 = $7.000 = $25.000 Brief Exercise 134 Erin’s Tires had actual sales of $775.000.000 f. b.20 Sam should tell sales people to sell more baseballs due to the higher contribution margin per unit.000 .$400 = $600 Brief Exercise 133 Kettle Goods Company has a unit selling price of $500.000]/2.Test Bank for Managerial Accounting.$750. $100 d.000 . e. If rent is increased by $1.000 . $300 . $600 – $100 = $500 d. $400/40% = $1.000]/4. If 40% = CM ratio.000. 000 + $75. The contribution margin ratio of each line is: Standard. Sleek sells for $30 and has variable costs of $18.000. Brief Exercise 135 Whitey’s Fish Camp has sales of $1. and fixed costs of $400.60 9.000 = $200. Calculate the margin of safety in dollars and the margin of safety ratio.000 Margin of safety ratio: $200.$45) = Weighted-average unit contribution margin $6.000 75.60 *Brief Exercise 138 Garrett Corporation sells two product lines. The sales mix of the three sets is: Sleek.000 − [$400.500.000 100.000 increase in fixed costs is within the margin of safety.000 X 12 months = $12. What is the weighted-average unit contribution margin? Solution Brief Exercise 137 (6–8 min.00 6.) Sleek: 50% X ($30 .500.800. In making the sales. 50%.Cost–Volume–Profit 6-31 Increase in rent: $1.000 for the first quarter of 2012.00 $21.000/25% = $1.000 Fixed $550.280.000 + $80.000 + $100. Garrett’s fixed costs are $2.000] = $228.000 80.5% .000.$18) = Smooth 30% X ($50 . Smooth sells for $50 and has variable costs of $28.600. Solution Brief Exercise 135 $1.000 67.000 − $1.000 = 11. Potent sells for $90 and has variable costs of $45.1% *Brief Exercise 137 Haldi Corporation sells three different sets of sportswear.000.000] − [$550. the company incurred the following costs and expenses. 30%.000 Margin of safety in dollars: $1.000 Calculate net income under CVP for 2012. What is the dollar amount of Deluxe sales at the break-even point? Solution Brief Exercise 138 Standard: 70% X 35% = (6–8 min. The contribution margin ratio is 25%.000 + $67. 30%.) 24.000 Brief Exercise 136 Strom Widget Company reported actual sales of $1. The sales mix of the product lines is: Standard.$28) = Potent 20% X ($90 . Erin’s Tires will still be profitable. 45%.000 Therefore because the $12.600. 20%. and Deluxe. 35%.800. Solution Brief Exercise 136 BEP in dollars: $400. and Potent.800. and Deluxe. 70%. Product costs Selling expenses Administrative expenses Variable $400.000/$1. Smooth. 000 respectively.000.000 x 5% = $90.$165.800. Net income is expected to remain the same $100. d.000 X 30% = $1. Calculate the degree of operating leverage before and after the purchase of the new equipment and interpret your results. Increase in CM: $1.000 . Sheldon’s earnings would go up (or down) by 1.000 x 10% = $180. Increase in CM: New OI $1.000 and $8. e.280.000 New OI $150. calculate the effect on budgeted operating income. In each of the following scenarios.650.800.000 Operating income $150. Third Canadian Edition Deluxe 30% X 45% = Weighted-average contribution margin ratio 13.000.000.200.650. Dollar amount of Deluxe sales at the break-even point: $6.000.5% 38. Its budgeted sales for the next year are $10.000 to $300.000 = 2 After: $300.000 break-even point in dollars.000 $150.200.6-32 Test Bank for Managerial Accounting.000 / $100.5 times (3/2) as much as it would have before the purchase. c. Management of the company wants to see what some changes in activity and costs could have on its operating income. The new equipment will reduce variable labour costs. but increase depreciation expense. b.000 / $100.800.000. Brief Exercise 140 Lo-Calorie Doughnuts operates a chain of coffee shops in southern Alberta.000 Contribution margin 1.000 = 3 After the new equipment is purchased.000 / 38% = $6.000 b.000 Fixed Costs 1.000 a.) Current Budget Sales $10.) Contribution margin / Net income = Degree of operating leverage Before: $200.000. *Brief Exercise 139 Sheldon Corporation is considering buying new equipment for its factory.000 ) c.650.0% $2.000 + $180. a.000 x 10% = $165. Solution Brief Exercise 139 (4–6 min. with an equal increase (or decrease) in sales.000 = ( $15.000 .000. Increase in fixed costs: $1. Contribution margin is expected to increase from $200. A 10% reduction in variable costs A 10% increase in fixed costs A 5% increase in sales A 5% increase in fixed costs and a 5% increase in sales A 5% increase in fixed costs and a 5% decrease in variable costs Solution Brief Exercise 140 (4–6 min.800.000 = $330.000 Variable costs 8.000 and its fixed and variable costs were $1. 000 x 2 = $10.000 New CM = $10.000 .000.500 = $157.000 = $2.0 and 3.) Ipso $5.$7.000 + $90.000 .500 6-33 .500 e.000 x 5% = $82.000 x 5% = $90.000 $5.000 + $410.000.000 Facto $17.790. Solution Brief Exercise 141 Contribution margin Operating income Fixed costs (4–6 min.000 $5.000 .790.000 Increase in fixed costs: $1.000 = $410.000 x 5% = $82. Determine the fixed costs of each company.000 + $90.650.200.800.500 = $477.210.500 5. Increase in CM: $1.000 = $240.000 x 3.5 = 5.000 $12.500 New OI $150.500 New OI $150.210.000 .500 *Brief Exercise 141 Ipso Company and Facto Company have degrees of operating leverage of 2.