Ch. 18

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A cost that behaves like a combination of fixed and variable costs is called a _____ cost.

mixed Explanation A cost that behaves like a combination of fixed and variable costs is called a mixed cost.

Contribution margin is computed as:

selling price per unit minus variable cost per unit Explanation Contribution margin is computed as selling price per unit minus total variable cost per unit.

After-tax income for Square Company is $10,000. Square Company pays 20% in taxes.

$12,500 Explanation [$10,000 / (1 − .20)] = $12,500.

Jelly Company has a product that sells for $150 per unit and has variable costs of $60 per unit. What is the contribution margin per unit?

$90 Explanation Contribution margin per unit = Selling price per unit of $150 − Variable costs per unit of $60 = $90.

Bloom Company management predicts that it will incur fixed costs of $255,000 and earn pretax income of $427,500 in the next period. Its expected contribution margin ratio is 65%.

1. Compute the amount of total dollar sales.

Hudson Co. reports the contribution margin income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (9,500 units at $225 each) $2,137,500 Variable costs (9,500 units at $180 each) 1,710,000 Contribution margin $427,500 Fixed costs 342,000 Pretax income $85,500

1. Compute the company's degree of operating leverage for 2019. Explanation 1. Degree of operating leverage=Total contribution margin/Pretax income =$427,500/$85,500 =5.0

A jeans maker is designing a new line of jeans called Slims. The jeans will sell for $365 per pair and cost $262.80 per pair in variable costs to make. (Round your answers to 2 decimal places.)

1. Compute the contribution margin per pair. 2. Compute the contribution margin ratio.

Blanchard Company manufactures a single product that sells for $160 per unit and whose total variable costs are $120 per unit. The company's annual fixed costs are $596,000.

2) Assume the company's fixed costs increase by $134,000. What amount of sales (in dollars) is needed to break even? Explanation (2) Sales (in dollars) to break even with increased fixed costs Break-even = (Original fixed costs + Additional fixed costs)/Contribution margin ratio = ($596,000 + $134,000) / 25% = $2,920,000

Bloom Company management predicts that it will incur fixed costs of $255,000 and earn pretax income of $427,500 in the next period. Its expected contribution margin ratio is 65%.

2. Compute the amount of total variable costs. Explanation 2.(Alternatively: $1,050,000 in sales × [1 − 0.65 CM ratio] = $367,500

Companies can use _____ analysis to predict income based on various changes in fixed or variable costs, selling price and volume.

CVP Explanation Companies can use CVP analysis based on different estimates of fixed cost, variable cost, selling price and/or volume to determine income.

A cost that increases as volume increases, but not at a constant rate is called a _____ cost.

curvilinear Explanation A cost that increases as volume increases, but not at a constant rate is called a curvilinear cost.

The total contribution margin will ____ fixed costs in a break-even multiple product income statement.

equal Explanation In a multiple product contribution margin income statement, the total contribution margin will equal fixed costs to yield a net income of zero.

A cost that does not change with changes in volume of activity is called a _____ cost.

fixed Explanation A cost that does not change with changes in volume of activity is called a fixed cost.

A cost that changes in proportion to changes in the activity output volume is called a _____ cost.

variable Explanation A cost that changes in proportion to changes in the activity output volume is called a variable cost.

Cost-volume-profit analysis is used to predict how changes in _____ levels affect profit.

costs and sales Explanation Cost-volume-profit analysis is used to predict how changes in cost and sales levels affect profit and requires the following four inputs: number of units sold, sales price per unit, variable cost per unit, and fixed costs.

Delta Company sells mini-flash drives. The selling price is $10 each and the variable costs are $8. If fixed costs are $3,000, how much in sales dollars must Delta have to break even?

$15,000 Explanation Break-even point in sales dollars = [Fixed costs of $3,000 ÷ Contribution margin ratio of 20% (or (Selling price per unit of $10 − Variable cost per unit of $8) ÷ Selling price per unit of $10) = $15,000.

