Cost-Volume-Profit Analysis

True/False 1. In cost-volume-profit analysis, the volume index is always stated in units. Answer: False 2. One characteristic common to all types of costs is the tendency to rise and fall in direct proportion to chan es in the volume of !usiness output. Answer: False ". #aria!le costs which increase in total amount in direct proportion to an increase in output represent a constant amount per unit of output. Answer: $rue %. Any !usiness which operates at less than capacity will have smaller fixed costs than varia!le costs. Answer: False &. 'hen cost-volume-profit analysis is used, the need for a cost accountin system is eliminated. Answer: False (. #aria!le costs are usually transformed into fixed costs when a !usiness operates at less than full capacity. Answer: False ). 'ith varia!le costs, the cost per unit varies with chan es in volume. Answer: False *. $he volume of output which causes fixed costs to !e e+ual in amount to total revenue is called the !rea,-even point. Answer: False -. $he contri!ution mar in is the difference !etween total revenue and fixed costs. Answer: False 1.. In a cost-volume-profit raph, the dollar amount !y which actual sales exceed !rea,-even sales volume is called the mar in of safety. $he mar in of safety sales volume times the contri!ution mar in ratio e+uals operatin income. Answer: $rue 11. 'ith fixed costs, the cost per unit varies with chan es in volume. Answer: $rue 12. $he hi her the unit contri!ution mar in, the hi her the volume of unit sales re+uired to cover a iven amount of fixed costs. Answer: False

1". /ontri!ution mar in is total revenue less varia!le costs. Answer: $rue 1%. 0ar in of safety is the dollar amount !y which actual sales volume exceeds the !rea,-even sales volume. Answer: $rue 1&. In cost-volume-profit analysis, the num!er of units sold is assumed to !e e+ual to the num!er of units produced. Answer: $rue 1(. 1xecutive salaries are typically considered varia!le costs. Answer: False 1). As volume increases, per unit varia!le costs stay the same. Answer: $rue 1*. As volume increases per unit fixed costs stay the same. Answer: False 1-. 1conomies of scale can !e achieved !y usin facilities more intensively. Answer: $rue 2.. $he ran e over which output may !e expected to vary is called the relevant ran e. Answer: $rue 21. $he !rea,-even point is the level of activity at which operatin income is e+ual to cost of oods sold. Answer: False 22. $he contri!ution mar in is the amount !y which revenue exceeds varia!le costs. Answer: $rue 2". /ontri!ution mar in ratio is e+ual to contri!ution mar in per unit divided !y unit sales price. Answer: $rue Multiple Choice 2%. 'hen volume increases, fixed costs per unit: A2 Increase. 32 4ecrease. /2 5tay the same. 42 Increase or decrease, dependin upon the situation. Answer: 3 2&. In cost-volume-profit analysis, income tax expense: A2 Is included amon the monthly operatin expenses as a varia!le cost. 32 Is considered a fixed cost of doin !usiness. /2 Is treated as a semi-varia!le cost that is partially dependent upon sales volume. 42 Is enerally i nored. Answer: 4
2

2(. A semi-varia!le cost: A2 Increases and decreases directly and proportionately with chan es in volume. 32 /han es in response to a chan e in volume, !ut not proportionately. /2 Increases if volume increases, !ut remains constant if volume decreases. 42 /han es inversely in response to a chan e in volume. Answer: 3 2). 'hich of the followin is an example of a fixed cost for an airline6 A2 4epreciation on the corporate head+uarters. 32 Fuel costs. /2 Income taxes expense. 42 7assen ers8 meals. Answer: A 2*. In order to calculate !rea,-even sales units, fixed costs are divided !y: A2 /ontri!ution mar in per unit. 32 /ontri!ution mar in percenta e. /2 $ar et operatin income. 42 5ales volume. Answer: A ".. $he !rea,-even point in a cost-volume-profit raph is always found: A2 At &.9 of full capacity. 32 At the sales volume resultin in the lowest avera e unit cost. /2 At the volume at which total revenue e+uals total varia!le costs. 42 At the volume at which total revenue e+uals total fixed costs plus total varia!le costs. Answer: 4 "1. Operatin income can !e calculated !y: A2 Fixed costs divided !y contri!ution mar in ratio. 32 Fixed costs multiplied !y contri!ution mar in ratio. /2 0ar in of safety multiplied !y contri!ution mar in ratio. 42 0ar in of safety divided !y contri!ution mar in ratio. Answer: / "2. $he contri!ution ratio is computed as: A2 5ales minus varia!le costs, divided !y sales. 32 Fixed costs plus varia!le costs, divided !y sales. /2 5ales minus fixed costs, divided !y sales. 42 5ales divided !y varia!le costs. Answer: A "&. $he mar in of safety is calculated !y: A2 :Fixed costs plus tar et income2 divided !y contri!ution mar in. 32 /urrent income minus !rea,-even income. /2 /urrent sales minus !rea,-even sales. 42 /urrent contri!ution mar in minus fixed costs. Answer: /

