Exam 11: Cost Behavior, Operating Leverage, and Profitability Analysis

What is the break-even point for a company?

Goff Corporation sells products for $75 each that have variable costs of $50 per unit. Goff's fixed cost is $350,000. Required:Calculate the contribution margin per unit, then use the per unit contribution margin approach to find the break-even point in units and dollars.

Canton Company produces and sells toasters. The following unit cost information assumes a production and sales volume of 15,000 units: Required:Compute the budgeted selling price per unit assuming Canton uses a cost-plus pricing strategy and a markup equal to 75% of production cost.Compute the firm's total fixed costs.Compute the firm's contribution margin per unit given the budgeted selling price you computed in Requirement 1.Compute the firm's breakeven point in units and dollars, using the selling price you calculated in part 1.Estimate the profit when 15,000 units are sold.

If a company had a pure variable cost structure, what would be the relationship between contribution margin and net income, and what would be the magnitude of operating leverage?

During the current year, Vanguard Company sold 80,000 of its only product at a selling price of $60 per unit. Variable costs were $18 per unit, and Vanguard's margin of safety for the year was 25,000 units. Required:Calculate Vanguard's margin of safety ratio for the current year.What was the amount of Vanguard's fixed costs for the current year?

What is an activity base, and how does the activity base relate to a variable cost?

Sandford Company manufactures one product. Its variable manufacturing cost is $16 per unit; total fixed manufacturing cost is $600,000.Required:Calculate Sandford's total manufacturing costs if it produces 10,000 units.What would be the total cost per unit (including both fixed and variable costs) assuming that Sandford produces 10,000 units?Calculate Sandford's total manufacturing costs if it produces 20,000 units.What would be the total cost per unit assuming that Sandford produces 20,000 units?Compare your answers from parts 2 and 4. If the cost per unit is different at 10,000 units than at 20,000 units, explain why.

Lush Lawn, Incorporated produces and sells electric lawn trimmers for $120 each. The variable costs of each mower total $80 while total monthly fixed costs are $6,000. Current monthly sales are $48,000. Required:Compute the company's current break-even point in units and dollars.What is the company's current margin of safety in units, dollars, and percentage?

What are mixed or semivariable costs? Give an example of a mixed cost.

Lex Company produces products that it sells for $10 each. Variable costs per unit are $4, and annual fixed costs are $120,000.Required:Use the equation method to determine the break-even point in units and dollars.

Grant Company and Lee Company compete in the same market. The following budgeted income statements illustrate their cost structures. Grant Company Lee Company Number of customers 200 200 Sales revenue (200\times\ 150) \ 30,000 \ 30,000 Less variable costs 6,000 18,000 Contribution margin \ 24,000 \ 12,000 Less fixed costs 19,000 7,000 Net income \ 5,000 \ 5,000 Required:If Grant Company lowers its price to $135, it will lure 80 customers away from Lee Company. Prepare Grant's income statement based on 280 customers.If Lee Company lowers its price to $135 (assuming that Grant Company is still charging $150 per customer), Lee would lure 80 customers away from Grant. Prepare Lee's income statement based on 280 customers.Which of the companies would benefit more from lowering its sales price to attract more customers, and why?

How does total fixed cost behave when volume increases?

How does total variable cost respond when volume increases?

The following information is for a product of Lanier Company:Last year, the variable cost per unit was $25. Total fixed costs were $800,000. At a volume of 170,000 units, the company achieved a profit of $50,000. Required:What was the unit sales price for the product last year?

Assume that Microsoft and Sony both plan to introduce a new hand-held video game. Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process. The following revenue and cost relationships are provided: Microsott Game sony Game Selling price per unit 150 150 Variable costs ner unit Direct materials \ 27.00 27.00 Direct labor 7.50 30.00 Overhead 7.50 30.00 Selling and administrative 3.00 3.00 Annual fixed costs Overhead \ 600,000 \ 240,000 Selling and adminstrative 135,000 135,000 Required:Compute the contribution margin per unit for each company.Prepare a contribution income statement for each company assuming each company sells 8,000 units.Compute each firm's net income if the number of units sold increases by 10%.Which firm will have more stable profits when sales change? Why?

Write an equation for each item provided: Contribution margin per unit = _______Break-even in units = _______Break-even in dollars = _______Units required to achieve desired profit = _______Dollars required to achieve desired profit = _______Margin of safety ratio = _______

What is meant by the phrase, "relevant range"? How does the concept of relevant range affect fixed costs?

For Marvin Company, the magnitude of operating leverage was 3.5 during the current year. Demonstrate what this magnitude of operating leverage would mean for the company's profitability by creating an example.

If a company had a pure fixed cost structure, what would be the relationship between a given dollar increase in sales and net income?

Maryland Novelties Company produces and sells souvenir products. Monthly income statements for two activity levels are provided below: Required:Identify the mixed expense(s).Prepare a contribution margin income statement at the 20,000-unit level.