CompuTop Company sells toy laptop computers for $30 each. If the variable cost for each laptop is $20 and fixed costs total $25,000, how much sales in dollars must it sell to generate a target income of $66,667? (Round your intermediate answers to 1 decimal place and your final answer to a whole dollar.)

$275,276 Explanation Contribution margin ratio = (Sales per unit of $30 − Variable cost per unit of $20) ÷ Sales per unit of $30 = 33.3% per unit. Dollar sales at target income = [(Fixed costs of $25,000) + (Target income of $66,667)] ÷ Contribution margin ratio of 0.333 = $275,276.

Month Tickets Sold Cost March 1,500 $10,000 April 2,000 $15,000 May 3,500 $19,000 June 2,500 $17,000 July 4,000 $22,000 The Movie Company has been in business for 5 months and wants to estimate its variable cost of tickets sold. Using the data from this chart and the high-low method, what is the variable cost for the Movie Company? (Round the cost to 2 decimal places.)

$4.80 per ticket Explanation Variable cost = [(Cost at highest activity of $22,000 − Cost at lowest activity of $10,000) ÷ (Highest activity of 4,000 tickets − Lowest activity of 1,500 tickets)] = $4.80 per ticket

Compute the after-tax income based on the following information. Sales $100,000 Variable costs 30,000 Fixed costs 5,000 Income tax rate 20%

$52,000 Explanation The contribution margin is $100,000 − $30,000 = $70,000. Pretax income is $70,000 minus $5,000 (fixed costs) = $65,000. Taxes equal $65,000 × .20 = $13,000. After tax income equals $65,000 minus taxes of $13,000 = $52,000.

Revenue $100,000 Variable Costs 20,000 Fixed Costs 5,000 What is the net income (pretax)?

$75,000 Explanation The contribution margin is $100,000 − $20,000, or $80,000. Net income then, is contribution margin minus fixed costs, or $80,000 − $5,000 = $75,000.

Blanchard Company manufactures a single product that sells for $160 per unit and whose total variable costs are $120 per unit. The company's annual fixed costs are $596,000.

(1) Prepare a contribution margin income statement for Blanchard Company showing sales, variable costs, and fixed costs at the break-even point. Explanation Break-even point in units = $596,000 / $40 = 14,900 units Contribution margin ratio = $40 / $160 = 25%(1) Sales: (14,900 × $160) = $2,384,000 Variable costs: (14,900 × $120) = $1,788,000 Contribution margin: (14,900 × $40) = $596,000

Blanchard Company manufactures a single product that sells for $120 per unit and whose total variable costs are $90 per unit. The company's annual fixed costs are $432,000. Management targets an annual pretax income of $750,000. Assume that fixed costs remain at $432,000.

1) Compute the unit sales to earn the target income. 2) Compute the dollar sales to earn the target income. Explanation (1) Unit sales at target income=(Fixed costs + Target income)Contribution margin/unit =($432,000 + 750,000) $30 =39,400 units (2) Dollar sales at target income=(Fixed costs + Target income)Contribution margin ratio =($432,000 + 750,000) 25% =$4,728,000 (Alternatively: 39,400 units × $120 = $4,728,000)

Delta Company sells mini-flash drives. The selling price is $10 each and the variable costs are $8. If fixed costs are $3,000, how many drives must Delta sell to break even?

1,500 Explanation Break-even point in units = [Fixed costs of $3,000 ÷ Contribution margin per unit of $2 (or Selling price per unit of $10 − Variable cost per unit of $8)] = 1,500 units.

Hat Company sells two types of hats: knit hats with a selling price of $15 and variable costs of $5, and hard hats with a selling price of $25 and variable costs of $10. Knit hats comprise 80% of all sales. If fixed costs are $22,000, how many knit hats and hard hats must be sold for the Hat Company to break even?

1,600 knit units; 400 hard units Explanation The selling price of a composite unit = $17 [(or knit hat selling price of $15 × 0.80) + (hard hat selling price of $25 × 0.20)]. The variable costs per composite unit = $6 [(or knit hat variable cost of $5 × 0.80) + (hard hat variable costs of $10 × 0.20)]. The contribution margin per composite unit is then $11 (or selling price of a composite unit of $17 − variable costs per composite unit of $6). The break-even point in composite units = 2,000 (or fixed costs of $22,000 ÷ contribution margin per composite unit of $11). This implies that Hat Company will break even if it sells 1,600 knit hats (or 2,000 × 0.80) and 400 hard hats (or 2,000 × 0.20).