"

"). All other thin s held constant, how will an increase in sellin price affect the !rea, even point measured in units6 A2 $he !rea, even point will decrease. 32 $he !rea, even point will increase. /2 $he !rea, even point will remain constant. 42 $he effect on the !rea, even point can8t !e predicted with certainty. Answer: A "*. A %&9 contri!ution mar in ratio means that: A2 $he company should contri!ute %&9 of its operatin income to +ualified charities for maximum tax !enefits. 32 &&9 of the company8s revenue is consumed !y fixed and varia!le costs. /2 $he company8s revenue has increased !y %&9 durin the current accountin period. 42 %&9 of the company8s revenue is availa!le to cover fixed costs and to contri!ute toward operatin income. Answer: 4 %.. A fixed cost may include all of the followin except: A2 ;ent for the warehouse. 32 Annual salary of the /1O. /2 4epreciation. 42 5ales commission expense. Answer: 4 %1. /ontri!ution mar in may !e expressed as: A2 A percenta e of revenue. 32 A total dollar amount for the period. /2 A contri!ution mar in per unit. 42 All of the a!ove. Answer: 4 %". If a product sells for <(, varia!le costs are <% and fixed costs are <1..,... what would total sales have to !e in order to !rea,-even6 A2 <1-.,.... 32 <1--,---. /2 <"..,.... 42 <"--,---. Answer: / Feed!ac,: 1..,...=:( > %2 ?&.,... x ( ? "..,... %%. #aria!le costs would include: A2 ;ent expense. 32 4epreciation expense. /2 5ales commission expense. 42 1xecutive salaries expense. Answer: /

%&. Fixed costs: A2 Fall as sales volume falls. 32 ;ise as sales volume rises. /2 ;ise as sales volume falls. 42 ;emain steady when sales volume chan es. Answer: 4 %(. If unit sales prices are <( and varia!le costs are <% per unit how many units would have to !e sold to !rea, even if fixed costs e+ual <(,...6 A2 1,... 32 2,... /2 ",... 42 2,*.. Answer: / Feed!ac,: (,...=:(-.%2 ? ",... %). If unit sales are <& and varia!le costs are <2, how many units have to !e sold to earn a profit of <%,2.. if fixed costs e+ual <(,...6 A2 1,2.. 32 2,... /2 ",... 42 ",%.. Answer: 4 Feed!ac,: (,... @ %,2..=:& > 22 ? ",%.. %*. If unit sales are <1%, varia!le costs are <) per unit and fixed costs are <2%,... what is the contri!ution ratio per unit6 A2 %.9 32 &.9 /2 (.9 42 ).9 Answer: 3 Feed!ac,: :1% > )2= 1% ? &.9 %-. If unit sales are <1%, varia!le costs are <) per unit and fixed costs are <%2,... what are the sales in dollars in order to !rea, even6 A2 <1.&,... 32 <*%,... /2 <).,... 42 <(.,... Answer: 3 Feed!ac,: %2,...=.&. ? *%,...

&

&.. If unit sales are <1%, varia!le costs are <) per unit and fixed costs are <%2,..., how many units must !e sold to earn <2&.,... A2 &2,1%2 32 %1,)1& /2 "%,)(2 42 2-,)-( Answer: 3 Feed!ac,: :%2,... @ 2&.,...2=) ? %1,)1& (.. 0ana ement expects total sales of <%. million, a mar in of safety of <1. million, and a contri!ution mar in ratio of %&9. 'hich of the followin estimated amounts is not consistent with this information6 A2 #aria!le costs, <22 million. 32 Fixed costs, <1* million. /2 Operatin income, <( million. 42 3rea,-even sales volume, <". million. Answer: / Feed!ac,: 3/ (1. 4orsey /ompany produces a sin le product which it sells for <*( a unit. If the fixed costs of manufacturin and sellin the product are <(%,2.. a month and the varia!le costs are <&% a unit: A2 $he fixed costs amount to <"2 per unit at any level of output within a relevant volume ran e. 32 $he company will !rea, even with a sales volume of <(%,2.. a month. /2 An increase in sales volume a!ove <(%,2.. a month will cause an increase in fixed costs. 42 $he contri!ution mar in per unit of product is <"2. Answer: 4 Feed!ac,: *( > &% ? "2 (2. A company with an operatin income of <(*,... and a contri!ution mar in ratio of &%9 has a mar in of safety of: A2 <"(,)2.. 32 <12&,-2&. /2 <1%),*2(. 42 It is not possi!le to determine the mar in of safety from the information provided. Answer: 3 Feed!ac,: (*,...=.&% ? 12&,-2&

