Managerial Exam 2
Panera Bread sells a box of bagels for $6 with a contribution margin of 62.5%. Its fixed costs are $150,000 per year. How much sales in dollars does Panera Bread need to break even per year if bagels are its only product?
$240,000 The breakeven point in sales dollars is solved by using the contribution margin. $150,000 / 62.5% = $240,000
Adler Company is considering developing a new product. The company has gathered the following information on this product. Expected total unit cost $25 Estimated investment for new product $500,000 Desired ROI 10% Expected number of units to be produced and sold 1,000 Given this information the desired markup percentage and selling price is:
$50,000 ($500,000 x .10). This reflects the desired ROI of 10 percent. In order to have $50,000 of income on sales of 1,000 units, the desired ROI per unit is $50. This ROI per unit is added to the total unit cost, $25 to arrive at the $75 selling price. Markup is determined by dividing the desired ROI per unit by the total cost and that yields 200 percent ($50/$25).
Cournot Company sells 100,000 wrenches for $12 a unit. Fixed costs are $300,000, and net income is $200,000. What should be reported as variable expenses in the CVP income statement?
(100,000*12)-300,000-200,000=700,000
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?
(200,000*4)*.25=200,000
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
(500,000*6)*.3=900,000
If a company makes two products, R1 and R2, what is the formula for the weighted-average unit contribution margin?
(unit contribution margin of r1 * sales mix percentage of r1) +(unit contribution margin of r2 * sales mix percentage of r2)
Yi Ling Company has 2 Divisions: Computers and Appliances. Given the following data, what is the break-even point in dollars? Total fixed costs $500,000 Sales-mix percentage .40 for Computers .60 for Appliances. Contribution margin ratio .45 for Computers .35 for Appliances.
1,282,051 or ($500,000/[(.45 x .40) + (.35 x .60)]
Jackson Manufacturing is introducing a new product with a unit selling price of $12.50. The product required an investment of $500,000, and the company requires a 20% ROI. Projected sales are 100,000 units. Compute the target cost per unit.
12.50-(500,000*20%)/100,000=11.50
It costs Bluffton Company $18.20 of variable costs and $7.80 of fixed costs to produce its product that sells for $39. Osborne Company, a foreign buyer, offers to purchase 3,000 units at $23.40 each. If the special offer is accepted and produced with unused capacity, net income will:
3000*(23.4-18.2) = 15,600
Winston Company's high and low level of activity last year was 60,000 units produced in April and 20,000 units produced in December. Machine maintenance costs were $52,000 in April and $20,000 in December. Using the high-low method, estimated total maintenance cost for a month in which 40,000 units will be produced is
36,000
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 - fixed 7,000 Selling expenses - variable 6,000 Administrative expenses - fixed 5,000 Administrative expenses - variable 7,500 How much is Deighan's contribution margin?
48,000
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+(.35*200)=120
Donovan Company had sales of $50,000, fixed costs of $30,000 and a variable cost ratio of 25%. If sales increase by 6% next year, net income will increase by:
50,000*.06=3000 3000*.25 = 750 3000-750 = 2250
Redman Company had actual sales $800,000 and its break-even sales were $600,000. Morgan's margin of safety ratio is
600,000/800,000=.75 1-.75 = 25%
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 - fixed 7,000 Selling expenses - variable 6,000 Administrative expenses - fixed 5,000 Administrative expenses - variable 7,500 How much is Deighan's contribution margin?
80,000-18,500-6000-7500=48,000
Simmons Company has required sales of $1,500,000 to meet its target net income. It has fixed costs of $200,000 and the contribution margin ratio is 40%. The company's target net income is
=(1,500,000*.4)-200,000
Bergman Company has total fixed costs of $350,000 and a contribution margin ratio of 20%. Hampton's target net income is $250,000. Sales in dollars to meet the target net income would be
=(350,000+250,000)/.2
The CVP Income statement would show Sales $350,000 - Variable expenses $100,000 = Contribution margin of $250,000. On a CVP income statement Net income is $190,000 ($250,000 Contribution margin - $60,000 Total fixed expenses) ("Basic Concepts"). The following information is available for Chap Company. Sales $350,000 Cost of goods sold $120,000 Total fixed expenses $60,000 Total variable expenses $100,000 Which amount would you find on Chap's CVP income statement?
=350,000-100,000=250,000
Marshall Company had actual sales of $600,000 when break-even sales were $420,000. What is the margin of safety ratio?
=420,000/600,000=.7 1-.7=.3
Which of the following are factors that can affect pricing decisions?
All of the above
The degree of operating leverage:
All of the above: can be computed by dividing total contribution margin by net income provides a measure of the company's earnings volatility affects a company's break-even point
Smith Company produces desk lamps. The information for June indicated that the selling price was $25 per unit, variable costs were $15 per unit, and fixed costs totaled $6,000. Smith currently sells 1,100 lamps and earns $5,000 of profit. How much is Smith's margin of safety in dollars?