$82.$1.000 d.000 Increase in CM: $2.650.5 respectively and each has operating income of $5.$82.800.000 x 95% = $7.Cost–Volume–Profit New OI $150.000 Increase in fixed costs: $1. New variable costs $8. 000 $975.000 − $1.000 = $0.750. total costs and expenses.000 505.781.505.000 400.000 − [$70.000 $1.000 14.000 700. a flavoured wine beverage.000]/$3.779.480.58 x − $61. Costs and expenses consisted of the following: Cost of goods sold Selling expenses Administrative expenses Total $1.000 + $15.000.480.000 units of product: Net sales.6-34 Test Bank for Managerial Accounting. $3.000 b.000 + $1. Calculate the break-even point units and dollars. The company’s income statement showed the following results from selling 375.305 units BEP in dollars: 66.50 x − $0. How much is net income for the year using the CVP approach? b. c. How much is the contribution margin ratio? Solution Exercise 142 (6 -8 minutes) a. Net sales Direct materials Direct labour Manufacturing overhead-variable Manufacturing overhead-fixed $3.000.000 + $40.000] = $1.000.000 + $35.000 30.50 per 8-ounce bottle to retailers. Number of units sold = $3.000. $2.000 = 0 Units = 66.000 450.457.000.000.50 c.345 or 66.000 Management is considering the following alternative for 2012: Purchase new automated equipment that will change the proportion between variable and fixed costs to 23% variable and 77% fixed.000 15.250.000 + $14.000 530.50 = $99.000] − [$17.500.000 Instructions a. and net loss of $698.000 Variable $900.000/$1.000.000]/2.000 Variable cost/unit = [$70.000 + $15. Management estimates the following revenues and costs at 100% of capacity.000 = 61% Exercise 143 Jay Manufacturing’s sales slumped badly in 2011 due to so many people purchasing gifts online.000 25. [$3.000 50.000 + $40.305 x $1. Third Canadian Edition EXERCISES Exercise 142 Ripple Company bottles and distributes Ripple Fizz.160.000 Selling expenses-variable Selling expenses-fixed Administrative expenses-variable Administrative expenses-fixed $35.000 $2.000 170.000 + $35.000 400.000.000 Fixed $600. The beverage is sold for $1.50 = 2.304. Instructions .000 1.000 + $1.58 BEP in units: $1.000.000.000.000 + $30. $1. 000 = $4.$27. c.000 23.000 units = $5/unit b.52 x − ($2.000 .250/375. Selling price − variable costs − fixed costs = $33. Information regarding these models is summarized for the month of March in the following table: Number of units Sales revenue Fixed costs Variable costs Net Income Bart 6.75 x − $2. d.000 = $1.480.000? Solution Exercise 144 (5-7 minutes) a.000/$2.75 x – $1.325.000 x 77%) = 0 New BEP in units = 591.480.808.$9*x .$60.480.000)/375. Calculate the break-even point in dollars under the alternative course of action for 2012. b.000 $90.781.000 = 39% New variable cost per unit = (23% x $2. Current variable proportion = $975.Cost–Volume–Profit a. Selling price = $1.000 = $33. Variable cost per unit = $975. Show how the contribution margin per unit of the Bart model was calculated.235 d.000 units 6-35 .000 Selling price per unit Contribution margin per unit $15 $5 $12 $3 Fixed costs of Bart will be avoided if only the Lisa model is produced. b.000 Lisa 14.000 $7. how many units must it sell to earn operating income of $33.000 $12x .000 c.75 per unit b. Instructions a.000 units BEP in dollars = 700. Calculate the break-even point in dollars for 2011. Determine the selling price per unit. Bart and Lisa. Which course of action do you recommend? Justify your answer.000/375.000 $15. Exercise 144 Homer Company produces two models. Total contribution margin/units = ($90.75 = $2.000 x = 20. Since the break-even point declines.60 per unit Sales − VC – FC = 0 $4.505.000)/6.52 per unit $4. the company should select the alternate option.207 units New BEP in dollars = 591. If Homer produces ONLY the Lisa model.207 x $4.000 = 0 BEP in units = 700.75 = $3.000 60.000 x $4.000 $168.000 126.000 = $2.60 x − $1. Solution Exercise 143 (8-10 minutes) a.000 27. $65 – $15 = $50 b.250 = $13. Wages. She estimates the following costs during the year: Depreciation on the building and equipment = $21. and will allow the average price of services to be increased to $75. This will cost an additional $4.500 + $7. Each window tinted takes 5 square feet of tint. Calculate the number of services Alice must provide in order to break-even.00 per service.880. c. with an annual increase in depreciation of $10.80 x − $13.250 (based on 625 windows tinted in the previous year). c.80 x − $13.) a. $63 x − $26. How many services will Alice need to provide to break-even under these changes? d. Should Alice upgrade the shower area? Why or why not? Solution Exercise 146 a. How many windows need to be tinted to earn income of $21.000? Solution Exercise 145 (6–8 min. depreciation on equipment.