ACG 2071 - Managerial Accounting

Study Probes - Chapter 7

Problems

1. Aukens Company produces homework machines. During July of 2004, Aukens produced and sold 600 units at \$40 per unit. At July’s level of production, it costs Aukens \$18 variable costs per unit and fixed costs of \$5 per unit. How much will total sales be if Aukens earns a profit of \$8,000?

2.  Parker Plants provided the following information relating to the production and sales of 500 plants: Sales, \$15,000; Variable product costs, \$3,800; variable operating expenses, \$2,000; fixed product costs, \$2,500; and fixed operating expenses, \$1,500.

A. How many cents out of every sales dollar is available to cover fixed expenses and to go towards profit for Parker Plants?

B. If Parker sells 600 plants, how much is available to cover fixed expenses and to go towards profit for Parker Plants?

C. How much is available to cover fixed expenses and to go towards profit if Parker sells 1 more plant?

3.  Best Buy has a contribution margin ratio of 32%, a contribution margin per unit of \$5, and fixed costs of \$21,160.

A.    How much is sales revenue when Best Buy achieves a target profit of \$7,000?

B     How much does Best Buy’s profit increase for each \$800 increase in revenue?

4. Outdoor Fun incurred the following costs in producing and selling 6,000 lawn chairs during 2009:

 Sales (6,000*\$21.80) \$130,800 Fixed costs (6,000*\$3.40) \$20,400 Variable costs (6,000*\$13.30) \$79,800

A.  If 150 more chairs are produced and sold, by how much will profit increase?

B.  How many chairs must be sold to breakeven?

C. By how many units can Outdoor Fun's sales drop before the company loses his 'cushion'?

5. Donough Company had the following income statement:

 Sales revenue (800 units) \$80,000 Cost of goods sold: Fixed costs \$20,000 Variable costs 18,500 38,500 Gross profit \$41,500 Operating expenses: Fixed costs 12,000 Variable costs 13,500 25,500 Operating income \$16,000

A.  How much is Donough's contribution margin?

B.  How many units must Donough sell in order to break even?

6. Evans Company manufactures and sells cologne. This product has a unit sales price of \$40 and a unit variable cost of \$24. Fixed expenses are \$32,000 per month. Calculate the following for the month of July.

A.  Contribution margin ratio

B. Contribution margin of each unit

C. Number of units needed to sell to break even

D. Total sales needed to sell to break even

E. Total variable costs at break even

f. Units that Evans must sell in order to report income before taxes of \$28,000

G. If the company sells 3,500 units, how much is:

A.  the total contribution margin?

B. Net operating income for the period?

C. The margin of safety in dollars?

7.  Allen Company sells homework machines for \$100 each. Variable costs per unit are \$75 and total fixed costs are \$62,000. Allen is considering the purchase of new equipment that would increase fixed costs to \$84,000, but decrease the variable costs per unit to \$60. At that level Allen Company expects to sell 3,000 units next year.

What is Allen’s break-even point in units if it purchases the new equipment?

Assuming the new equipment is acquired, by how much can Allen's sales drop before he loses his 'cushion'?

8.  Smith Company produces desk lamps. The budget information for June indicated that production and sales of 800 units at \$25 per unit would generate variable costs of \$15 per unit and fixed costs of \$7.50 per unit.

A.  How much is the contribution margin of each desk lamp?

B.   How many lamps must be sold to generate profit of \$5,000?

C.   How much sales dollars must Smith generate to break even?

D.   Suppose Smith operates at \$5,000 profit during June. By how many units can sales decline before Smith would incur a net loss?

E.   What is the accounting name of the concept you calculated in part D?

9. Margulais, Inc. produces guitars. The selling price is \$2,000 per unit and the variable costs are \$1,500 per guitar. Fixed costs per month are \$40,000. If Margulais sells 10 more units beyond breakeven, how much does profit increase as a result?

10. Panera Bread sells a box of bagels for with a contribution margin of 62.5%. Its fixed costs are \$150,000 per year. How much sales dollars does Panera Bread need to break-even per year if bagels are its only product?

11. When fixed costs are \$100,000 and variable costs are 20% of the selling price, how much are breakeven sales?

12. Olsen Drug Stores has three product lines: Drugs (\$500,000 sales, 25% contribution margin ratio), Cosmetics (\$250,000 sales, 50% contribution margin ratio), and Housewares (\$100,000 sales, 30% contribution margin ratio). How much is profit expected to increase if drug sales increase by \$80,000 and the other product levels stay the same?

13. The following is from Regetta Cos income statement for last month:
 Sales (50,000 units) \$2,000,000 Variable expenses 1,400,000 Fixed costs 339,000 Operating income \$   261,000

Calculate the break even point in units.

