Exam 23: Cost Behavior Analysis

In cost-volume-profit analysis, sales revenue is computed by multiplying units sold by the selling price per unit, and the targeted profit is projected by management.

A digitized music tuner has been a staple in Smooth Sounds' product line for several years. Annual fixed costs of production and administration related to this product in the past have been $643,500. Variable costs of production and sales have been $17 per unit. The selling price in the past has been $28 per unit. Based on the appearance of competing products on the market, management has asked you to do the following: a. Compute the breakeven point in units and sales dollars for the present product. b. Compute the breakeven point in units and sales dollars if the variable costs increased by $3 per unit and the fixed costs increased by $14,375 per month. c. Using the information from (b), an expected additional monthly advertising charge of $10,000, and a monthly sales rate of 15,000 units, compute the competitive selling price that the company must obtain in order to have a profit of $32,000 per month.

Service businesses do not have any overhead costs.

Theoretical operating capacity is the level at which management expects to operate during a normal business environment.

All variable costs except manufacturing costs are subtracted from sales to determine the total contribution margin.

Regression analysis can be performed using one or more activities to predict costs.

Campground, Inc., is considering the production and sale of propane lamps. Annual fixed costs associated with the project are expected to total $60,000. In addition, each lamp would sell for $12 and would require $7 in variable costs. Calculate (a) the breakeven point in units, (b) the breakeven point in dollars, (c) the number of lamps that must be sold to earn a profit of $120,000, and (d) the operating income or loss at a sales volume of 16,000 lamps.

Adding the contribution margin as a component to cost-volume-profit computations will not change the resulting amount of breakeven units in a given situation.

a. What is the formula for breakeven units? b. How is knowledge of the contribution margin of a product helpful? In your answer, explain two possible benefits of computing the contribution margin of a product.

The breakeven point is the point at which

In breakeven analysis adjusted for a profit factor, increasing the unit sales price will decrease the number of units needed to meet the targeted profit.

The Raquet Business is considering the manufacture of a new type of tennis ball. Each tennis ball would sell for $3.75 and would require $1.75 in variable costs. In addition, annual fixed costs associated with the project would total $64,000. a. Use the contribution margin approach to calculate: (1) the breakeven point in units (2) the breakeven point in dollars b. Determine the operating income or loss at a sales volume of 30,000 tennis balls. c. Determine the number of tennis balls that must be sold to earn a profit of $80,000.

The engineering method of separating costs is sometimes called a time and motion study.

Ryan's Landscaping sells a quality brand of hoes, shovels, and rakes in a sales mix of 2:4:2. The company's fixed costs are $61,600. Product data include the following: a. Compute the weighted-average contribution margin. b. Determine the weighted-average breakeven point. c. Calculate the breakeven point for each product. d. Determine the breakeven point in sales dollars.

Unit fixed costs vary inversely with activity or volume.

Depreciation calculated using the production or units of output method is an example of a fixed cost.

The contribution margin and the gross margin can be used interchangeably.

Mixed costs are fixed and variable costs that are recorded in the same general ledger account.

For profit planning purposes, the following equation is used: Target Sales Units = (FC + P) CM per Unit.

Is breakeven analysis a tool that can be used for a service-oriented business? Explain your answer.