$3 = $9 Exercise 145 Gloria Meehan is considering opening a window tinting business.000 + $87. Florida. How much is the contribution margin per service? b. $7.000 .000 = 960 units Exercise 146 Alice Davies operates a day spa in Jacksonville. Instructions a.000 Maintenance person’s annual salary = $34.250. b.750 = $0 BEP in units = 380 units c. Third Canadian Edition *$12 . Variable cost: Wages.500.000 Units to earn $21. She estimates that the following costs will be incurred during the first year of operations: Rent.00 Total variable cost $26. $4 per square foot.000 Miscellaneous operating costs = $15 per customer per service Each service creates average revenue of $65 each. Alice is considering upgrading the shower area to attract more business and increase prices. (8–10 min.6-36 Test Bank for Managerial Accounting.) Fixed costs = $21. Determine the break-even point in number of windows to be tinted. Gloria anticipates that she will tint each window for a retail price of $63 each.750 = 21.000 = $142.80 per window + Materials: (5 sf x $4/sf) 20.250/625 $6.000 + $34. tinting. $4.80 per window Fixed costs: $6.000 Spa Technicians’ annual salaries = $87. $6.750 b. Instructions a. $63x − $26. $4. Determine variable costs per unit and total fixed costs. 000. Nonetheless. He plans to sell his cola for a dollar per bottle.840 c.Cost–Volume–Profit 6-37 65 x − 15x − 142.000 = 0 x = 2.000 X 0. Variable costs are $0. He realizes that the soft drink industry is dominated by only three companies that keep the competition out by spending a great deal on advertising. Sales (100.880) = 0 X = 2.000 Daryl is concerned the slowdown in the economy will have a negative impact on sales. 75 x − (15x + 4x) − (142.000 b. What was Daryl’s margin of safety for August? b.000 63.000 + 10.000 / 0. or $70. To add to Daryl’s concerns.000.730 services d.20 per bottle. Yes. and sales fall by 10%? Solution Exercise 147 (6-8 min.000 Variable costs 30.000/$100.9 units) Variable costs Contribution margin Fixed costs Operating income $90.000 Fixed costs 49. his landlord is looking to increase his monthly rent by $1.$70. Fred is tempted by the high profit margin.000 Exercise 148 Fred is thinking of entering the soft drinks market in the area surrounding his cottage. It reported the following results for the month of August: Sales (100.7.000 $13.000 = 70% Break-even in dollar = $49.) a.000 = $30.000 27. The number of services to be provided to break-even will decline.000 Operating income $21. Instructions a. Break-even in dollars = Fixed costs ÷ Contribution margin ratio Contribution margin ratio = Contribution margin ÷ Sales = $70. His fixed costs are estimated at $100.000 .000 50.000 Margin of safety = Actual sales – Break-even sales = $100. What would Daryl’s operating income be if the rent increase does occur.000 Contribution margin 70. He currently has the . Exercise 147 Daryl’s Anything For A Buck is a dollar store. He is going to call his company “Pop’s Pop”.000 units) $100. 000? c.320 and variable costs were 40% of sales.000.750 to reach his target income of $15.6 x − $4. The average sales price was $24. Instructions a.000.000 bottles to break-even.880 .750 bottles c. b. Doe Company sold 400 widgets.600 × 40%) Contribution margin Contribution margin per unit Unit sales price Less: Variable cost per unit ($24 × 40%) Contribution margin per unit $9. Break-even in units = Fixed costs ÷ Contribution margin per unit = $100.000 bottles. and as a ratio. How much are total variable costs at break-even? Solution Exercise 149 (7–9 min.000) ÷ ($1.000 bottles.760 ÷ 400 = $14. per unit. Contribution margin in dollars Sales (400 × $24) Less: Variable costs ($9.$0. Instructions a.840 $5. he will have income of (200. Calculate the break-even point in units and dollars.600 3. rather than sitting on his dock.000 bottles. BEP in units: $24 x − $9.80) .760 $24.$100.40 Contribution margin ratio: $14.00 9. or $60. He only needs to sell 125. What is Fred’s break-even in units? b.20) = 125.000 + $15.) a. 300 x $9. fixed costs were $4.000.000 bottles in a summer.00 .320 = $0 x = 300 units BEP in dollars: 300 x $24 = $7. If he does sell 200.200 c. b.40 ÷ $24 = 60% b.6-38 Test Bank for Managerial Accounting. c. Units needed for target income = ($100. Is Fred’s plan feasible? Solution Exercise 148 (7–9 min.$0. Determine the contribution margin in dollars.60 $14. In order to justify spending his time on this venture. Fred needs to have an operating income of $15. How many bottles must Fred sell to achieve his target income of $15.60 = $2.20) = 143.) a. Third Canadian Edition capacity to make and sell 200. and 143.00 .000 ÷ ($1. During the month.000 X $0.000. If Fred can sell 200. his plan is feasible.40 Or Contribution margin per unit ÷ Widgets sold = $5. Exercise 149 In the month of June. ....000/25........ How much additional sales revenue does the company need to break-even in 2011? b............ Fixed costs = Break-even Sales × CM Ratio = $920......... c. but the break-even point increased to $920.....000 = $26.......650 Units needed to break-even = 27.. 