Calculate margin of safety in units.

14. - Martin’s variable costs are 35% of sales. Its selling price is \$100 per unit. If Martin sells one unit more than break even units, how much will profit increase?

15.  A firm makes and sells a single product. Monthly fixed expenses are \$19,500, monthly unit sales are 3,000, and the unit contribution margin is \$20. How much is monthly net profit?

16. A company with a single product has a contribution margin rate of 24%. Total units sold for 2004 was 100. If total fixed costs are \$84,000, what is the company's sales volume in dollars at break-even?

17. Schwan, Inc. is a nonprofit organization that captures alligators from residential ponds and releases them in a remote habitat. Fixed costs are \$20,000. The cost of capturing each gator is \$40.00 each. Schwan is funded by a local philanthropy in the amount of \$48,000 for 2003. How many gators can Schwan capture during 2013 under its current funding?

18.  Moore Company has fixed costs of \$200,000 and variable costs are 60% of sales. How much will Moore report as sales when its net income equals \$20,000?

19. The following is Tyler Corporation's contribution income statement for last month:

 Sales \$4,000,000 Less variable expenses 2,800,000 Contribution margin 1,200,000 Less fixed expenses 720,000 Net income \$   480,000

The company has no beginning or ending inventories. What is the company’s margin of safety?

Problem 36 -Zweig Company produces paint brushes, which it sells for \$8 each. Each brush costs \$2 to make. During March, 3,000 brushes were sold. Fixed costs for March were \$1 per unit for a total of \$3,000 for the month.

A. How much is the contribution margin ratio for Zweig Company?

B. How much is the monthly break-even level of sales in dollars for Zweig?

C.  How much does Zweig’s operating income increase for each \$1,000 increase in revenue per month?

D.  If variable costs decrease by 20%, and fixed costs increase by 20%, what happens to the break-even level of units per month for Zweig?

20.  A company requires \$600,000 in sales to meet its target net income. Its contribution margin is 40%, and fixed costs are \$80,000. How much is the targeted net income?

21. Bell Brushes produces hair brushes which are sold for \$20 each. The variable costs are \$8 per brush. Fixed costs per month are \$4,800. If Bell sells 10 more units beyond breakeven, how much does profit increase as a result?

22. Moore Company has fixed costs of \$200,000 and variable costs are 60% of sales. How much will Moore report as sales when its net income equals \$20,000?

Multiple Choice Questions

1. In the graph of CVP, the breakeven point is the

A.   point where the variable costs line crosses the fixed costs line.

B.   point where the sales revenue line crosses the total costs line.

C.   point where the variable costs line crosses the sales line.

D.   point where the variable cost line, the fixed cost line, and the sales line all meet.

2,  H55 Company sells two products, beer and wine. Beer has a 10 percent profit margin and wine has a 12 percent profit margin. Beer has a 27 percent contribution margin and wine has a 25 percent contribution margin. If customers want to buy only one product and beer sells for \$4, while wine sells for \$5, which product should H55 push to customers?

A.    Beer

.       B.    Wine

C.    The product that has the higher sales price

D.    It should sell an equal quantity of both.

E.    Selling either results in the same additional income for the company.

3.  What most likely occurs when variable costs per unit increase?

A. The breakeven point will decrease

B. The selling price will decrease

C. The fixed cost per unit increase

D. Breakeven sales will increase

4. Cost-volume-profit analysis assumes all EXCEPT

A.   all costs are variable or fixed.

B.   units manufactured equal units sold.

C.   total variable costs remain the same over the relevant range.

D.   total fixed costs remain the same over the relevant range.

5.  The break-even point is the point where

A. total sales revenue equals total expenses.

B. total contribution margin equals total fixed expenses.

C. both A and B are true.

D. neither A nor B is true.

6. A business's normal operating range, which excludes extremely high and low volumes that are not likely to be encountered, is the

A. Margin of safety.

B. Contribution margin.

C. Break-even point.

D. Relevant range

7. When graphing cost-volume-profit data on a CVP graph

A.    Units are plotted on the horizontal axis; costs on the vertical axis

B.    Units are plotted on the vertical axis; costs on the horizontal axis

C.    Both units and costs are plotted on the horizontal axis.

D.    Both units and cost are plotted on the vertical axis

Use the information that follows to answer the next two questions.

Gessel’s CVP analysis resulted in the following graph of its costs related to producing widgets during June:

 0 100 200 300 400 500 600 700

8. Gessel’s break even point in units is about

A.   2,500 units

B.   350 units

C.   250 units

D.   not enough information provided

9.  Total costs to produce 200 units is approximately

A.   \$2,000

B.   \$3,000

C.   \$4,000

D.   \$1,300

10. Todd Company sells two products, Fred and Barney. Fred has a 40 percent contribution margin and Barney has a 20 percent contribution margin. If customers plan to spend a total of \$50, what should Todd Company do?