(". $he followin information is availa!le:

'hat is the operatin income6 A2 <.. 32 <%.,.... /2 <*,.... 42 <1.,.... Answer: 4 Feed!ac,: :*.,... > %.,...2 x .2& ? 1.,... (%. A company with monthly revenue of <12.,..., varia!le costs of <&.,..., and fixed costs of <%.,... has a contri!ution mar in of: A2 <12.,.... 32 <*.,.... /2 <).,.... 42 <"&,.... Answer: / Feed!ac,: 12.,... > &.,... ? ).,... (&. A company with monthly fixed costs of <1(.,... expects to earn monthly operatin income of <2.,... !y sellin (,... units per month. 'hat is the company8s expected unit contri!ution mar in6 A2 <".. 32 <2*. /2 <2. 42 $he information iven is insufficient to determine unit contri!ution mar in. Answer: A Feed!ac,: 1(.,... @ 2.,... ? (,...xA x ? ". ((. If the monthly sales volume re+uired to !rea, even is <1*-,... and monthly fixed costs are <&%,-.., the contri!ution mar in ratio is: A2 2-9. 32 )19. /2 %2.-9. 42 """.""9. Answer: A Feed!ac,: 1*-,... x ? &%,-..A x ? 2-9

(). If monthly fixed costs are <1-,... and the contri!ution mar in ratio is %.9, the monthly sales volume re+uired to !rea, even is: A2 <),(... 32 <%),&... /2 <)(,.... 42 <2(,(... Answer: 3 Feed!ac,: 1-,...=.% ? %),&.. (*. 7roduct B sells for <". per unit and has related varia!le costs of <2. per unit. $he fixed costs of producin product B are <(.,... per month. Cow many units of product B must !e sold each month to earn a monthly operatin income of <*.,...6 A2 %,((). 32 ),.... /2 1%,.... 42 -,.... Answer: / Feed!ac,: :(.,... @ *.,...2=1. ? 1%,... Dse the followin to answer +uestions (--)1 $he followin data are availa!le for product no. /F)2, manufactured and sold !y Eold /orporation:

(-. ;efer to the a!ove information. $he contri!ution mar in per unit for product no. /F)2 is: A2 <2). 32 <*1. /2 <11*. 42 <(%. Answer: 3 Feed!ac,: 2.2.&. > 121.&. ? *1 ).. ;efer to the a!ove information. $he num!er of units of /F)2 that Eold must sell to !rea, even is :rounded, if necessary2: A2 ".,.... 32 2.,&... /2 *,2... 42 12,"... Answer: 4 Feed!ac,: --(,"..=*1 ? 12,"..

)1. ;efer to the a!ove information. $he dollar sales volume to produce operatin income of <2%),&.. is: A2 <2,.)",.... 32 <%,1%(,.... /2 <2,%*),(... 42 <",1.-,&... Answer: 4 Feed!ac,: :--(,".. @ 2%),&..2=.% ? ",1.-,&.. Dse the followin to answer +uestions )2-)( All /ounty Associates sells only one product, with a current sellin price of <). per unit. #aria!le costs are %.9 of this sellin price, and fixed costs are <12,... per month. 0ana ement has decided to reduce the sellin price to <(& per unit in an effort to increase sales. Assume that the cost of the product and fixed operatin expenses are not chan ed !y this reduction in sellin price. )2. ;efer to the a!ove information. At the current sellin price of <). per unit, the contri!ution mar in ratio is: A2 (.9. 32 %.9. /2 ()9. 42 12.9. Answer: A Feed!ac,: :). > 2*2=). ? (.9 )". ;efer to the a!ove information. At the current sellin price of <). per unit, the dollar volume of sales per month necessary for All /ounty to !rea, even is: A2 <12,.... 32 <2.,.... /2 <".,.... 42 5ome other amount. Answer: 3 Feed!ac,: 12,...=.( ? 2.,... )%. ;efer to the a!ove information. At the current sellin price of <). per unit, what dollar volume of sales per month is re+uired for All /ounty to earn a monthly operatin income of <1&,...6 A2 <2&,.... 32 <".,.... /2 <%&,.... 42 5ome other amount. Answer: / Feed!ac,: :12,... @ 1&,...2=.( ? %&,... )&. ;efer to the a!ove information. At the reduced sellin price of <(& per unit, the contri!ution mar in ratio is :rounded, if necessary2: A2 %".19.
-