227.000 . Selling price per unit = $650..........................000 − (80.............000 = $9..Cost–Volume–Profit 6-39 Exercise 150 In 2011......400 Net income (loss) ...............25 per unit in 2012 and other costs and unit revenues remain unchanged..... Raple Stark Company Income Statement For the Year Ended December 31........000 x $26 = $676........000 Variable expenses .000 b............000/$10 = 80.. Calculate the contribution margin ratio for 2011. Calculate the amount of total fixed costs for 2012...........000 Total sales revenue to break-even = 26.... the selling price and variable costs per unit did not change...... Calculate the variable cost per unit............ If the company is able to reduce variable costs by $1.000 = $26 Variable cost per unit = $227. Units sold = $800.....000 × 40% = $368...000..........000 units $800.000 Additional sales revenue to break-even = $676...500/25.. b...10 x − $439....500 Contribution margin .500 Fixed expenses ....400 =$ 50................... Instructions a.......... Karly Company had a break-even point of $800..........................000 Exercise 151 The income statement for Raple Stark Company for 2011 appears below..... 439.....650? Solution Exercise 151 (7–9 min...000 = $0 VC = $6 per unit b..000) (x) − $320.......................... 2011 ——————————————————————————————————————————— Sales (25.............................. In 2012....... $( 16.................... $26 x − [($9.............10 $26 x − $9...... 422... how many units will the company have to sell in order to earn a net income of $50.........000 units) ..) a...... ($10 − $6)/$10 = 40% c....000........900) Instructions Answer the following independent questions and show computations to support your answers: a..) a......... $650.. Solution Exercise 150 (7–9 min.10 − $1....................25) x] − $439................000 based on a selling price of $10 per unit and fixed costs of $320....000 − $650..........400 = $0 Total units to break-even = 26.. 000 $90 x − $54 x − ($432. $90 x − $54 x − $432.000. and 5.000 c. how many additional units must the company sell to earn the same net income it is now making? Solution Exercise 152 (7–9 min. How much can sales decline before the company experiences a loss? Solution Exercise 153 (4–5 min.000 units b.000 on an advertising program.400 x $90 = $1. estimates that variable costs will be 55% of sales and fixed costs will total $297.000 + $135.000 units.600 units will be sold.000 .000 = $50. b.400? c.750 Exercise 153 Tractor Power.750 − 14. Calculate the break-even point in units and dollars.000 = $72. but plans to spend an additional $135.000) = $72.600) – $660.500 x $120 = $660. Instructions a.) a.000 = $12.6-40 Test Bank for Managerial Accounting.500 Sales = 5.000 = $0 Units = 5.000 = 3. $90 x − $54 x − $432.206.000 b. How many units must be sold to break-even? b.400 x = 13.000 Units needed = 17. Margin of safety in dollars: ($120 x 5.750 Additional units = 17.) a. a. What are the total sales in dollars that must be generated for the company to earn a profit of $50. The selling price of each gear is $120.000 ($36) − $432.000 Instructions Answer the following independent questions and show computations to support your answers. Current income = 14. Inc.000 = $0 x = 12.400 units Sales = 13. If the company is presently selling 14. Third Canadian Edition Exercise 152 Slow Movers developed the following unit amounts for one of its divisions that manufacturers one product: Per Unit Sales price $90 Variable cost 54 Contribution margin $36 Total fixed costs $432. Variable cost per unit = $120 x 55% = $66 $120 x − $66 x − $297. ..................................... Solution Exercise 154 a................... 4............ management expects fixed costs to be $43.000 Selling ..................................................................... Variable costs are $7 per unit..................... 26.............................. Instructions a..000 Contribution margin ...............................) Oak Hammock Company Income Statement For the Year Ended December 31. Oak Hammock Company produced and sold 15..................500 b.......... Exercise 155 Varona Company makes student book bags that sell for $12 each.................000 buckets.......000................... For the coming year... 2012 ——————————————————————————————————————————— Sales ...........Cost–Volume–Profit 6-41 Exercise 154 Oak Hammock Company developed the following information for its bucket sales: Sales price Variable cost of goods sold Fixed cost of goods sold Variable selling expense Variable administrative expense Fixed selling expense Fixed administrative expense $6...............500 Variable expenses Cost of goods sold ....................500 Fixed expenses Cost of goods sold .... 3.........................................25 per unit $4................................... Both report the same net income assuming ending and beginning inventories do not change during the period....................... (9–12 min.................................................. .................................... $97.......000 $3..........000 For the year ended December 31........750 Total variable expenses .............................. Calculate break-even sales in dollars.. 