Exam 3: Cost-Volume-Profit Analysis

The Fricker Co. sells three products in a ratio of 3:2:6. The contribution margins for the units are $10, $25, and $30, respectively. Total fixed costs are $119,600. What is the breakeven point in total number of units?

Managers can use cost-volume-profit analysis to: I. Plan operating activity levels II. Achieve targeted profits III. Monitor organizational performance

An assumption needed for CVP analysis in multiple-product companies is that the sales mix remains constant.

Salmon Co. is deciding between two compensation plans. In Plan A, salaries are $100,000 and the commission is $2 per unit. In Plan B, salaries are $40,000 and the commission is $4 per unit. At what level of sales, in units, is Salmon indifferent between the two compensation plans?

The breakeven point for a service organization will decrease if:

Ciao Company manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Ciao incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling. Ciao Company is considering changes to its production and distribution procedures. If the changes are made, total variable costs (manufacturing and selling) will be $3 and total fixed costs (manufacturing, administration, and selling) will be $350,000 per month. The selling price will remain at $10. If the changes are made, the number of units required to break even will be:

The Candle Company expects sales of $500,000 and total variable costs of $200,000 in 2016. Total budgeted fixed costs are $180,000. What is the breakeven volume in sales dollars?

The margin of safety is:

CVP analysis can be used in the following type(s) of organization: I. Manufacturing II. Service III. Not-for-profit

Juurlink, Inc. projects the following for next year: Selling price per unit \ 30 Variable manufacturing costs per unit \ 16 Fixed manufacturing costs \ 74,000 Variable selling costs per unit \ 2 Fixed administrative costs \ 24,480 After-tax profit \ 48,000 Tax rate 40\% How many units will Juurlink have to sell to realize the projected after-tax profit?

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

French Enterprises expects sales of $1,000,000 and total variable costs of $250,000 for 2016. Total budgeted fixed costs are $200,000. What is the dollar amount of sales necessary to achieve after-tax profits of $700,000 if the tax rate is 30%?

Ferguson Co. incurs $568,000 in fixed costs while producing three products with the following characteristics: Sales Mix Unit Contribution Contribution Product (Units) Margin Margin Ratio 5 \ 900 45\% 3 600 40\% 2 400 35\% What is the breakeven point in units?

The Martinez Game Co. produces and sells parlour games. In 2016, sales were $400,000, total variable costs were $200,000, and total fixed costs were $150,000. What is the total revenue required to increase pre-tax profits by $40,000 and to cover an expected increase of $20,000 in fixed costs?

On a cost-volume-profit graph, the breakeven point is located where the fixed cost line intersects the x-axis.

Which of the following is an uncertainty faced by managers in CVP analysis? I. Unexpected changes in costs II. How quickly demand for new products will change III. The amount of budgeted advertising costs

The Puppet Co. has the following unit and mix data: $\begin{array}{lll}&\text { Do }&\text { Dah }&\text { Total }\\\text { Unit sales price } & \$ 5.00 & \$ 4.00 \\\text { Unit contribution margin } & 0.75 & 0.6 \\\text { Sales mix }(\$) & 80 \% & 20 \%\\\text { Fixed costs }&&&\$99,000\\\text { Target profit }&&&24,750\end{array}$ How many units in total must be sold to earn the target profit?

For companies with multiple products, the sales mix should be stated as a proportion of units when performing CVP computations in units.

The relevant range is important because:

CVP analysis can be used in companies that sell multiple products.