32 &(.-9. /2 &2.*9. 42 5ome other percenta e. Answer: 3 Feed!ac,: :(& > 2*2=(& ? &(.-9

)(. ;efer to the a!ove information. At the reduced sellin price of <(& per unit, what dollar volume of sales per month is re+uired to !rea, even6 :;ounded2 A2 <2),*%2. 32 <22,)2). /2 <21,.-.. 42 <2),*%2. Answer: / Feed!ac,: 12,...=&(.-9 ? 21,.-. Dse the followin to answer ))-*1 Ereat Ead et /ompany produces a sin le product with a current sellin price of <1(.. #aria!le costs are <12. per unit, and fixed costs per month avera e <&,1*.. 0ana ement is considerin increasin the sellin price to <1*. per unit. Assume that the cost of the product and monthly fixed expenses will not chan e as a result of the proposed increase in sellin price. )). ;efer to the a!ove information. At the current sellin price of <1(. per unit, the contri!ution mar in ratio is: A2 2&9. 32 )&9. /2 "" 1="9. 42 ".9. Answer: A Feed!ac,: :1(. > 12.2=1(. ? 2&9 )*. ;efer to the a!ove information. At the current sellin price of <1(. per unit, what dollar volume of sales per month is re+uired for Ereat Ead et to !rea, even6 A2 <&,12.. 32 <(,-.). /2 <2.,)2.. 42 <1&,&&(. Answer: / Feed!ac,: &,1*.=.2& ? 2.,)2. )-. ;efer to the a!ove information. At the current sellin price of <1(. per unit, what dollar volume of sales per month is necessary for Ereat Ead et to enerate monthly operatin income of <-,...6 A2 <"(,.... 32 <1*,-.).
1.

/2 <&-,2.. 42 <&(,)2.. Answer: 4 Feed!ac,: :-,... @ &,1*.2=.2& ? &(,)2. *.. ;efer to the a!ove information. At the proposed increased sellin price of <1*. per unit, the contri!ution mar in ratio is: A2 (.9. 32 ""."9. /2 (( 2="9. 42 &.9. Answer: 3 Feed!ac,: :1*. > 12.2=1*. ? ""."9 *1. ;efer to the a!ove information. At the proposed increased sellin price of <1*. per unit, what dollar volume of sales per month is re+uired to !rea, even6 A2 <1&,&&(. 32 <1%,%... /2 <1",%%.. 42 <1%,-%.. Answer: A Feed!ac,: &,1*.=.""" ? 1&,&&( Dse the followin to answer *2-*( 1mpress /ompany produces a sin le product. $he sellin price is <&. per unit, and varia!le costs amount to <2. per unit. 1mpress 8s fixed costs per month total <*.,.... *2. ;efer to the a!ove information. 'hat is the contri!ution mar in ratio of 1mpress 8s product6 A2 2&9. 32 )&9. /2 (.9. 42 %.9. Answer: / Feed!ac,: :&. > 2.2=&. ? (.9 *". ;efer to the a!ove information. 'hat is the monthly sales volume in dollars necessary to !rea, even6 :;ounded2 A2 <"2.,.... 32 <1.(,((). /2 <2..,.... 42 <1"",""". Answer: 4 Feed!ac,: *.,...=.( ? 1"",""" *%. ;efer to the a!ove information. Cow many units must !e sold each month to earn a monthly operatin income of <2&,...6

11

A2 *"". 32 2,"... /2 ",&... 42 5ome other amount. Answer: / Feed!ac,: :*.,... @ 2&,...2=". ? ",&.. *&. ;efer to the a!ove information. 'hat will !e the monthly mar in of safety :in dollars2 if ",... units are sold each month6 A2 <1(,((). 32 <1..,.... /2 <12,.... 42 <1&.,.... Answer: A Feed!ac,: :",... x &.2 > 1"",""" ? 1(,(() *(. ;efer to the a!ove information. 'hat will !e 1mpress 8s monthly operatin income if ",).. units are sold each month6 A2 <1&,.... 32 <"1,.... /2 <)&,.... 42 <1.&,.... Answer: 3 Feed!ac,: :",).. x &.2 > *.,... > :2. x ",)..2 ? "1,... *). 3er en /ompany earns an avera e contri!ution mar in ratio of %.9 on its sales. $he local store mana er estimates that he can increase monthly sales volume !y <"&,... !y spendin an additional <&,... per month for direct mail advertisin . /ompute the monthly increase in operatin income if the mana er8s estimate a!out the increased sales volume is accurate. A2 <-,.... 32 <21,.... /2 <1%,.... 42 <1(,.... Answer: A Feed!ac,: :"&,... x .%2 > &,... ? -,... **. /ollins F 5ons enerates an avera e contri!ution mar in ratio of %&9 on its sales. 0ana ement estimates that !y spendin <",&.. more per month to rent additional facilities, the !usiness will !e a!le to increase operatin income !y <1.,... per month. 0ana ement must feel that the additional facilities will increase monthly sales volume :in dollars2 !y: A2 <%,)2&. 32 <*,))&. /2 <1",&... 42 <".,.... Answer: 4 Feed!ac,: .%&x > ",&.. ? 1.,... .%&x ? 1",&..
12