61............50 per unit $26.... b....... Briefly explain how this statement differs from the traditional GAAP income statement......000 10% of sales price $0... $28..... 33.....000 Administrative ..... 9. Prepare a CVP income statement using the contribution margin format for Oak Hammock Company for 2012........................... Instructions a.000 Net income ............. The contribution margin income statement format separates costs into fixed and variable components......750 Selling expenses ...500 Administrative ..................50 per unit $1............. $22....... 36.. The traditional income statement separates costs into product and period costs..................000 Total fixed expenses .... 3..... 2012........................................ 200 Exercise 156 Graphly Company has prepared the following cost-volume-profit graph: I B H E A F G C D Instructions For the items listed below. Third Canadian Edition 6-42 b. $12 x − $7 x − $43. produces a hip-hop CD that is sold for $15.600 units. Calculate the sales in dollars required to earn net income of $30.200 b.000 = $30. E Dollars 3. C Fixed costs 4. F Variable costs 9. A Break-even point 2. H Total costs 8. Fixed costs ____ 4. Profit ____ 6. Solution Exercise 155 (4–5 min. enter to the left of the item. Loss ____ 5. 8.000 X = 14. 14. Break-even point ____ 2.Test Bank for Managerial Accounting. D Activity base Exercise 157 Speakerboxx Music. Inc.000.600 x $12/unit = $175. Activity base Solution Exercise 156 1. Fixed expenses total $6. Variable costs ____ 9.750. B Profit (4–7 min. G Loss 5.600 × $12/unit = $103.600 units. I Revenues 7. . the letter in the graph which best corresponds to the item. The contribution margin ratio is 30%. ____ 1.) 6. Revenues ____ 7.) a.000 = $0 X = 8. Dollars ____ 3. $12 x − $7 x − $43. Total costs ____ 8. Fill in the dollar amounts for the summary income statement below based on your answer to part C. Calculate the variable cost per unit.500 units c. Instructions a. Fill in the dollar amounts for the summary income statement for 2012 below based on your answer to part A. c. earned net income of $250. The company's fixed costs are expected to be $75. d.500 53.000.200 X = 5. Calculate how many CDs that Speakerboxx will have to sell in order to make a target net income of $16. Sales revenue $ Variable costs Contribution margin Fixed costs Operating income Solution Exercise 158 (4–5 min. $15 x – $10.50 x – $6.000 $ .000 during 2012.000 during 2011.200.200 Exercise 158 Jagswear.750 = $0 X = 1. Variable cost per CD: $15 × (1 – .50/unit b.Cost–Volume–Profit 6-43 Instructions a.50 x – $6. Sales revenue Variable costs Contribution margin Fixed costs Net income $76. b. The company wants to earn operating income of $275. 60% x − 75.) a.950 6. Calculate how many CDs that Speakerboxx will have to sell in order to break-even.100 units d.30) = $10.750 = $16. and variable costs are expected to be 40% of sales.) a. Sales revenue $ Variable costs Contribution margin Fixed costs Net income $ Solution Exercise 157 (7–10 min. b.000 = 275.550 22. $15 x – $10. Determine the required sales to meet the target net income during 2012.750 $16. Inc. Sales revenue Variable costs Contribution margin Fixed costs Net income $583.) Sales mix 15% 60% 25% Margin $120 $ 60 $ 40 Contribution Margin $ 18 $ 36 $ 10 64 $5.000 ÷ $64 = 85. b. Calculate the revenue from each type of service that the company must achieve to breakeven. What amount of revenue would Account-Able earn from tax services if they achieve this goal with the current sales mix? Solution Exercise 160 (10–15 min.750 bikes 51.6-44 Test Bank for Managerial Accounting.000 = 85.333 350.440.000 *Exercise 159 Trail King manufactures mountain bikes.000 bikes 21. The company has a desired net income of $1.000 $275.) a. Instructions Calculate the number of each type of bike that the company would need to sell in order to breakeven under this product mix.000.440. Instructions a.100.000 = 12. Its sales mix and contribution margin information per unit is shown is follows: Sales mix Contribution margin Destroyer 15% $ 120 Voyager 60% $ 60 Rebel 25% $ 40 It has fixed costs of $5. The company’s fixed costs are $8.000.333 b.000 bikes Sales mix 15% 60% 25% X X X 85.000 75. Accounting-related services represent 60% of its revenue. and provide a 45% contribution margin ratio. Contribution Weighted Average .800. Third Canadian Edition Required sales = $583. Tax services provide 40% of its revenue. Solution Exercise 159 Destroyer Voyager Rebel Total break-even sales = Destroyer Voyager Rebel (8–12 min.000 = 85. and provide a contribution margin ratio of 30%.000.333 233.250 bikes *Exercise 160 Account-Able provides primarily two-lines of service: accounting and tax. 000 d.000 140.000 $ 60.000 VG Systems $200.000 + $1.100.20 = $120.000 $ 9.100.000 480.000.000 228.000 = 30% b.000 6-45 .000.000 ÷ .000 ÷ $200.000 X $27.000) ÷ .000 ($8.Cost–Volume–Profit Accounting Tax Total break-even sales = Accounting Tax Sales mix 60% 40% Margin Ratio 30% 45% $8.000 Total $1. Weighted