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Exam 22: Cost-Volume-Profit Analysis

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Question 21

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A company's product sells at $12 per unit and has a $5 per unit variable cost. The company's total fixed costs are $98,000.The contribution margin per unit is:

A) $5.00.
B) $7.00.
C) $8.17.
D) $12.00.
E) $17.00.

F) A) and B)
G) B) and D)

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Question 22

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Which of the following is the correct interpretation of a degree of operating leverage of 5?

A) Operating leverage of 5 means that sales can decrease by 5% before the firm's current level of sales will hit the break-even point.
B) Operating leverage of 5 means that if sales increase by 5% the firm will hit its break-even point.
C) Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.
D) Operating leverage of 5 measures the degree of debt employed by the firm's debt structure.
E) Operating leverage of 5 means that the company would need to increase sales by 5 times in order to hit its break-even point.

F) C) and D)
G) A) and C)

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Question 23

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A firm sells two different products, A andA. Total fixed costs for this firm are $1,260,000. Additional selling prices and cost information for both products follow: Required: (a) Calculate the contribution margin per composite unit. (b) Calculate the break-even point in units of each individual product. (c) If pretax income before taxes of $294,000 is desired, how many units of A and B must be sold? B. For each unit of B, the firm sells two units of

Hiller Co. anticipates total fixed costs of $120,000 and variable costs equal to 40% of sales. What is the pretax income if sales are $650,000?

Brown Company's contribution margin ratio is 24%. Total fixed costs are $84,000. What is Brown's break-even point in sales dollars?

A graph used to analyze past cost behaviors by displaying costs and volume levels for each period as points on the diagram is called a:

The margin of safety is the amount that sales can drop before the company incurs a loss.

Identify items a, b, and c in the cost-volume-profit graph shown below.

Use the following information to determine the margin of safety in dollars:

Dunkin Company manufactures and sells a single product that sells for $480 per unit; variable costs are $300. Annual fixed costs are $990,000. Current sales volume is $4,200,000. Dunkin company management targets an annual after-tax income of $843,750. The company is subject to a 25% income tax rate. Compute the unit sales to earn the target after-tax net income.

The method most likely to produce the most precise line of cost behavior is the scatter diagram.

A _______________ cost is one that remains unchanged in amount when volume of activity varies from period to period within a relevant range. A ______________ cost is one that changes in proportion to changes in volume of activity.

Thomas Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. Should Thomas reduce its per unit sales price and pay for the additional advertising? (Support your answer with calculations.)

What are the basic assumptions of CVP analysis with regard to variable cost, fixed cost, and selling price per unit? (Assume a single product).

Contribution margin is the amount of sales that exceeds total variable costs.

A company has fixed costs of $90,000. Its contribution margin ratio is 30% and the product sells for $75 per unit. What is the company's break-even point in dollar sales?

___________________________ is a statistical method of identifying an estimated line of cost behavior.

In cost-volume-profit analysis, the unit contribution margin is:

A company's product sells at $12 per unit and has a $5 per unit variable cost. The company's total fixed costs are $98,000. The break-even point in units is:

Baines Brothers manufactures and sells two products, A and Z in the ratio of 4:2. Product A sells for $75; Z sells for $95. Variable costs for product A are $35; for Z $40. Fixed costs are $418,500. Compute the break-even point in composite units.