x ? ".,... Dse the followin to answer *---" ;uss /orporation manufactures a sin le product. $he sellin price is <*. per unit, and varia!le costs amount to <(% per unit. $he fixed costs are <1(,... per month. *-. ;efer to the a!ove information. 'hat is the contri!ution mar in ratio of ;uss 8s product6 A2 (&9. 32 *.9. /2 )29. 42 2.9. Answer: 4 Feed!ac,: :*. > (%2=*. ? 2.9 -.. ;efer to the a!ove information. 'hat is the monthly sales volume in dollars necessary to !rea, even6 A2 <*.,.... 32 <(%,.... /2 <&(,2&.. 42 <)",.... Answer: A Feed!ac,: 1(,...=.2. ? *.,... -1. ;efer to the a!ove information. Cow many units must !e sold each month to earn a monthly operatin income of <(,...6 A2 1,.... 32 1,")&. /2 *.,.... 42 %1). Answer: 3 Feed!ac,: :1(,... @ (,...2=1( ? 1,")& -2. ;efer to the a!ove information. 'hat will !e the monthly mar in of safety :in dollars2 if 1,(.. units are sold each month6 A2 <*.,.... 32 <%*,.... /2 <1",.... 42 <1(,.... Answer: 3 Feed!ac,: :1,(.. x *.2 > *.,... ? %*,... -". ;efer to the a!ove information. 'hat will !e ;uss8s monthly operatin income if 1,(.. units are sold each month6 A2 <112,.... 32 <2&,(... /2 <2%,*... 42 <-,(...
1"

Answer: 4 Feed!ac,: :1,(.. x *.2 > 1(,... > :1,(.. x (%2 ? -,(.. Dse the followin to answer -%--& Ewynne 1nterprises manufactures sprin s and shoc, a!sor!ers. 5prin s account for %.9 of the company8s total sales revenue, whereas shoc,s account for a!out (.9. $he contri!ution mar in ratios for sprin s and shoc,s are %&9 and "&9, respectively. Fixed costs avera e <&..,... per month. -%. ;efer to the a!ove information. EwynneGs monthly !rea,-even point expressed in sales dollars is: A2 <1,111,111. 32 <1,2*2,.&1. /2 <1,".1,&*(. 42 <1,%2*,&)1. Answer: / Feed!ac,: :&..,... x .%2=.%& @ :&..,... x .(2=."& ? 1,".1,&*( -&. ;efer to the a!ove information. In order to earn an operatin income of <1*2,&.., Ewynne must enerate total sales of approximately: A2 <1,(..,.... 32 <1,)2&,.... /2 <1,)&.,.... 42 <1,*..,.... Answer: / Feed!ac,: :&..,... @ 1*2,&..2=:.%. x .%&2 @ :.(. x ."&2 ? 1,)&.,... Essay -(. Accountin terminolo y Histed !elow are nine technical accountin terms introduced or emphasiIed in this chapter:

1ach of the followin statements may :or may not2 descri!e one of these technical terms. In the space provided !elow each statement, indicate the accountin term descri!ed, or answer JKoneJ if the statement does not correctly descri!e any of the terms. LLLL :a2 $he amount !y which sales revenue exceeds total varia!le cost expressed as a percenta e of sales. LLLL :!2 $he amount !y which sales volume exceeds the !rea,-even point. LLLL :c2 $he study of financial statements !y a potential investor or creditor as a means of evaluatin the profita!ility and solvency of a !usiness. LLLL :d2 A type of activity that has a causal effect in the occurrence of a particular cost.
1%

