Exam 7: Cost-Volume-Profit Analysis

Bolton Publications, Inc. produces and sells business books. The results of the company's operations for the year ended December 31, 20x1, are given below. A. Prepare a traditional income statement for the company. B. Prepare a contribution income statement for the company. C. Which income statement (traditional or contribution) would an operating manager most likely use to study changes in operating income that are caused by changes in sales? Why?

Which of the following does not typically appear on an income statement prepared by using a traditional format?

Use the following information to answer the following Questions -Refer to the figure above. Assume that the company whose cost structure is depicted in the figure expects to produce a loss for the upcoming period. The loss would be shown on the graph:

Which of the following occurs if a company experiences a decrease in its fixed costs?

Elise Corporation has the following sales mix for its three products: A, 20%; B, 35%; and C, 45%. Fixed costs total $400,000 and the weighted-average contribution margin is $100. How many units of product A must be sold to break-even?

The contribution margin ratio can also be expressed as a percentage.

Companies with advanced manufacturing technology tend to have lower fixed costs.

Companies with advanced manufacturing technology tend to have higher break-even points.

Many firms are moving toward flexible manufacturing systems and adopting the just-in-time (JIT) philosophy. A. How is cost behavior altered in the typical flexible manufacturing environment as compared to a traditional manufacturing system? What is the impact on the break-even point? Explain. B. One of the assumptions underlying cost-volume profit analysis is that sales volume and production volume are equal. Stated another way, inventories are assumed to remain constant. Is this assumption likely to be violated under an ongoing JIT philosophy? Explain.

Hsu, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Hsu's break-even point would be:

Max Company manufactures and sells three products: Good, Better, and Best. Annual fixed costs are $3,315,000, and data about the three products follow. A. Determine the weighted-average unit contribution margin. B. Determine the break-even volume in units for each product. C. Determine the total number of units that must be sold to obtain a profit for the company of $234,000. D. Assume that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%, respectively. Will the number of units required to break-even increase or decrease? Explain. Hint: Detailed calculations are not needed to obtain the proper solution.

Paranormal Company is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows. Regardless of which product is introduced, the anticipated selling price will be $50 and the company will pay a 10% sales commission on gross dollar sales. Paranormal will not carry an inventory of these items. Required: A. What is the break-even sales volume (in dollars) on product no. 66? B. Which of the two products will be more profitable at a sales level of 25,000 units? C. At what unit-volume level will the profit/loss on product no. 65 equal the profit/loss on product no. 66?

Use the following information to answer the following Questions -Refer to the figure above. The slope of line B is equal to the:

Total contribution margin is an important assumption in multiproduct CVP analysis.

All other things being equal, a company that sells multiple products should attempt to structure its sales mix so the greatest portion of the mix is composed of those products with the highest:

Dane Company has a break-even point of 120,000 units. If the firm's sole product sells for $40 and fixed costs total $480,000, the variable cost per unit must be:

The break-even point is that level of activity where:

Use the following information to answer the following Questions Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units. -Each unit that Narchie sells will:

Clarkson Enterprises is studying the addition of a new product that would have an expected selling price of $180 and expected variable cost of $120. Anticipated demand is 9,000 units. A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration: Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars Plan 2: An annual salary of $180,000 and no commission A. What is meant by the term "operating leverage"? B. Calculate the contribution margin and income of the two plans at 9,000 units. C. Compute the operating leverage factor of the two plans at 9,000 units. Which of the two plans is more highly leveraged? Why? D. Assume that a general economic downturn occurred during year no. 2, with product demand falling from 9,000 to 7,200 units. By using the operating leverage factors, determine and show which plan would produce a larger percentage decrease in income.

Pfitz Company is studying the impact of the following: An increase in sales price on the break-even point. 2. A decrease in fixed costs on the contribution margin. 3. An increase in the contribution margin on the break-even point. 4. A decrease in the variable cost per unit on the sales volume needed to achieve Pfitz's $68,000 target profit. 5. An increase in sales commissions on the contribution margin and the break-even point. 6. A decrease in anticipated advertising outlays on fixed cost and the break-even point.