Chapter 3 Week 3

Calculate contribution margin per unit assuming sales price is $21, variable cost is $11, and fixed cost is $6 per unit

$10

Sam's Dog Company sells two toys: Red and Blue. Red sells for $7 and has a variable cost of $5. Blue sells for $9 and has a variable cost of $6. The expected sales mix is 80% Red and 20% Blue. What is the weighted average contribution margin?

$2.20 Reason: Red ($2 CM × 80%) + Blue ($3 CM × 20%) = $2.20

A company's contribution margin is $14 per unit. If fixed costs are $6 per unit and variable costs are $9 per unit, the selling price of the product must be (blank).

$23 Reason: Contribution margin of $14 + variable costs of $9= $23 selling price

Assume the sales price is $15 per unit, variable cost is $6 per unit, and fixed cost is $5,000. If the variable cost decreases to $3 per unit, how many fewer units will have to be sold to earn a target profit of $4,000?

$250 Reason: $9,000/$9=$1,000 units $9,000/$12= 750 units for a decrease of 250 units

Assume the sales price is $10 per unit, variable cost is $5 per unit, and fixed cost is $1,000. If the variable cost increases to $8 per unit, how many additional units will need to be sold to earn a target profit of $3,000?

1,200 Reason: $4,000 ÷ $5 = 800 units; $4,000 ÷ $2 = 2,000 units for an increase of 1,200 units.

The sale price of a product is $20 per unit; the variable cost is $5 per unit; and fixed costs total $1,500. How many units must be sold to break even?

100 Reason: ($20n-$5n)-$1,500 =$0 N= $1,500/15=100 units

If the sale price of a product is $10 per unit; the variable cost is $6 per unit; and fixed costs total $10,000, how many units must be sold to earn a profit of $10,000?

5,000 Reason: ($10,000 + $10,000) / ($10-$6) = 5,000

Sam's Dog Company sells two toys: Red and Blue. Contribution margins are $5 for Red and $10 for Blue. The expected sales mix is 60% Red and 40% Blue. Total fixed costs are $3,000 and the company's desired profit is $500. How many total units must be sold to reach this goal?

500 units ($3,000+500)/(45*.6+10*.4)=500

Jen's Shampoo Company currently earns $50,000 net income. The marketing manager believes reducing the sales price per bottle from $26 to $22 will increase sales volume from 4,375 to 5,000 units. Variable costs are $10 per unit and total fixed costs are $20,000. If the sales price is reduced and the volume increases as expected, net income will _blank​_.

decrease by $10,000 Reason: ($22 × 5,000 units) - ($10 × 5,000 units) - $20,000 = $40,000. This is $10,000 less than Jen's current net income.

When compared to companies with high variable cost structures, companies with high fixed costs structures have _blank​_ risk

higher

The amount at which a company's sales can fall short before incurring losses is the (blank)

margin of safety

Reducing fixed costs (blank) the break-even point

reduces

Investigating a multitude of what-if possibilities involving simultaneous changes in fixed cost, variable cost, and volume is called (blank) analysis

sensitivity

Investigating a multitude of what-if possibilities involving simultaneous changes in fixed cost, variable cost, and volume is called (blank) analysis.

sensitivity

On the CVP graph, the break-even point is the point where total sales intersects _blank​_ cost.

total

When a company has multiple products the break-even point is calculated using the (blank)(blank) contribution margin.

weighted average

At the break-even point, profit equals (Blank)

Zero

Determining the sales price by marking up the cost is (blank)

cost-plus pricing

When a company sells a product for the variable cost to produce plus 25% of the variable cost, they are using a(n) (blank) strategy)

cost-plus pricing

True or False: The contribution margin ratio can only be computed using total sales and total variable cost

False- the contribution margin ratio can be computed using either total or per-unit amounts.

On a CVP graph, the (horizontal/vertical) axis represents activity in units.

Horizontal

Identify the underlying assumptions of CVP analysis.

Inventory levels in manufacturing companies are constant All CVP variables are within the relevant range The sales mix in multiproduct companies is constant

The contribution margin ration is calculated by dividing the contribution margin by (Blank)

Sales