LLLL :e2 $he level of sales at which revenue e+uals operatin expenses. LLLL :f2 A cost that responds to chan es in sales volume !y less than a proportionate amount. LLLL : 2 A mathematical techni+ue used to determine the fixed and varia!le elements of a mixed or semivaria!le cost. Answer: :a2 /ontri!ution mar in ratio :!2 0ar in of safety :c2 Kone :$he statement descri!es financial statement analysis. /ost-volume-profit analysis re+uires more detailed data than are availa!le in financial statements and enerally is performed !y mana ers, rather than outsiders.2 :d2 /ost driver :e2 3rea,-even point :f2 Kone :$his descri!es semivaria!le costs2. : 2 Ci h-low method

1&

1... /ost-volume-profit analysis 5ylvia /ompany, a sole proprietorship, sells only one product. $he re ular price is <1%.. #aria!le costs are &&9 of this sellin price, and fixed costs are <),%.. a month. 0ana ement decides to decrease the sellin price from <1%. to <12& per unit. Assume that the cost of the product and the fixed operatin expenses are not chan ed !y this pricin decision. :a2 At the ori inal sellin price of <1%. a unit, what is the contri!ution mar in ratio6 LLLLLLLLLLLLLLL9 :!2 At the ori inal sellin price of <1%. a unit, what dollar volume of sales per month is re+uired for 5ylvia /ompany to !rea, even6 <LLLLLLLLLLLLLLL :c2 At the ori inal sellin price of <1%. a unit, what dollar volume of sales per month is re+uired for 5ylvia /ompany to earn a monthly operatin income of <&,&..6 <LLLLLLLLLLLLLLLL :d2 At the reduced sellin price of <12& a unit, what is the contri!ution mar in ratio6 LLLLLLLLLLLLLLL9 :e2 At the reduced sellin price of <12& a unit, what dollar volume of sales per month is re+uired to !rea, even6 <LLLLLLLLLLLLLLL /omputations Answer: /omputations Answer: :a2 %&9 :!2 <1(,%%& :c2 <2*,(() :d2 "*.%9 :e2 <1-,2)1 /omputations :a2 5ales price :1..92 minus varia!le costs :&&92 ? %&9 :!2

:c2

<),%.. + <&,&.. = <2*,(() %&9 :d2 unit sales price - varia!le costs per unit /ontri!ution mar in = unit sales price <12& :<1%. x &&9 = = "*.%9 <12& =

1(

:e2

)%.. = 1-,2)1 ."*%

1.1. /ost-volume-profit relationships /lean-Dp, Inc., sells only one product. $he sales price per unit is <(., with varia!le cost per unit of <&.. Fixed costs are <).,... per month. 0aximum capacity is %%,... units per month. Answer the followin +uestions: :a2 $o !rea, even, how many units must /lean-Dp sell per month6 LLLLLLLLLLLLLLL units :!2 If /lean-Dp, Inc., sold 2&,... units, what would !e its operatin income for the month6 <LLLLLLLLLLLLLLLL :c2 At present capacity, what is the maximum operatin income /lean-Dp can expect to earn per month6 <LLLLLLLLLLLLLLLL :d2 Assumin that direct la!or cost can !e reduced !y <2 per unit, what would /lean-DpGs maximum operatin income !e per month6 <LLLLLLLLLLLLLLL /omputations Answer: :a2 ),... units :!2 <1*.,... :c2 <").,... :d2 <%&*,... /omputations :a2 <).,... fixed costs = <1. contri!ution mar in ? ),... units :!2 <1,&..,... sales revenue - :2&,... units x <&. per unit2 varia!le costs - <).,... fixed costs ? <1*.,... operatin income :c2 <2,(%.,... sales revenue - :%%,... units x <&. per unit2 varia!le costs - <).,... fixed costs ? <").,... operatin income :d2 <2,(%.,... sales revenue - :%%,... units x <%* per unit2 varia!le costs - <).,... fixed costs ? <%&*,... operatin income 1.2. Dsin cost-volume-profit formulas 3rian /orporation manufactures a sin le product. $he sellin price is <1.% per unit, and varia!le costs amount to <)* per unit. $he fixed costs are <"(,... per month. :a2 'hat is the contri!ution mar in per unit6 <LLLLLLLLLLLLLLL per unit :!2 'hat is the contri!ution mar in ratio6 LLLLLLLLLLLLLLL9 :c2 'hat is the monthly sales volume :in dollars2 at the !rea,-even point6 <LLLLLLLLLLLLLLLL :d2 Cow many units must !e sold each month to earn a monthly operatin income of <"2,...6 LLLLLLLLLLLLLLLunits :e2 'hat is the monthly mar in of safety :in dollars2 if ",... units are sold each month6 <LLLLLLLLLLLLLLL :f2 'hat will !e the monthly operatin income if ",... units are sold each month6 <LLLLLLLLLLLLLLL /omputations

