Exam 7: Cost-Volume-Profit Analysis

Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows: Plain Fancy Unit selling price \ 20.00 \ 35.00 Variable cost per unit 12.00 24.50 Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000. The weighted-average unit contribution margin is:

Cortez Enterprises is studying the addition of a new product that would have an expected selling price of $180 and expected variable cost of $120. Anticipated demand is 9,000 units. A new salesperson must be hired because the company's current sales force is working at capacity. Two compensation plans are under consideration: Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars Plan 2: An annual salary of $180,000 and no commission Required: A. What is meant by the term "operating leverage"? B. Calculate the contribution margin and income of the two plans at 9,000 units. C. Compute the operating leverage factor of the two plans at 9,000 units. Which of the two plans is more highly leveraged? Why? D. Assume that a general economic downturn occurred during year no. 2, with product demand falling from 9,000 to 7,200 units. By using the operating leverage factors, determine and show which plan would produce a larger percentage decrease in income.

Boyze Company manufactures and sells three products: Good, Better, and Best. Annual fixed costs are $3,315,000, and data about the three products follow. Required: A. Determine the weighted-average unit contribution margin. B. Determine the break-even volume in units for each product. C. Determine the total number of units that must be sold to obtain a profit for the company of $234,000. D. Assume that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%, respectively. Will the number of units required to break-even increase or decrease? Explain. Hint: Detailed calculations are not needed to obtain the proper solution.

Cost-volume-profit analysis is based on certain general assumptions. One of these assumptions is that product prices will remain constant as volume varies within the relevant range.

Brooklyn sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Brooklyn's unit sales are 200 units less than anticipated, its breakeven point will:

You are analyzing Becker Corporation and Newton Corporation and have concluded that Becker has a higher operating leverage factor than Newton. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2) the percentage change in income caused by a change in sales?

Operating leverage is an important concept for many companies. Required: A. Define operating leverage. B. Assume that a firm pays no income taxes and is planning to increase its selling price. If sales volume in units does not change, what will be the effect on the operating leverage factor? Explain. C. Assume that another firm that pays no income taxes is planning to increase total fixed manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating leverage factor? Explain.

Grime-X is studying the profitability of a change in operation and has gathered the following information: Current Anticipated Operation Operation Fixed costs \ 38,000 \ 48,000 Selling price \ 16 \ 22 Variable cost \ 10 \ 12 Sales (units) 9,000 6,000 Should Grime-X make the change?

Edmonco Company produced and sold 45,000 units of a single product last year, with the following results: Edmonco's operating leverage factor was: