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Exam 5: Cost Behavior and Cost-Volume-Profit Analysis

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Question 1

True/False

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The margin of safety can be expressed in units of product, in dollars, or as a percentage of sales.

A) True
B) False

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Question 2

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A company wishes to earn a pretax income equal to 35% of total fixed costs.Its product sells for $50.75 per unit.Total fixed costs equal $156,800 and variable costs per unit are $32.50.How many units must this company sell to meet its goal? (Round answer to complete units.)

A) 11,599
B) 8,592
C) 4,171
D) 6,513
E) 11,047

F) A) and B)
G) A) and E)

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Question 3

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Three important assumptions in cost-volume-profit analysis is that (1)_______________per unit is constant, (2)_____________ per unit is constant, and (3)______________ are constant in total.

A company manufactures and sells a product for $91 per unit.The company's fixed costs are $859,716 and its variable costs are $25 per unit.The company's break-even point in units is:

A company manufactures and sells spotlights.Each spotlight sells for $145.The variable cost per unit is $98, and the company's total fixed costs are $235,000.Predicted sales are 15,000 units.What is the contribution margin per unit?

The margin of safety is the excess of:

Solving problems to determine the relationship of cost, volume, and profit often commences with the measurement of the _____________ point.Further analysis emphasizing profitability may be accomplished by measuring the _______________ and _________________.

Ivan Company has a goal of earning $70,000 after-tax income.Ivan would need to pay $20,000 of income taxes at the target level of income.The contribution margin ratio is 30%.What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?

A firm sells two products, A and B. For every unit of A the firm sells, two units of B are sold. The firm's total fixed costs are $1,612,000. Selling prices and cost information for both products follow: $\begin{array}{ccc}& \text { Unit } & \text { Variables } \\& \text { Sales } & \text { Costs } \\\underline { \text { Product } }& \underline { \text { Price } }& \underline { \text { per Unit }}\\\mathrm{A} & \$ 20 & \$ 8 \\\mathrm{~B} & 24 & 4\end{array}$ -The contribution margin per composite unit is:

Tanner Inc. has incurred the following overhead costs over a six-week period: $\begin{array}{|c|c|c|}\hline \text { Week } & \text { Machine Hours } & \text { Overhead Cost } \\\hline 1 & 68 & \$ 1,190 \\\hline 2 & 62 & \$ 1,004 \\\hline 3 & 72 & \$ 918 \\\hline 4 & 46 & \$ 710 \\\hline 5 & 94 & \$ 1,025 \\\hline 6 & 48 & \$ 965 \\\hline\end{array}$ -Using the high-low method, calculate the variable cost component of these overhead costs (round to the nearest two decimal places) .

Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to do cost-volume-profit analysis.

The most complex of the cost estimation methods is the high-low method.

A firm produces and sells a product with a contribution margin of $32 per unit.The firm is presently selling 90,000 units and earning $240,000 in after-tax income.Taxes are $80,000 at a 25% tax rate.If the firm desires to increase its after-tax income to $300,000, how many more units must it sell?

Duxbury Co.reports the following data for the current year: $\begin{array}{lr} \text { Units sold } &1,200 \\ \text { Unit sales price } &\$ 30 \\ \text { Unit variable cost } &\$ 10 \\ \text { Total fixed cost } &\$ 18,000\end{array}$ Required: a.Calculate the break-even point in units. b.Calculate Duxbury's pretax income. c.Calculate Duxbury's degree of operating leverage. d.Calculate the margin of safety in units.

As the level of output activity increases, the variable cost per unit remains constant.

A firm expects to sell 25,000 units of its product at $11 per unit.Pretax income is predicted to be $60,000.If the variable costs per unit are $6, total fixed costs must be:

Unit contribution ratio is calculated by dividing sales price per unit by the unit contribution margin.

A step-wise variable cost can be separated into a fixed component and a variable component.

Mueller Corp.manufactures compact discs that sell for $5.Fixed costs are $28,000 and variable costs are $3.60 per unit.Mueller can buy a newer production machine that will increase fixed costs by $8,000 per year but will decrease variable costs by $0.40 per unit.What effect would the purchase of the new machine have on Mueller's break-even point in units?

A company manufactures and sells a product for $150 per unit.The company's fixed costs are $68,200, and its variable costs are $95 per unit.The company's break-even point in dollars is: