Exam 23: Cost Behavior Analysis

The level of operating capacity that is needed to meet expected sales demand is called

Last year, RC Rancho's revenue was $120,000,000, variable costs were $90,000,000 and fixed costs were $15,000,000. RC Rancho's contribution margin ratio was 25 percent.

Adding a desired profit level to breakeven computations will lower the number of sales units.

The breakeven formula adjusted for profits may be stated as

When fixed costs are $18,000 and the contribution margin per unit is $4, the breakeven point is

Ben & Harry Co. sold 100,000 units last year with the following results: a. Management thinks that a 5 percent reduction in the unit sales price and a $31,000 increase in fixed advertising costs will create a 30 percent increase in unit sales. Assess this proposal and make a recommendation on what action should be taken. b. Assume that the marketing manager thinks that the unit sales price should not be changed. Instead, he recommends a $0.40 per unit increase in sales commissions coupled with some increase in advertising to generate the 30 percent increase in unit sales and a 20 percent increase in operating income. Assess this proposal and determine the maximum amount of money that can be spent on advertising if the targeted profit is to be achieved.