Ch. 5 CVP

Dahlia Company sells a product which has a unit selling price of $5. Variable costs are 60% of the sales and total fixed costs are $200,000. The number of units that the Dahlia Company must sell to break even is

Break-even Point in Units = Fixed Costs ($200,000) ÷ Contribution Margin per Unit [$5- ($5 x .60)] = 100,000 units

Benson Company produces flash drives for computers which have variable costs of $10 per flash drive to produce. Each flash drive sells for $20 each. During the current month, 1,000 flash drives were sold. Fixed costs for the current month were $4,500. If variable costs increase by 10%, what happens to the breakeven level in units for the month for Benson Company?

Break-even Point in Units-Before (450 units) = Fixed Costs ($4,500) ÷ Contribution Margin per Unit ($20 - $10). Break-even Point in Units-After (500 units) = Fixed Costs ($4,500) ÷ Contribution Margin per Unit [$20 - ($10 x 1.10)]. Break-even Point-After (500 units) - Break-even Point-Before (450 units) = 50 units increase in break-even or 11% increase (50 ÷ 450) It increases by 50 units.

Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25%. If Gossen will break even at this level of sales, what are the fixed costs?

Contribution margin per unit is $1 ($4 X 25%). Fixed costs / Contribution margin per unit = Break-even point in units. Solving for fixed costs, 200,000 units x $1 per units = $200,000.

Why is determination of a relevant range important?

Cost behavior outside the relevant range may be distorted.

Which of the following is likely to contain a linear relationship between costs and activities?

Relevant range.

On a CVP income statement

Sales - Variable costs = Contribution margin.

Walden Company expects to sell 500,000 units for $6 per unit. The contribution margin ratio is 30%. If Walden will break even at this level of sales, fixed costs are

Since the break-even point is $3,000,000 (500,000 x $6) fixed costs are $900,000 ($3,000,000 x .30)

Redman Company had actual sales $800,000 and its break-even sales were $600,000. Morgan's margin of safety ratio is

The margin of safety ratio is 25% ($800,000 - $600,000) / $800,000).

Carla Vista Diesel owns the Fredonia Barber Shop. He employs 5 barbers and pays each a base rate of $1,480 per month. One of the barbers serves as the manager and receives an extra $510 per month. In addition to the base rate, each barber also receives a commission of $5.50 per haircut. Other costs are as follows. Advertising$220 per month Rent$980 per month Barber supplies$0.36 per haircut Utilities$180 per month plus $0.24 per haircut Magazines$20 per month Carla Vista currently charges $11.00 per haircut.

VC = Commission + Supplies + Utilities = $6.10 FC = Salaries + Extra Manager Salary + Advertising + Rent + Utilities + Magazines = $9,310 Break-Even Point = $11.00X = $6.10X + $9,3101,900 haircuts X $11.00 = $20,900 $4.9X = $9,310 X = 1,900 haircuts (No. haircuts x USP) - (No. haircuts x UVC) - FC = Net inc. Net income = ($2,420 x $11.00) - ($6.10 x 2,420) - $9,310 = $2,548

What type of cost remains the same per unit at every level of activity?

Variable cost.

Which statement describes a fixed cost?

When activity declines, its cost per unit increases.

At the break-even point

contribution margin equals total fixed costs.

The break-even point in dollars is computed by dividing

fixed costs by contribution margin ratio.

Costs that change in total but not proportionately with changes in the activity level are

mixed costs.

When comparing a traditional income statement to a CVP income statement

net income will always by identical on both.

Contribution margin is

the amount available to cover fixed costs and contribute to income for the company.

Cost-volume-profit analysis includes all of the following assumptions except

the behavior of costs is curvilinear throughout the relevant range.

Mixed costs consist of a

variable cost element and a fixed cost element.

Your phone service provider offers a plan that is classified as a mixed cost. The cost per month is $50 flat rate for the first 1,000 minutes plus $0.35 for each minute exceeding 1,000 minutes. If you use 1,200 minutes this month, your cost will be

$50 + ($0.35 x 200 minutes) = $120.

Deighan Company had the following amounts from its income statement: Sales revenue (800 units)$80,000 Cost of goods sold -fixed 20,000 Cost of goods sold -variable 18,500 Selling expenses - fixed7,000 Selling expenses - variable6,000 Administrative expenses - fixed5,000 Administrative expenses - variable7,500 How much is Deighan's contribution margin?

$80,000 − $18,500 − $6,000 − $7,500 = $48,000