1)

Answer: :a2 <2( per unit :!2 2&9 :c2 <1%%,... :d2 2,(1( units :e2 <1(*,... :f2 <%2,... /omputations

1.". Dsin cost-volume-profit formulas ;ain!ow /orporation manufactures a sin le product. $he sellin price is <12. per unit, and varia!le costs amount to <)( per unit. $he fixed costs are <2*,%.. per month. :a2 'hat is the contri!ution mar in per unit6 <LLLLLLLLLLLLLLL per unit :!2 'hat is the contri!ution mar in ratio6 LLLLLLLLLLLLLLL9 :;ounded to 1 decimal place2 :c2 'hat is the monthly sales volume :in dollars2 at the !rea,-even point6 <LLLLLLLLLLLLLLLL :d2 Cow many units must !e sold each month to earn a monthly operatin income of <%.,...6 LLLLLLLLLLLLLLLunits :e2 'hat is the monthly mar in of safety :in dollars2 if 1,&.. units are sold each month6 <LLLLLLLLLLLLLLL :f2 'hat will !e the monthly operatin income if 1,&.. units are sold each month6 <LLLLLLLLLLLLLLL /omputations Answer: :a2 <%% per unit :!2 "(.)9 :c2 <)),"*% :d2 1,&&& units :e2 <1.2,(1( :f2 <"),((. /omputations

1*

1.%. 1stimatin costs and profit 'orld-'ide, Inc. expects total sales of <&& million, a mar in of safety of <2& million, and a contri!ution mar in ratio of 2&9. /ompute the followin : :a2 #aria!le costs: <LLLLLLLLLLLLLLLLL :!2 3rea,-even sales volume :in dollars2: <LLLLLLLLLLLLLLLLL :c2 Fixed costs: <LLLLLLLLLLLLLLLLL :d2 Operatin income: <LLLLLLLLLLLLLLLLL Answer:

1.&. 1stimatin costs and profit Always ;eady /ompany sells a sin le product. $he unit sellin price is <2)&, and varia!le costs are (.9 of this sellin price. Fixed costs are currently <&&,... per month. :a2 /alculate the monthly !rea, even point in units. LLLLLLLLLLLL Dnits. :!2 Always ;eady is considerin the ac+uisition of new ro!otic e+uipment. 4epreciation on the new ro!ots will increase monthly fixed costs !y <(,..., !ut reduce varia!le costs to &.9 of the current sellin price. If Always ;eady ac+uires the ro!ots what will !e the new monthly !rea, even point in units6 LLLLLLLLLLLLLLLLLLLLLLLL Dnits. Answer: :a2 3rea,-even point: <&&,... M :<2)& > :.(. x <2)&2 ? &.. units :!2 3rea,-even point: <(1,... M :<2)& - .&. x <2)&2 ? %%% units 1.). ;alph 3yrd, Inc. wants to manufacture a new cell phone that can !e worn on the wrist. Information from doin mar,et research shows that he can sell this phone for <". each. Cis fixed costs would !e <1"&,... a year and varia!le costs would amount to <12 per phone. :12 'hat would the contri!ution mar in ratio !e6 :22 'hat sales volume in units would ;alph need to !rea,-even6 :"2 'hat sales volume in units would ;alph need to earn <2..,... profit6 :%2 'hat would !e the mar in of safety if he sold 2&,... units6 Answer: :12 ". > 12 ? 1*=". or (.9 :22 3rea,-even ? 1"&,...=1* ? ),&.. units :"2 $o earn a profit of <2..,... :2..,... @ 1"&,...2= 1* ? 1*,(11 units :%2 0ar in of safety ? 1"&,...=.(. ? <22&,... sales to !rea, even 2&,... x <". ? )&.,... > 22&,... ? &2&,...

1-

1.*. A manufacturin company produced the followin report:

;e+uired: :12 Cow many units would have to !e sold to !rea, even6 :22 If fixed overhead were to increase !y <1,*.. what would !rea,even !e in units6 :"2 'hat is operatin income if sales increase !y 2&96 Answer: :12 /ontri!ution mar in: 2.. > 1%& > 1& ? %. :&.. @ %...2 = %. ? 112.& or 11" units :22 :&.. @ %... @ 1*..2 = %. ? 1&).& or 1&* units :"2

2.

NAME 10-MINUTE QUIZ A SECTI N

Information re ardin a product manufactured and sold !y 7reston is shown !elow: 0aximum capacity with existin facilities............................... $otal fixed costs per month...................................................................... #aria!le cost per unit............................................................................... 5ales price per unit.................................................................................. %,... units <&.,... <%2... <&(...