average contribution margin ratio = (80% x 40%) + (20% x 30%) = 38% c. Determine the sales level. c.000 x .38 = $600.000) = 80% VG Systems: $200.500.000 ÷ ($800.000 620. Sales dollars at break-even point Computers: $600.000 x . d.000 = $11.000 ÷ ($800. in dollars.000 $320.000. Variable costing income statements for the current year are presented below: Sales Variable costs Contribution margin Fixed costs Net income Computers $800.000 = $13.500.000 380.800.000 $ 152.000 VG Systems: $600.36 = $22.000 ÷ .80 = $480.500. The business is divided into two divisions along product lines. for each division at the break-even point. Break-even point in dollars = $228.000 = 40% VG Systems: $ 60.36 = $27.000) = 20% Contribution margin ratio: Computers: $320.000 Sales mix 60% 40% X X b. b.000 + $200.000 *Exercise 161 Mad City Flash sells computers and video game systems. Calculate the company’s weighted average contribution margin ratio. and contribution margin ratio for each division. Calculate the company’s break-even point in dollars. Determine the sales mix.500.000 Instructions a. Solution Exercise 161 (15–20 min.000 ÷ $800.000 + $200.) a.000 = $22. Sales mix: Computers: $800.500.500. Sales to achieve target net income = Sales mix 40% Tax Contribution Margin Ratio 18% 18% 36% $22. Variable costing income statements for the two companies are shown below: Sales Variable costs Contribution margin Fixed costs Fireside $1.000 = = = Degree of Operating Leverage 2. Sales revenue Variable costs Contribution margin Fixed costs Net income Antique Company $ 700.000 200.000 400.000*** 448.000* 280.000 $ 80. b.000 *** ($140.000) x $560. Assume that sales revenue decreases by 20%. Antique Contemporary (15–20 min.000* 112.000 . Prepare a variable costing income statement for each company.000 350.000 350.000 $150.) Contribution Margin ÷ Net Income $350.000 Instructions a.000 $ 38.000 560.000 200.733 b.000) x $560.000 600.000 410.000 750.000 200.000 Contemporary Company $700.000 ÷ ÷ $150.000.000 $150.000 ÷ $700.000 *$700.000 ÷ $700.000 *Exercise 163 An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes.000.333 3.8 ** ($350.000 140.000 410. Third Canadian Edition *Exercise 162 The following variable costing income statements are available for Antique Company and Contemporary Company.000 $560. Solution Exercise 162 a. Fireside uses a labour-intensive approach and Stirring Moments uses a mechanized system.000 250.000 550.000 Contemporary Company $560. Sales revenue Variable costs Contribution margin Fixed costs Net income Antique Company $ 560.000 $150.000** 280.000 x . Calculate the degree of operating leverage for each company.000 Stirring Moments $1.6-46 Test Bank for Managerial Accounting. Determine the affect on each company’s net income if sales decrease by 10% and if sales increase by 20%.000 The investment banker is interested in acquiring one of these companies. (8–10 min. called the Jake Sparrow Model.000. % Change in Sales = = = Degree of Operating Leverage 2. Moments $750.000 6-47 $200. calculate the increase or decrease in operating income. Instructions: a. Instructions a.5%) Fireside St.00 3.000 x Degree of Operating Leverage b. If the new chest is produced and sold. This model has the following budgeted sales and costs data: Budgeted sales Selling price per chest Variable costs per chest Fixed costs for the year Manufacturing Head office admin 10. Calculate the lowest selling price per chest that could be charged for the company to break even. b.75 = = (20.000 St.Cost–Volume–Profit Net income $ 200.00 3.000 $175. b. Moments 20% 20% x x 2. The manufacturing fixed costs are considered to be avoidable costs whereas the head office admin costs are not.000 ÷ ÷ ÷ Net Income $200. is looking at adding a new treasure chest to its line up.0%) (37.75 = = 40.75 = % Change in Net Income Fireside St.000 $200. Solution Exercise 163 a.000 The company knows that the new chest will reduce sales of current models and the contribution margin of these models will decrease by $260.) Contribution Margin Fireside $400. Solution Exercise 164 (8–10 min. she is concerned about the impact that each company’s cost structure might have on its profitability.) .00 3.0% 75. Calculate each company’s degree of operating leverage. However. Do not prepare income statements. Moments (10%) (10%) x x 2.0% Exercise 164 Treasure Island Bullion Chests Ltd.000 chests $225 $120 $350. 000 x (X – 120) .200.000 In units: Total revenue 250.$260.000X = $1.) a.750.000 = $15 Fixed Costs ÷ Unit CM ratio: $1.000 = $0 10.000 X = $181 is the least that can be charged for the company to break even *Exercise 165 Jenson Industries manufactures and sells a mouse pad for office environments.6-48 Test Bank for Managerial Accounting.000 (30 – 15) – 1.750.050.200. Information on this product is as follows: Mouse pads sold 250.200.000 units b.750.000 ÷ 250. Third Canadian Edition a.$260.000 CM per unit: $3.000 per year Selling price $30 Variable costs $15 Fixed costs $1.000 ÷ .471 .000 ÷ 15 = 80.000 .000 .000 x ($225 .$120) = $1.50 = $2.000 Variable costs 250.200.000 . 