Hudson Co. reports the contribution margin income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (11,000 units at $300 each) $3,300,000 Variable costs (11,000 units at $240 each) 2,640,000 Contribution margin 660,000 Fixed costs 360,000 Pretax income $300,000

1. Assume Hudson Co. has a target pretax income of $158,000 for 2020. What amount of sales (in dollars) is needed to produce this target income? 2. If Hudson achieves its target pretax income for 2020, what is its margin of safety (in percent)? (Round your answer to 1 decimal place.) Explanation 1. Dollar sales for target income=Fixed costs + Target income Contribution margin ratio =$360,000 + $158,000 20% =$2,590,000 2. Break-even point in dollars=Fixed costs Contribution margin ratio =$360,000 / 20%* =$1,800,000 *Computed as $60 / $300 Margin of safety (%)=Expected sales - Break-even sales Expected sales =$2,590,000 - $1,800,000 $2,590,000 =30.5% (rounded)

1. Compute Hudson Co.'s break-even point in units. 2. Compute Hudson Co.'s break-even point in sales dollars. Explanation 1. Break-even in units=Fixed costs Contribution margin per unit =$360,000 / ($300 - $240) =6,000 units 2. Break-even point in dollars=Fixed costs Contribution margin ratio =$360,000 / 20%* =$1,800,000 *Computed as $60 / $300

Nombre Company management predicts $1,656,000 of variable costs, $2,338,000 of fixed costs, and a pretax income of $146,000 in the next period. Management also predicts that the contribution margin per unit will be $54.

1. Compute the total expected dollar sales for next period. 2. Compute the number of units expected to be sold next period. Explanation (1) Pretax income = Sales − Variable costs − Fixed costs $146,000 = $__? __ − $1,656,000 − $2,338,000 Sales = $146,000+$1,656,000 + $2,338,000=$4,140,000 (2) Unit sales=Fixed costs + Target pretax income/Contribution margin per unit =($2,338,000+$146,000)/ $54 =46,000 units

2. If sales decrease by 4% in 2020, what will be the company's pretax income? Explanation 2. If sales decrease by 4%, then pretax income will decrease by 5.0 × 4%, or 20%. This means pretax income will decrease by $85,500 × 20%, or $17,100. Pretax income will then equal $68,400.

A company sells three products: Product A, Product B, and Product C. Usually it sells 5,000 units of Product A; 6,000 units of Product B; and 8,000 units of Product C. What is the sales mix for Products A, B and C, respectively?

26.3%, 31.6%, 42.1% Explanation Total unit sales = 5,000 + 6,000 + 8,000 = 19,000. Product A = Units sales of 5,000 ÷ Total unit sales of 19,000 = 26.3%. Product B = Units sales of 6,000 ÷ Total unit sales of 19,000 = 31.6% Product C = Units sales of 8,000 ÷ Total unit sales of 19,000 = 42.1%.

3. Assume sales for 2020 decrease by 4%. Prepare a contribution margin income statement for 2020. Explanation 3. If sales decrease by 4%, a total of 9,120 (computed as 9,500 × 96%) units will be sold. Contribution margin income statement, assuming 4% sales decrease: HUDSON CO. Forecasted Contribution Margin Income Statement For Year Ended December 31, 2020 Sales (9,120 × $225) $2,052,000 Variable costs (9,120 × $180) 1,641,600 Contribution margin $410,400 Fixed costs 342,000 Income (pretax) $68,400

Remote Company has expected sales of 55,000 units and break-even sales of 50,000 units. If fixed costs are $75,000, what is the margin of safety?

9% Explanation Margin of safety = [(Expected sales of 55,000 − Break-even sales of 50,000) ÷ Expected sales of 55,000] = 9%.

