Exam 5: Cost Behavior Cost-Volume-Profit Analysis

A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. Of the 10,000 units produced, 9,200 were sold, and 800 remain in inventory at year-end. Under absorption costing, the value of the inventory is:

The high-low method can be used to estimate the cost equation using just two points.

A company has total fixed costs of $360,000. Its product sells for $40 per unit and variable costs amount to $25 per unit. What is the break-even point in dollar sales?

Leeks Company's product has a contribution margin per unit of $11.25 and a contribution margin ratio of 22.5%. What is the selling price of the product?

Define the break-even point of a company.

Preston Company is analyzing two alternative methods of producing its product. The production manager indicates that variable costs can be reduced 40% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed. (a) Compute the break-even point in units and dollars for both alternatives. (b) Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income. Below the income statement, compute the degree of operating leverage. Which alternative would you recommend and why?

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

While the total amount of fixed cost changes with the level of production, fixed cost per unit remains constant as volume changes.

The variable costing method is required for external financial reporting.

When graphing cost-volume-profit data on a CVP chart:

Least-squares regression is a statistical method for identifying cost behavior.

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

An important assumption in multiproduct CVP analysis is a changing sales mix.

Madison Corporation sells three products (M, N, and O) in the following mix: 3:1:2. Unit price and cost data are: Total fixed costs are $340,000. The break-even point in sales dollars for the current sales mix is (round to the nearest thousand):

Cost-volume-profit analysis is a predictive tool for determining the profit consequences of future cost changes, price changes, and volume of activity changes.

Crookshank Manufacturing has total fixed costs of $460,000. A unit of product sells for $20 and variable costs per unit are $11. Prepare a contribution margin income statement showing predicted net income (loss) if Crookshank sells 100,000 units for the year ended December 31.

The contribution margin ratio:

A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. Of the 10,000 units produced, 9,200 were sold, and 800 remain in inventory at year-end. Under variable costing, the value of the inventory is:

The following information is available for a company's cost of sales over the last five months. Using the high-low method, the estimated total fixed cost is:

Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $270. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the contribution margin ratio.