10.000 Instructions: a.000 (Note that the HO admin fixed costs are unavoidable and therefore do not enter the calculation) b.000 = $440. [250.000 (30 – 15)] / [250.$350.400.000 Contribution margin $3.000 x $30 = $7.000 x $15 = 3. Determine the degree of operating leverage Solution Exercise 165 (8–10 min.500. In dollars: Fixed Costs ÷ CM ratio: $1. 10.$350. Determine the break-even point for this product in dollars and units b.810.000] = 1. .Cost–Volume–Profit 6-49 COMPLETION STATEMENTS 166. A _______________ income statement classifies costs and expenses as variable or fixed and reports contribution margin. break-even point can be determined by dividing fixed expenses by __________________________. The _________________________ provides a measure of a company’s earning’s volatility and can be used to compare operating leverage across two companies. _________________ is the relative percentage in which each product is sold when a company sells more than one product. The _______________ point is when total revenues equal total costs. 169. When more than one product is sold. *171. 170. 168. _______________ divided by the contribution margin ratio will give the amount of _______________ to break-even. The amount of revenue remaining after deducting total variable costs is called the ________________________________________. The difference between actual or expected sales and break-even sales is called the _________________________________________. *172. *173. 167. weighted-average unit contribution margin 173. degree of operating leverage . CVP 171. sales in dollars 169. Third Canadian Edition ANSWERS TO COMPLETION STATEMENTS 166.6-50 Test Bank for Managerial Accounting. break-even 168. contribution margin 167. margin of safety 170. Sales mix 172. Fixed costs. Activity index Variable costs Fixed costs High-low method Relevant range F. The percentage of sales dollars available to cover fixed costs and produce income ____ h. The operating level over which the company expects to operate during the year ____ c. E. The amount of revenue remaining after deducting variable costs ____ f. Costs that remain the same in total regardless of changes in the activity level ____ d. J. Match the items in the two columns below by entering the appropriate code letter in the space provided. H. Costs that contain both a variable and a fixed cost element ____ g. Mixed costs Break-even point Contribution margin Margin of safety Contribution margin ratio ____ a. B. A. C. The difference between actual sales and sales required to break-even . G.Cost–Volume–Profit 6-51 MATCHING 174. A mathematical method that uses the total costs incurred at the high and low levels of activity ____ e. D. The level of activity at which total revenues equal total costs ____ b. I. Third Canadian Edition 6-52 ANSWERS TO MATCHING a. E c. G b. D e. H f.Test Bank for Managerial Accounting. C d. F g. J h. I . management can readily identify the break-even point and can see how much profit or loss would result from varying levels of sales. Using a CVP graph. One of the toys is a paper doll. The company's sales were mainly to large educational institutions until last year. and to analyze the impact on net income of changes in sales or costs. This is necessary to create the axes and also to plot the total revenue line from the origin. with $0. information is needed concerning the maximum estimated level of sales units and the unit sales price. Briefly describe the type of information and data that you would need in order to prepare a CVP graph.50. and enough orders received to keep the department at full capacity for the immediate future. whose "clothes" are made of acetate and stay on the doll with static electricity. Each set consists of a doll and one set of clothes and sells for $2. Mackenzie is considering two options to improve profitability.000. After a CVP graph is prepared.75 per unit variable costs. One would reduce variable costs to $0. Solution Short Answer Essay 176 Several features of the CVP income statement make it more useful for internal decision-making.000. Short Answer Essay 177 (Communication) Alex Mackenzie has been the manager for two years of the production department of a company manufacturing toys made of plastic-coated cardboard. the CVP income statement shows the contribution margin. The CVP income statement classifies costs as either fixed or variable. The fixed costs for the department are $45. Also. when the dolls were sold for the first time to a large discount retailer. Being able to identify the behaviour of costs in this manner can aid management in controlling those costs. the costs must be broken down into fixed and variable components in order to plot both the fixed cost line and the total cost line.000 units.75. