Exam 21: Cost-Volume-Profit Analysis

The following information is available for a company's cost of sales over the last five months. Month Units sold Cost of sales January 400 31,00 February 800 37,000 March 1,600 49,000 April 2,400 61,000 - Using the high-low method, the estimated variable cost of sales per unit sold is:

Madison Corporation sells three products (M, N, and O) in the following mix: 3:1:2. Unit price and cost data are: M N O Unit sales price \ 7 \ 4 \ 6 Unit variable costs 3 2 3 Total fixed costs are $340,000. - The break-even point in sales dollars for the current sales mix is (round to the nearest thousand):

A term describing a firm's normal range of operating activities is:

A firm sells two products, Regular and Ultra. For every unit of Regular the firm sells, two units of Ultra are sold. The firm's total fixed costs are $1,612,000. Selling prices and cost information for both products follow. What is the firm's break-even point in units of Regular and Ultra? Unit Sales Variable Cost Per Product Price Unit Regular \ 20 \ 8 Ultra 24 4

The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. -If Forrester purchases this new equipment, the revised break-even point in units would:

A ________ cost is one that includes both fixed and variable cost components; a ________ cost is one that reflects a step pattern.

An important tool in predicting the volume of activity, the costs to be incurred, the sales to be made, and the profit to be earned is:

What are the unit contribution margin and the contribution margin ratio? What do these measures reveal about a company's cost structure?

Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to perform cost-volume-profit analysis.

A manufacturer reports the following information below for its first three years in operation. Year 1 Year 2 Year 3 Income under variable costing \ 76,000 \ 109,000 \ 115,000 Beginning inventory (units) 0 800 500 Ending inventory (units) 800 500 0 Fixed manufacturing overhead per unit \ 8.00 \ 8.00 \ 8.00 - Income for year 2 using absorption costing is:

A line on a scatter diagram that is intended to reflect the past relation between cost and unit volume is the:

Under variable costing, only costs that change in total with changes in production levels are included in product costs.

Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.

The following information is available for a company's cost of sales over the last five months. Month Units sold Cost of sales January 1,200 \ 43,000 February 800 \ 37,000 March 1,600 \ 49,000 April 2,400 \ 61,000 Use the high-low method to estimate the fixed and variable components of the cost of sales.

A manufacturer reports the following information below for its first three years in operation. Year 1 Year 2 Year 3 Income under variable costing \ 76,000 \ 109,000 \ 115,000 Beginning inventory (units) 0 800 500 Ending inventory (units) 800 500 0 Fixed manufacturing overhead per unit \ 8.00 \ 8.00 \ 8.00 - Income for year 3-year period using absorption costing is:

Zola Co. has a contribution margin ratio of 40% and would like to determine whether an additional advertising expenditure of $4,000 would increase sales by $8,000. Calculate the increase or decrease in net income that would result from this change, and comment on whether Zola should purchase the additional advertising.

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? Alternative 1 Alternative 2 Variable costs per unit \ 20 ? Fired costs \ 200,000 \ 274,400 Selling price per unit \ 40 \ 40 Income tax rate 25\% 25\%

A manufacturer reports the following information below for its first three years in operation. Year 1 Year 2 Year 3 Income under variable costing \ 76,000 \ 109,000 \ 115,000 Beginning inventory (units) 0 800 500 Ending inventory (units) 800 500 0 Fixed manufacturing overhead per unit \ 8.00 \ 8.00 \ 8.00 - Income for year 1 using absorption costing is:

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