chapter 18 accounting

A company has total fixed costs of $240,000 and a contribution margin ratio of 20%. The total sales necessary to break even are

$1,200,000.

Frazier Manufacturing Company collected the following production data for the past month: Units Produced Total Cost 1,600 $66,000 1,300 57,000 1,500 67,500 1,100 49,500 If the high-low method is used, what is the monthly total cost equation?

$13,200 + $33/unit

One outdoor Rolling Stones' show should bring 70,000 individuals for a gross of $2.45 million. The promoter guarantees $1.2 million to the Rolling Stones. In addition, 20% of gross goes to the stadium in which the performance is staged. Add another $400,000 for other expenses such as ticket takers, parking attendants, advertising, and so on. The promoter also shares in sales of T-shirts and memorabilia for which the promoter will net over $7 million during the tour. How much ticket revenue would the Rolling Stones' promoter need to break even on a single concert, ignoring T-shirts and memorabilia? Price per ticket = 2,450,000 ÷ 70,000 = $35 Stadium's share = 0.20 × 35 = $7 Net revenue to promoter = 35 - 7 = $28 per ticket Total fixed cost = 1,200,000 + 400,000 = 1,600,000 Breakeven ticket sales = 1,600,000 ÷ 28 = 57,142.86 Breakeven sales revenue = 57,142.86 × 35 = $2,000,000

$2,000,000

Boswell company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell's break-even point in units?

$40,000

One outdoor Rolling Stones' show should bring 70,000 individuals for a gross of $2.45 million. The promoter guarantees $1.2 million to the Rolling Stones. In addition, 20% of gross goes to the stadium in which the performance is staged. Add another $400,000 for other expenses such as ticket takers, parking attendants, advertising, and so on. The promoter also shares in sales of T-shirts and memorabilia for which the promoter will net over $7 million during the tour. If the promoter of the Rolling Stones concerts includes revenue from the sale of T-shirts and memorabilia into his/her calculations, how much ticket revenue is needed to breakeven on a concert? Assume that non-ticket revenue is variable and is projected on the basis of full occupancy. Total concert potential profit = 35,000,000 - 7,000,000 = $28,000,000 Potential profit per concert = 2,450,000 - 2,000,000 = $450,000 Number of concerts in a tour = 28,000,000 ÷ 450,000 = 62.22 Non-ticket revenue per concert seat sold = 7,000,000 ÷ (62.22 × 70,000) = $1.607 Price per ticket = 2,450,000 ÷ 70,000 = $35 Stadium's share = 0.20 × 35 = $7 Net revenue to promoter = 35 - 7 = $28 per ticket Total revenue including non-ticket sales = 28 + 1.607 = $29.607 Total fixed cost = 1,200,000 + 400,000 = 1,600,000 Breakeven ticket sales = 1,600,000 ÷ 29.607 = 54,041.27 Breakeven sales revenue = 54,041.27 × 35 = $1,891,445

1,891,445

A company desires to sell a sufficient quantity of products to earn a profit of $400,000. If the unit sales price is $20, unit variable cost is $12, and total fixed costs are $800,000, how many units must be sold to earn net income of $400,000?

150,000 units

April Industries sells a product with a contribution margin of $12 per unit, fixed costs of $223,200, and sales for the current year of $300,000. How much is April's break-even point?

18,600 units

Fixed costs are $3,000,000 and the unit contribution margin is $150. What is the break-even point?

20,000 units

A company has a unit contribution margin of $120 and a contribution margin ratio of 40%. What is the unit selling price?

300

Hollis Industries produces flash drives for computers, which it sells for $20 each. Each flash drive costs $13 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month. How much is the contribution margin ratio?

35%

Boswell company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell's contribution margin ratio?

45%

Which one of the following is not an assumption of cost-volume-profit analysis?

Changes in activity and sales mix are the only factors that affect costs.

Why is determination of a relevant range important?

Cost behavior outside the relevant range may be distorted.

A fixed cost remains constant in total and on a per unit basis at various levels of activity.

FALSE

A mixed cost has both selling and administrative cost elements.

FALSE

At the break-even point, contribution margin equals total variable costs.

FALSE

Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions.

FALSE

Contribution margin is the amount of revenues remaining after deducting cost of goods sold.

FALSE

Fixed costs are costs that remain the same per unit regardless of changes in the activity level.

FALSE

Mixed costs change proportionately with changes in the activity level.

FALSE

The contribution margin ratio is computed by multiplying contribution margin by unit selling price.

FALSE

The contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.

FALSE

The difference between the costs at the high and low levels of activity represents the fixed cost element of a mixed cost.

FALSE

The relevant range of activity is the activity level where the firm will earn income.

FALSE

target net income is calculated by taking actual sales minus the margin of safety.

FALSE

Which one of the following is not an assumption of CVP analysis?

Profit for the period is constant.

On a CVP income statement

Sales - Variable costs = Contribution margin.

A CVP income statement shows contribution margin instead of gross profit.

TRUE

A variable cost remains constant per unit at various levels of activity.

TRUE

An activity index identifies the activity that has a causal relationship with a particular cost.

TRUE

An assumption of CVP analysis is that all costs can be classified as either variable or fixed.

TRUE

Cost-volume-profit analysis assumes that changes in activity are the only factors that affect costs.

TRUE

If the unit contribution margin is $1 and unit sales are 10,000 units above the break-even volume, then net income will be $10,000.

TRUE

If variable costs per unit are 70% of sales, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000.

TRUE

Target net income is an income objective for individual product lines set by management.

TRUE

The high-low method is used in classifying a mixed cost into its variable and fixed elements.

TRUE

The margin of safety is the difference between sales at breakeven and sales at a determined activity level.

TRUE

The range over which a company expects to operate during a year is called the relevant range of the activity index.

TRUE

What is contribution margin?

The amount available to cover fixed costs and contribute to profits.

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.

Which of the following statements is FALSE? When fixed costs increase but variable costs decrease, the change in breakeven rate will be indeterminate. When fixed costs as well as variable costs increase, the breakeven rate will decrease. When fixed costs as well as variable costs increase, the breakeven rate will increase. When fixed costs as well as variable costs decrease, the breakeven rate will decrease.

When fixed costs as well as variable costs increase, the breakeven rate will decrease.

Mixed costs

are costs that vary as activity level changes, but do not stay the same per unit like variable cost.

At the break-even point

contribution margin equals total fixed costs.

A company would determine its breakeven quantity in the following manner

divide fixed cost by contribution margin per unit.

One of the following is not involved in CVP analysis. That factor is

fixed costs per unit.

The relevant range is

the range over which the company expects to operate during a year.

An example of a mixed cost is

utility costs.

Mixed costs consist of a

variable cost element and a fixed cost element.

The mathematical equation for computing required sales to obtain target net income is: Required sales =

variable costs + fixed costs + target net income.

A mixed cost contains

variable element and a fixed element.

A variable cost is a cost that

varies in total in proportion to changes in the level of activity.

Variable costs are costs that

vary in total directly and proportionately with changes in the activity level and remain the same per unit at every activity level.