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users. The graph also makes it easy to portray the effects of any changes such as costs or selling prices. Mr. In addition. With the increased volume. what are the major points that could be made from the graph that would be of interest to management? Solution Short Answer Essay 175 To begin constructing a CVP graph. The dolls were sold out immediately. rather than by function. rather than a gross profit. Short Answer Essay 176 A CVP income statement is frequently prepared for internal use by management. Instructions . This helps management establish the extent to which their sales are able to cover their fixed costs. and the other would reduce fixed costs to $30.Cost–Volume–Profit 6-53 SHORT-ANSWER ESSAY QUESTIONS Short Answer Essay 175 A cost-volume-profit graph is frequently used in business meetings because it presents a picture of cost relationships within a company. The maximum volume is 80. 000 Plan #1: Reduce Variable Costs to $0.75 × 80.000 *Short Answer Essay 178 Jacob Andrews. Solution Short Answer Essay 177 The variable costs should be reduced to $0.000 = $220.50 per unit because profits are higher at this level. president of Video Adventure. Support your recommendation with a calculation showing him how profitability will change with each option.000 = $220.50 Profit = ($2. What is operating leverage? How does a company increase its operating leverage? Solution Short Answer Essay 178 Operating leverage refers to the change in net income that a company experiences when there is a change in net sales revenue. Third Canadian Edition Given the fact that sales are increasing. but decrease rapidly when sales revenue decreases. make a short (one paragraph) recommendation to Mr.000 = $130.75 × 80.000) – ($0.000 – $60. with a corresponding decrease in variable costs.6-54 Test Bank for Managerial Accounting.50 × 80. Companies that have higher fixed costs relative to variable costs have higher operating leverage.000 Plan #2: Reduce Fixed Costs to $30. A company can increase its operating leverage by increasing its reliance on fixed costs.000) – $45.75 × 80.000) – ($0. the company’s profits will increase rapidly when sales revenue increases.000 Profit = ($2. In that case.000 – $60.000 = $220. .75 × 80.000) – ($0.000 – $40.000 – $45.000 – $30. has heard about operating leverage and asks you to explain this term.75 × 80.000 = $135. Current Profit = ($2.000) – $45.000) – $30.000 = $115.000 – $45. Mackenzie about which option he should choose. B/E in new city: CM/Unit = $225 – 25 = $200 Incremental fixed costs = $61. In addition. Calculate the break-even volume in tonnes for the year b.224 tonnes e. [(2.100 tonnes of filling next year.9 = $450 .6 = $135.500 + 58.5 tonnes d.500 B/E point = 61.000 $ 94.000 / 250 = 1.000 ÷ 1. Calculate the sales volume in dollars needed if Vinnie is to maintain his after tax income of $94.000 B/E Point = $306.000 c. d. calculate the expected after tax income. He is worried that per-tonne selling prices will decline by 10% and variable costs will increase by $40 per tonne. Calculate the number of tones that will have to be sold to maintain the current after tax net income. CM/unit = $250 FC = 247.Cost–Volume–Profit 6-55 MULTI PART QUESTION Multi Part Question 179 The following information on the most recent years for Vinnie`s Cream Pie Fillings is available: Baking capacity Tonnage sold in year 3.500 45.000 $157.100 x 225) – 247.000 tonnes of filling 1.800 Sales Variable costs Contribution margin Fixed costs Manufacturing Selling Administration Income before taxes Income taxes @ 40% Net income $900.000 90.000 ÷ 1. Vinnie wants to ramp up production by investing in a new machine that will cost $58. If Vinnie expects to sell 2.000 112.500 ÷ 225 = 1.800 = $225 B/E point = $247. Assume instead that Vinnie does not purchase the machine or begin selling in the new city.500] x . e.500 ÷ 200 = 307. assuming costs and prices remain the same c.000 $405.000 495. Calculate the new break-even if the new machine is purchased.500. The benefit will be that variable costs will decrease by $25 per tonne.500 = $306. Vinnie will have to pay his cousin $25 for each tonne sold. Solution Multi Part Question 179 a.500 63. New Selling Price = 900.500 to advertise the product.500 Instructions: a.800 x . CM/Unit = $405.500.100 tonnes b. Vinnie`s cousin says he can sell pie filling to a new company in a nearby city but will require Vinnie to pay $61. Third Canadian Edition New VC/unit = $275 + 40 = $315 CM/Unit = $135 CM ratio = 30% Before tax income = 94.500 ÷ .6 = 157.000 .6-56 Test Bank for Managerial Accounting.30 = $1.500) ÷ .500 + 157.350.500 Sales = (247. modified. The material provided herein may not be downloaded. or related companies. recording. All rights reserved. The data contained in these files are protected by copyright. made available on a network. stored in a retrieval system.Cost–Volume–Profit 6-57 Legal Notice Copyright © 2011 by John Wiley & Sons Canada. mechanical. Ltd. used to create derivative works. This manual is furnished under licence and may be used only in accordance with the terms of such licence. or otherwise without the prior written permission of John Wiley & Sons Canada. photocopying. scanning. electronic. Ltd. or transmitted in any form or by any means. reproduced. .