A.    It should sell more Barney units.

B.    It should sell more Fred units.

C.    It should sell an equal number of each.

D.    No recommendation can be made from the data given

11. When other factors remain constant, a decrease in sales price

1. increases the number of units needed to earn profits.

2. decreases the number of units needed to earn profits.

3. has no effect on the number of units needed to earn profits.

4. causes management to make irrational decisions.

12. A firm will break even when

A.    Revenues = variable costs – fixed costs

B.    Its sales exceed its fixed costs.

C .  Revenues = variable costs + fixed cost

D.  Either b or c

13. In cost-volume-profit analysis, all costs are classified into which two categories?

a. fixed costs and variable costs
b. sunk costs and fixed costs
c. opportunity costs and sunk costs
d. product and period costs

14. Which of the following would have no effect on the break-even point in units?

A.    Sales volume increases

B.    Sales price increases

C.    Fixed costs increases

D.    Variable cost per unit decreases

15.   Why must a company determine what its relevant range is?

A.   It directly impacts the indirect cost allocated to a product or service.

B.   It is a relevant cost.

C.     GAAP requires companies to report this information.

D.     Cost behavior outside of the relevant range is generally distorted

16.   Which is not part of a CVP graph?

A.  Total cost line                          C.  Revenue line

B.  Fixed cost line                          D.   Variable cost line

17. Which of the following would have no effect on the break-even point in units?

A.    Sales price is reduced.

B.    Sales price increases

C.    Fixed costs increases

D.    Variable cost per unit decreases

E.    None of these.

18.  Which of the following statements is true when making decisions using CVP analysis?

A.   As long as the contribution margin is a positive number, net income will be positive.

B.   As long as variable costs are more than fixed costs, net income will be negative.

C.   As long as the contribution margin is greater than fixed costs, net income will be positive.

D.   As long as the sales price per unit is greater than fixed costs per unit, net income will be positive.

19. Carver Company’s management established its target net income for the year. What did Carver do?

A.    It estimated its break-even income level for the year.

B.    It calculated its contribution margin.

C.    It allocated its costs to cost objects.

D.    It established its desired annual income for its product lines.

20.What is a relevant range of activity?

A.    The geographical locations in which the company operates

B.    The activity level at which profits are maximized

C.    Operating activity over which the company expects to operate

D.    The level of activity in which all costs are constant

21. Max, Inc. was evaluating its margin of safety. Which one of the following is true?

A.    The margin of safety ignores fixed costs.

B.    The higher the margin of safety, the lower the profit a company makes

C.    The higher the margin of safety, the lower the amount of sales revenue.

D.    The higher the margin of safety, the more cushion the company has.

22.  In CVP analysis, what does the term "cost" mean?

A.    It includes all fixed and variable costs of products, but excludes period costs.

B.    It includes all costs which are part of cost of goods sold, plus variable operating expenses.

C.    It includes all manufacturing costs and operating expenses.

D.    It includes only manufacturing costs.

23.    Which statement describes a fixed cost?

A.    It varies in total at every level of activity.

B.    The unit cost varies directly to the activity level.

C.    Its unit cost varies inversely to the level of activity.

D.    It remains the same per unit regardless of activity level.

Short Answer Questions

Answers can be found in chapter 7.

It is immensely more beneficial if you look up the answers in the chapter as you will get more insight by reading the concept in context of the chapter compared to if I would provide you a one sentence answer. Hence, I will not post answers to the following. If you want confirmation of your interpretation of the answer, feel free to ask.

1.  What is a profit equation?  What does the 'x' stand for?

2.    List the assumptions of CVP and explain why these are important as a group.

3.    What is meant by a break-even point in units? by a break-even point in dollars?

4.    What happens to the breakeven point if VC increase? VC decrease? FC increase? FC decrease? actual sales volume increases? actual sales volume decreases? sales price per unit increases? sales price per unit decreases?

5.    What is target profit? How is a target profit used in determining units or sales to be achieved?

6.    Why is a relevant range important in CVP calculations?

7.    What is margin of safety and why is it important?

8.    What is the interpretation of CM and CM ratio and margin of safety? How are these amounts determined?

9.    What is what-if analysis? What items can vary in what-if analysis?

•     10.   How does breakeven and the related components appear on a graph ? How do you read a CVP graph?

•     11.  How do you decide which product to push if a customer wants to buy one item, but does not care which product, or if a customers wants to spend a fixed sum of money and don't care which product to buy?

12.    When do you use the CM ratio in the profit equation?

13.    When do you use the CM per unit amount in the profit equation?

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