CompuTop Company sells toy laptop computers for $30 each. If the variable cost for each laptop is $20 and fixed costs total $25,000, how many laptops must CompuTop sell to generate a target income of $66,667?

9,167 Explanation Contribution margin = Sales per unit of $30 − Variable cost per unit of $20 = $10 per unit. Unit sales at target income = [(Fixed costs of $25,000) + (Target income of $66,667)] ÷ Contribution margin of $10 per unit = 9,167 units.

Assume the company is considering investing in a new machine that will increase its fixed costs by $38,500 per year and decrease its variable costs by $8 per unit. Prepare a forecasted contribution margin income statement for 2020 assuming the company purchases this machine. Explanation HUDSON CO. Forecasted Contribution Margin Income Statement For Year Ended December 31, 2020 Sales (11,000 × $300) $3,300,000 Variable costs (11,000 × $232*) 2,552,000 Contribution margin $748,000 Fixed costs ($360,000 + $38,500) 398,500 Income (pretax)$349,500 *Revised variable costs = $240 - $8 = $232 per unit

Harrison Co. expects to sell 250,000 units of its product next year, which would generate total sales of $22,500,000. Management predicts that pretax net income for next year will be $1,300,000 and that the contribution margin per unit will be $20.

Complete the below table to calculate the next year's total expected variable costs and fixed costs. Explanation Total expected variable costs= Variable costs per unit × units produced and sold = $70* × 250,000 units = $17,500,000 *The $70 variable costs per unit is computed by determining (i) sales price per unit and (ii) subtracting contribution margin per unit: Sales price per unit ($22,500,000 / 250,000 units)$90 Less: Contribution margin per unit (given) (20) Variable costs per unit$70 To solve, set up a brief contribution margin income statement Sales (given) $22,500,000 Variable costs (from part a) (17,500,000) Fixed costs ( ?) Pretax income (given) $1,300,000 Thus: Fixed costs = $3,700,000

Which of the following is NOT a reason we can make assumptions in CVP analysis?

Financial analysts at the company are trained to be precise in their analysis of CVP numbers. Explanation Financial analysts at the company are not trained to be precise in their analysis of CVP number.

A contribution margin income statement follows this format:

Sales minus variable costs equals contribution margin Explanation A contribution margin income statement starts with sales and subtracts variable costs to determine contribution margin. Fixed costs are subtracted from contribution margin to determine pretax income.

Following are five series of costs A through E measured at various volume levels. Identify each series as either fixed, variable, mixed, step-wise, or curvilinear. Volume (Units) Series A Series B Series C Series D Series E 0 $8,800 $0 $4,400 $0 $4,800 400 8,800 5,120 5,000 7,900 4,800 800 8,800 10,240 5,600 8,690 5,800 1,200 8,800 15,360 6,200 9,480 5,800 1,600 8,800 20,480 6,800 10,797 6,800 2,000 8,800 25,600 7,400 12,640 6,800 2,400 8,800 30,720 8,000 17,775 7,800

Series A = Fixed Cost Series B = Variable Cost Series C = Mixed Cost Series D = Curvilinear Cost Series E = Step-wise Cost

Blanchard Company manufactures a single product that sells for $190 per unit and whose total variable costs are $133 per unit. The company's annual fixed costs are $735,300.

a) Compute the company's contribution margin per unit. b) Compute the company's margin per ratio. c) Compute the company's break-even points in units. d) Compute the company's break-even points in dollars of sales. Explanation: (a) Contribution margin per unit = $190 - $133 = $57 per unit (b) Contribution margin ratio = $57 / $190 = 30% (c) Break-even point in units = $735,300 / $57 = 12,900 units (d) Break-even point in dollars = $735,300 / 30% = $2,451,000 (Alternatively: 12,900 units × $190 = $2,451,000)

A cost that remains fixed over limited ranges of volumes but changes by a lump sum when volume changes occur outside these limited ranges is called a _____ cost.

step-wise Explanation A cost that remains fixed over limited ranges of volumes but changes by a lump sum when volume changes occur outside these limited ranges is called a step-wise cost.

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