Exam 22: Cost-Volume-Profit Analysis

Abrams Co. has total fixed costs of $240,000 and a contribution margin ratio of 40%. If rent expense increases by $5,000, how much will sales have to increase to cover this increase in costs?

Wilton 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?

Cost-volume-profit analysis is a precise tool for perfectly predicting the profit consequences of cost changes, price changes, and volume changes.

Define the break-even point of a company.

A graphic presentation of cost-volume-profit data is known as a __________________ graph (or chart); this presentation is also sometimes called a ______________ chart.

The margin of safety is the excess of:

A firm produces and sells a product with a contribution margin of $32 per unit. The firm is presently selling 90,000 units and earning $240,000 in after-tax income. Taxes are $80,000 at a 25% tax rate. If the firm desires to increase its after-tax income to $300,000, how many more units must it sell?

What are the basic assumptions of CVP analysis with regard to variable cost, fixed cost, and selling price per unit? (Assume a single product).

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

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

Curvilinear costs are also known as nonlinear costs.

A target income refers to:

What is the high-low method? Briefly describe how it is applied.

Wilson Co. is preparing next period's forecasts. Total fixed costs are expected to be $300,000 and the contribution margin ratio is expected to be 30%. The applicable income tax rate is 25%. (a) Calculate the company's break-even point in dollar sales. (b) If sales are $1,800,000 above the break-even point, what will income be (i) pretax income and (ii) after-tax income?

The proportion of sales volumes for various products is known as the composite mix.

Which one of the following statements is not true?

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

As the level of output activity increases, fixed cost per unit remains constant.

A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and volume.

A product has a contribution margin per unit of $17 and sells at $25 per unit. If the break-even point is 82,000 units, calculate (a) the variable costs per unit and (b) the total fixed costs.