ACCT 2220 - Chapter 3 Preview: Analysis of Cost, Volume & Pricing to Increase Profitability

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

$2.20

If the contribution margin is $80,000 and sales are $120,000 what is the contribution margin ratio?

0.67 80000/120000 = 0.67

If the contribution margin is $90,000 and sales are $100,000 what is the contribution margin ratio?

0.90

If the contribution margin per unit is $5 and fixed costs total $5,000, how many units must be sold to break even?

1,000

The sales price of a product is $100 per unit; the variable cost is $20 per unit; and fixed costs total $800. How many units must be sold to break even?

10

The sales 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

If the sales price of a product is $10 per unit; the variable cost is $9 per unit; and fixed costs total $10,000, how many units must be sold to earn a profit of $10,000?

20,000

The sales price of a product is $10 per unit; the variable cost is $5 per unit; and fixed costs total $1,000. How many units must be sold to break even?

200

If the sales price of a product is $10 per unit; the variable cost is $5 per unit; and fixed costs total $1,000, how many units must be sold to earn a profit of $5?

201

If the sales price of a product is $10 per unit; the variable cost is $5 per unit; and fixed costs total $1,000, how many units must be sold to earn a profit of $1,000?

400

If the contribution margin per unit is $200 and fixed costs total $1,000, how many units must be sold to break even?

5

If the contribution margin per unit is $2 and fixed costs total $1,000, how many units must be sold to break even?

500

Mark's Chemical Co. produces two products, Product A and Product B. Fixed costs are $20,000 and the weighted average contribution margin is $16 per unit. It is expected that 60% of sales will come from Product A and 40% will come from Product B. What is the break-even point in units for Product A?

750 Reason: Break-even for Product A = (20,000 / 16) × .6

Which of the following are components of the CVP graph?

Area of Loss Total Sales Line Total Cost Line Area of Profit Fixed Cost Line

Sam's Company sells dog toys. Red toy has a contribution margin of $2 and Blue toy has a contribution margin of $3. The current sales mix is 80% Red toy and 20% Blue toy. To increase profitability, Sam's Company should shift customers to

Blue Toy

Determining the sales price by marking up the variable cost is

Cost-plus pricing

Which of the following are components of the CVP graph?

Fixed Cost Line Break-even Point Total Sales Line Total Cost Line

Assume the sales price is $10 per unit, variable cost is $5 per unit, and fixed cost is $1,000. How would the break-even point in units change if the variable cost increased to $8 per unit?

Increase by 300 units.

Assume the sales price is $10 per unit, variable cost is $5 per unit, and fixed cost is $2,000. How would the break-even point in units change if the variable cost increased to $8 per unit?

Increase by 600 units.

How does increasing fixed cost affect the break-even point?

Increases the number of units to break-even

Identify the underlying assumptions of CVP analysis.

Inventory levels in manufacturing companies are constant Cost are linear The selling price is constant

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.

Jen's Shampoo Company currently earns a net income of $50,000. 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. What effect will reducing the sales price have on net income?

Net income will decrease by $10,000

How does reducing fixed cost affect the break-even point?

Reduces the number of units to break-even

The point at which contribution margin equals total fixed cost is called the

break-even point.

The break-even point is the point where:

contribution margin equals total fixed costs. profit equals zero.

Sam's Company sells dog toys. Red toy has a contribution margin of $9 and Blue toy has a contribution margin of $5. The current sales mix is 80% Red toy and 20% Blue toy. If the company can shift customers from Red toy to Blue toy, profitability will ________.

decrease

Increasing fixed costs will

increase the number of units necessary to earn a desired profit.

The amount at which a company's sales can fall short and still break even is called the

margin of safety.

Cost-plus pricing is a strategy where the sales price is determined by

marking up the variable cost.

If you are unable to sell enough units to earn your desired profit, which of the following would help?

reduce fixed costs

The amount by which a company's sales can fall short and still break even is called the margin of ______

safety

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

sensitivity

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

sensitivity analysis

On the CVP graph, the break-even point is the point where total sales intersects

total cost.