1 Refer to the above data. $he contri!ution mar in ratio for this product is: a 2.9. c ".9. ! 2&9. " %.9. # Refer to the above data. $he num!er of units 7reston must sell to !rea, even is: :rounded2 a ",-2). c %,*2". ! "&)2. " &,1%.. $ Refer to the above data. $he dollar sales volume necessary to produce monthly operatin income of <12,... !efore taxes is: a <1**,.... c <2**,.... ! <1*(,.... " <2%*,....

21

NAME 10-MINUTE QUIZ % 1 SECTI N

0ana ement predicts total sales for Nune to !e <",...,..., yieldin a mar in of safety of <1,...,... and a contri!ution mar in ratio of 2&9. 'hich of the followin amounts is not consistent with this information6 a Fixed costs, <&..,.... ! #aria!le costs, <)&.,.... c Operatin income, <2&.,.... " 3rea,-even sales volume, <2,...,....

NAME 10-MINUTE QUIZ C SECTI N

&&&&&&&&&&&&&&&&&&&&&#

Freeman /ompany sells only one product. $he re ular sellin price is <%.. #aria!le costs are ).9 of this sellin price, and fixed costs are <&,&.. per month. 0ana ement decides to increase the sellin price from <%. to <%& per unit. Assume that the cost of the product and the fixed operatin expenses are not chan ed !y this pricin decision. 1 # $ Refer to the above data. At the original sellin price of <%. per unit, what is the contri!ution mar in ratio6 LLLLLLLLLLLL9 Refer to the above data. At the original sellin price of <%. per unit, how many units must Freeman sell to !rea, even6 LLLLLLLLLLLLunits Refer to the above data. At the original sellin price of <%. per unit, what dollar volume of sales per month is re+uired for Freeman to earn a monthly operatin income of <%,...6 <LLLLLLLLLLLL Refer to the above data. At the increased sellin price of <%& per unit, what is the contri!ution mar in ratio6 LLLLLLLLLLLL9 :;ound to one decimal place2 Refer to the above data. At the increased sellin price of <%& per unit, what dollar volume of sales per month is re+uired to !rea, even6 <LLLLLLLLLLLLL

' (

NAME

10-MINUTE QUIZ ) SECTI N Caywood !rews reduced calorie !eer and re ular !eer. 5ales of its reduced calorie !eer represent 2&9 of the companyGs total revenue. 5ales of re ular !eer represent the remainin )&9. ;educed calorie !eer has a contri!ution mar in ratio of *.9, whereas the contri!ution mar in ratio of re ular !eer is only (.9. CaywoodGs monthly fixed costs avera e <*12,&... 1 'hat is the companyGs monthly !rea,-even point expressed in sales dollars6 <LLLLLLLLLL

22

'hat monthly sales level must !e achieved for Caywood to earn a monthly operatin income of <"2&,...6 <LLLLLLLLLL If Caywood enerates <1,"&.,... in monthly sales, it will earn a monthly operatin income of <LLLLLLLLLL. Assume CaywoodGs mar in of safety was <2&.,... in 0ay. 'hat was the companyGs operatin income in 0ay6 <LLLLLLLLLL. If CaywoodGs monthly fixed costs increase !y <(,&.., what level of monthly sales revenue will !e re+uired to !rea,-even6 <LLLLLLLLLL. SE*F-TEST QUESTI NS F+ M TE,T% -

'

/hoose the !est answer for each of the followin +uestions and insert the identifyin letter in the space provided. 1 4urin the current year, the net sales of ;id eway, Inc. were 1.9 !elow last yearGs level. Oou should expect ;id ewayGs semi varia!le costs to: a 4ecrease in total, !ut increase as a percenta e of net sales. ! Increase in total, and increase as a percenta e of net sales. c 4ecrease in total, and decrease as a percenta e of net sales. " Increase in total, !ut decrease as a percenta e of net sales. 0arston /ompany sells a sin le product at a sales price of <&. per unit. Fixed costs total <1&,... per month, and varia!le costs amount to <2. per unit. If mana ement reduces the sales price of this product !y <& per unit, the sales volume needed for the company to !rea, even will: a Increase !y <&,.... ! Increase !y <%,&... c Increase !y <2,.... " ;emain unchan ed. Olsen Auto 5upply earns a contri!ution mar in ratio of %.9. $he store mana er estimates that !y spendin an additional <&,... per month for radio advertisin , the store will !e a!le to increase its operatin income !y <",... per month. $he mana er is expectin the radio advertisin to increase monthly sales volume !y: a <12,&... ! <*,.... c <),&... " 5ome other amount.

2"