Exam 20: Cost-Volume-Profit Analysis

The margin of safety is calculated by:

Estimating costs and profit International,Inc.expects total sales of $55 million,a margin of safety of $25 million,and a contribution margin ratio of 25%.Compute the following: (a)Variable costs: $_________________ (b)Break-even sales volume (in dollars): $_________________ (c)Fixed costs: $_________________ (d)Operating income: $_________________

Cost-volume-profit analysis is often complex when applied to a company with different products.

The contribution margin ratio is expressed as:

Within the relevant range,fixed costs:

The dollar amount by which sales can decline before an operating loss is incurred is called the:

In order to calculate break-even sales units,fixed costs are divided by the:

High-low method The following information is available regarding the total manufacturing overhead costs of Paymore,Inc.,for five months in 2015: (a)Using the high-low method,compute the following (round all answers): (1)The variable element of overhead cost per machine-hour. (2)The fixed element of monthly overhead cost. (b)Use the cost relationship determined in part (a)to estimate the total manufacturing overhead costs for July 2015,given that 7,250 machine-hours are scheduled.

Executive salaries are typically considered variable costs.

Accounting terminology Listed below are nine technical accounting terms introduced or emphasized in this chapter: Each of the following statements may (or may not)describe one of these technical terms.In the space provided beside each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms. ____ (a)The amount by which sales revenue exceeds total variable cost expressed as a percentage of sales. ____ (b)The amount by which sales volume exceeds the break-even point. ____ (c)The study of financial statements by a potential investor or creditor as a means of evaluating the profitability and solvency of a business. ____ (d)A type of activity that has a causal effect in the occurrence of a particular cost. ____ (e)The level of sales at which revenue equals operating expenses. ____ (f)A cost that responds to changes in sales volume by less than a proportionate amount. ____ (g)A mathematical technique used to determine the fixed and variable elements of a mixed or semi-variable cost.

Stan Todd,Inc.wants to manufacture a new cell phone that can be worn on the wrist.Information from doing market research shows that he can sell this phone for $25 each.His fixed costs would be $145,000 a year and variable costs would amount to $10 per phone. (1)What would the contribution margin ratio be? (2)What sales volume in units would Stan need to break-even? (3)What sales volume in units would Stan need to earn $200,000 profit? (4)What would be the margin of safety if he sold 25,000 units (use the information calculated in #2)?

Nanu Corporation manufactures two products; data are shown below: If Nanu's monthly fixed costs average $425,000,what is its break-even point expressed in sales dollars?

Stupper Corporation manufactures two products; data are shown below: If Stupper's monthly fixed costs average $200,000,what is its break-even point expressed in sales dollars (rounded)?

Cost-volume-profit analysis Diana Company,a sole proprietorship,sells only one product.The regular price is $160.Variable costs are 55% of this selling price,and fixed costs are $8,400 a month. Management decides to decrease the selling price from $160 to $145 per unit.Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision. (a)At the original selling price of $160 a unit,what is the contribution margin ratio? _______________% (b)At the original selling price of $160 a unit,what dollar volume of sales per month is required for Diana Company to break-even? (Round your answer to the nearest whole dollar)$_______________ (c)At the original selling price of $160 a unit,what dollar volume of sales per month is required for Diana Company to earn a monthly operating income of $6,500? (Round your answer to the nearest whole dollar)$________________ (d)At the reduced selling price of $145 a unit,what is the contribution margin ratio? _______________% (e)At the reduced selling price of $145 a unit,what dollar volume of sales per month is required to break-even? (Round your intermediate percentage to one decimal place and final answer to the nearest whole dollar)$_______________

Using cost-volume-profit formulas Fantasy Corporation manufactures a single product.The selling price is $125 per unit,and variable costs amount to $81 per unit.The fixed costs are $28,500 per month (round any units to the next highest full unit). (a)What is the contribution margin per unit? $_______________ per unit (b)What is the contribution margin ratio? _______________% (Rounded to 1 decimal place) (c)What is the monthly sales volume (in dollars)at the break-even point? $________________ (d)How many units must be sold each month to earn a monthly operating income of $50,000? _______________ units (e)What is the monthly margin of safety (in dollars)if 1,500 units are sold each month? $_______________ (f)What will be the monthly operating income if 1,500 units are sold each month? $_______________

A fixed cost may include all of the following except:

The contribution margin is the amount by which revenue exceeds variable costs.

A product sells for $125,variable costs are $80,and fixed costs are $45,000.If the selling price can be increased by 20% with a similar increase in variable costs,how many fewer units would have to be sold to earn $300,000? (Rounded)

The Gillett Company's breakeven point in units is 25,000.Assuming that variable costs are 50% and fixed costs are $500,000,what is the company's projected operating income if sales are $1,250,000?

The higher the unit contribution margin,the higher the volume of unit sales required to cover a given amount of fixed costs.