BEP units = 6,000/(25-15)=600 units BEP Dollars = 600*25=15,000 Margin of Safety = (25*1,100)-15,000=12,500 Margin of safety Ratio = 12,500/(lamps selling*25) 27,500=45.5%
Smith Company produces desk lamps. The information for June indicated that the selling price was $25 per unit, variable costs were $15 per unit, fixed costs totaled $6,000, and the margin of safety in dollars was $12,500. Smith currently sells 1,100 lamps and earns $5,000 of profit. How much is Smith's margin of safety ratio?
BEP units = 6,000/(25-15)=600 units BEP Dollars = 600*25=15,000 Margin of Safety = (25*1,100)-15,000=12,500 Margin of safety Ratio = 12,500/(lamps selling*25) 27,500=45.5%
Bergeron Company is considering replacing equipment with a cost of $30,000, accumulated depreciation of $20,000, and a 2 year remaining useful life. The new equipment has a cost of $42,000 and a useful life of 6 years. The seller has offered a trade-in allowance of $7,500. The new equipment is much more efficient. Bergeron projects cost savings of $10,000 per year if the new equipment is purchased. Which of the following is not relevant in deciding whether to retain or replace equipment?
Book value of existing equipment
In the month of April, Carly's Carwash provided 3,000 car washes at an average price of $25. Fixed costs are $9,300 and variable costs are 85% of sales. Compute the margin of safety ratio.
Breakeven sales are [$9,300 ÷ (1 - .85)] or $62,000. The margin of safety is ($75,000 - $62,000) or $13,000. The margin of safety ratio is ($13,000 ÷ $75,000) or 17.33%
__ is the amount of revenue that remains after deducting variable costs in a CVP income statement
Contribution Margin
Genesis Company manufactures digital televisions and computer monitors. The limiting resource for the company is 7,200 hours per month. Televisions have a contribution margin per unit of $400 and computer monitors have a contribution margin per unit of $100. Machine hours per unit for televisions and monitors are 0.80 and 0.25, respectively. If Genesis is able to increase machine capacity to 7,500 hours and increase the production of only one of these products, what amount of contribution margin is available under each alternative for the additional 300 hours? Digital TVs Computer Monitors
Contribution margin per unit of limited resource for TVs = $400 ÷ 0.80 = $500; $500 x 300 additional hours = $150,000 contribution margin; Contribution margin per unit of limited resource for Monitors = $100 ÷ 0.25 = $400; $400 x 300 additional hours = $120,000 contribution margin
Why is determination of a relevant range important?
Cost behavior outside the relevant range my be distorted
Moss, Inc. has total fixed costs of $56,000 and a contribution margin ratio of 40%. Moss wants to generate net income totaling $35,000. How much will sales revenue be at Moss' target net income?
Desired contribution = Fixed cost + Desired net income = $56,000 + $35,000 = $91,000 Contribution margin ratio = 40% Desired revenue to achieve desired net income = Desired contribution / Contribution margin ratio = $91,000 / 40% = $227,500
When the units required to fill a special order can be produced within existing plant capacity, which of the following will not increase?
Fixed costs
one of the following is not involved in CVP Analysis. That factor is
Fixed costs per unit
Relevant costs in accepting an order at a special price include all of the following except:
Fixed manufacturing overhead
Contribution margin -
Is revenue remaining after deducting variable costs and may be expressed as contribution margin per unit (A+B)
Which one of the following describes the break-even point?
It is the point where total sales equals total variable costs plus total fixed costs
Croc Catchers calculates its contribution margin to be less than zero. Which statement is true?
Its unit selling price is less than the unit variable cost
Delivery costs at Hernandez, Inc. appear below for specific months of operations: Month Amount Units Produced March $20,000 16,000 April $18,000 12,000 Which type of cost are delivery costs at Hernandez?
Mixed
costs that change in total but not proportionately with changes in the activity level are
Mixed Costs
Valerio Company sells Mountain Bikes and Racing Bikes. The Mountain Bikes sell for $300 and have variable costs of $125. The Racing Bikes sell for $450 and have variable costs of $275. Valerio Company has limited machine hours for production. If Mountain Bikes take 2 machine hours and racing bikes take 2.5 machine hours which product should be emphasized if capacity (machine hours) is increased and sufficient demand exists for each product?
Mountain bikes should be emphasized since they produce the higher contribution margin of $87.50 per machine hour [($300 - $125)/2]. Racing Bikes produce a contribution margin of only $70 per machine hour [($450-$275)/2.5]
which of the following is not an assumption of CVP Analysis
Profit for the period is constant
Which of the following is likely to contain a linear relationship between costs and activities
Relevant Range
In incremental analysis, the only costs to be considered are:
Relevant costs
In the month of April, Carly's Carwash provided 3,000 car washes at an average price of $25. Fixed costs are $9,300 and variable costs are 85% of sales. Compute the contribution margin and the contribution margin ratio.
Sales ($25 × 3,000) or $75,000. Contribution margin = [$75,000 × (1 - .85)] or $11,250. Contribution margin ratio is $11,250/$75,000 = 15%
On a CVP Income statement
Sales - Variable Costs = Contribution Margin
What is the contribution margin?
The amount available to cover fixed costs and contribute to profits
Which one of the following is an important assumption that is made when considering the decision to accept an order at a special price?
The firm is not currently operating at full capacity
In order to maximize profits when limited resources are available a company should concentrate on the producing products with:
The highest contribution margin per unit of limited resource
An example of mixed cost is
Utility Costs
What type of cost remains the same per unit at every level of activity?
Variable Cost
The mathematical equation for computing required sales to obtain target net income is: required sales =
Variable costs + fixed costs + Target net income
Which statement describes a fixed cost?
When activity declines, its cost per unit increases
If Morton Company expects to sell VCR's at $100 a unit with variable costs of $60 per unit and DVD's at $200 per unit with variable costs of $120 per unit, what is the weighted average contribution margin if the sales mix is 4 DVD's for 1 VCR?
[($200 - $120) x (4/5)] + [ ($100 - $60) x (1/5)] or $64 + $8 = $72
Linburgh Inc manufactures model airplanes and repair kits. The planes account for 80% of the sales mix, and the kits the remainder. The variable cost ratio for the planes is 85% and 70% for the kits. Fixed costs are $99,000. Compute the breakeven point in sales dollars.
[(.80 × .15) + (.20 × .30)] or .18. The breakeven point in sales dollars is ($99,000 ÷ .18) or $550,00
in general, a company should sell more units of products with
a higher contribution margin
Sales mix is
a measure of the relative percentage in which a company's products are sold
margin of safety is computed as
actual sales - break even sales
in a make or buy decision, opportunity costs are
added to the make total cost
If Company A has a higher proportion of fixed costs relative to variable costs than Company B:
all of the above Company A has a higher break-even point than Company B Company A is more sensitive to changes in sales than Company B Company A has greater risk compared to Company B
in a make-or-buy decision, relevant costs are:
all of the above: manufacturing costs that will be saved the purchase price of the units opportunity costs
Mixed costs
are costs that vary as activity level changes, but do not stay the same per unit like variable cost.
In a retain or replace equipment decision, all of the following are considered except the
book value of the old asset
Incremental analysis is the process of identifying the financial data that:
change under alternative courses of action
Which 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
The degree of operating leverage is computed by dividing
contribution margin by net income
at the break even point
contribution margin equals total fixed costs
Target cost is computed by subtracting:
desired profit from market price
When a company sells multiple products, the breakeven point in sales dollars is computed by:
dividing the total fixed costs by the weighted average contribution margin ratio
In which steps of the management decision-making process does accounting make its primary contribution?
evaluating possible courses of action and reviewing the results of the decision
A high degree of operating leverage:
exposes a company to greater earnings volatility risk
The break even point in dollars is computed by dividing
fixed costs by contribution margin ratio
CVP Analysis considers the interrelationships among all of the following components except
fixed costs per unit
required sales in dollars to meet a target net income is computed by dividing
fixed costs plus target net income by contribution margin ratio
Net income will be
greater if more higher-contribution margin units are sold than lower-contribution margin units
A company with high operating leverage:
has a greater proportion of fixed costs to variable costs
The margin of safety ratio is:
higher for a company with lower operating leverage
The decision rule in a sell-or-process-further decision is: process further as long as the incremental revenue from processing exceeds:
incremental processing costs
Which of the following will not affect a make-or-buy decision?
incremental revenue
which one of the following is correct concerning contribution margin?
it is helpful in determining the effect of changes in sales on net income
Costs incurred prior to the split-off are
joint costs
the basic rule in a sell or process further decision is to process further as long as the incremental revenue is:
less than the incremental processing costs
The margin of safety ratio is computed by dividing
margin of safety in dollars by actual sales
When comparing a traditional income statement to a CVP Income Statement
net income will always be identical on both
It costs Orkid Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Homer Industries offers to purchase 5,000 units at $19 each. In the deal, Orkid will incur special shipping costs of $1.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:
net income will increase by $2,500. The variable cost per unit will be $18.50 ($17 + $1.50); the income per unit is $.50 ($19 - $18.50); and the total increase in net income will be $2,500 ($.50 X 5,000 units).
another name for the option to buy a component from a supplier is:
outsourcing
Target cost related to price and profit means that:
price and desired profit must be determined before costs
which one of the following is the format of a CVP income statement?
sales - variable costs - fixed costs = net income
In a decision to retain or replace equipment, the book value of the old equipment is a(an):
suck cost
sell or process further decision
sunk costs
Cost-Volume-Profit Analysis includes all of the following assumptions except:
the behavior of costs is curvilinear throughout the relevant range
The relevant range is
the range over which the company expects to operate during a year
if a company has limited resources:
the sales mix is determined by computing contribution margin per unit of limited resource
Mixed costs consist of a
variable cost element and a fixed cost element
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
