Question 1

Seco Corp.,a wholesale supply company,uses independent sales agents to market the company's products.These agents currently receive a commission of 20% of sales,but are demanding an increase to 25% of sales.Seco had already prepared its budget for next year before learning of the sales agents' demand for an increase in commissions.That budgeted income statement appears below:

Seco is considering the possibility of employing its own salespersons. Three individuals would be required, at a salary of $30,000 each, plus commissions of 5% of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000.

Required:

a) Compute Seco's break-even point in sales dollars based upon the company's budgeted income statement, assuming that the company continues to use independent sales agents and that they are paid the old commission rate of 20% of sales.
b) Compute Seco's break-even point in sales dollars, assuming that the company employs its own salespersons.
c) Compute the sales dollars required to attain the target profit of $1,900,000, assuming that the company continues to use independent sales agents and the company agrees to their demand for a 25% sales commission.
d) Compute the sales dollars that would be required to generate the same operating income, whether Seco employs its own salespersons or continues to use the independent sales agents and pays them a 25% commission.

Accepted Answer

The answer of Seco Corp.,a wholesale supply company,uses independent sales...

Question 2

In two companies making the same product and with the same total sales and total expenses,the contribution margin ratio will tend to be lower in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

A) True 
 B)False

Question 3

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows:

-How many units need to be sold to earn an annual operating income equal to 10% of sales?

Accepted Answer

A)  44,000 units. 
B)  53,200 units. 
C)  54,500 units. 
D)  47,500 units.

Question 4

The following is Allison Corporation's contribution format income statement for last month:

The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.
-How many units would the company have to sell to attain after-tax profits of $72,000,assuming it is subject to a 40% income tax rate?

Accepted Answer

A)  9,440 units. 
B)  11,600 units. 
C)  10,400 units. 
D)  12,000 units.

Question 5

The following is Addison Corporation's contribution format income statement for last month:

The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.
-How many units would the company have to sell to attain target operating profits of $150,000?

Accepted Answer

A)  22,000 units. 
B)  37,500 units. 
C)  25,000 units. 
D)  26,667 units.

Question 6

Which of the following is defined as the amount by which a company's sales can decline before operating losses are incurred?

Accepted Answer

A)  Contribution margin. 
B)  Degree of operating leverage. 
C)  Margin of safety. 
D)  Contribution margin ratio.

Question 7

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.

Accepted Answer

A) True 
 B)False

Question 8

Arthur Company had the following data for the year just ended:

-If the company's sales volume increases by 30% next year,all other factors remaining the same,by how much will its operating income increase?

Accepted Answer

A)  $92,400. 
B)  $50,400. 
C)  $37,800. 
D)  $72,000.

Question 9

Loren Company's single product has a selling price of $15 per unit.Last year,the company reported total variable expenses of $180,000,fixed expenses of $90,000,and an operating income of $30,000.A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%.If her proposal is adopted,what would the outcome be for operating income?

Accepted Answer

A)  Increase by $45,000. 
B)  Increase by $37,500. 
C)  Increase by $7,500. 
D)  Increase by $28,500.

Question 10

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows:

-What is the break-even point in units per year?

Accepted Answer

A)  15,200 units. 
B)  26,600 units. 
C)  38,000 units. 
D)  40,000 units.

Question 11

The following monthly data are available for the Phelps Company:

What are the break-even sales for the month for the company?

Accepted Answer

A)  $91,667. 
B)  $203,000. 
C)  $148,000. 
D)  $137,500.

Question 12

The formula for the break-even point is the same as the formula to attain a given target operating profit for the special case where the target operating profit is zero.

Accepted Answer

A) True 
 B)False

Question 13

Company Y is considering two production technologies,Bronze and Platinum,for producing its new product.The cost structures of the two technologies are as follows:

At what level of sales volume in units (rounded to the nearest whole unit)would Company Y be indifferent in choosing between the Bronze and Platinum technologies?

Accepted Answer

A)  10,000 units. 
B)  12,100 units. 
C)  13,000 units. 
D)  Cannot be determined without additional information.

Question 14

The following is Allison Corporation's contribution format income statement for last month:

The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.
-What is the company's degree of operating leverage?

Accepted Answer

A)  0.2. 
B)  8.0. 
C)  1.7. 
D)  5.0.

Question 15

A company has provided the following data:

If the dollar contribution margin per unit is increased by 10%,total fixed cost is decreased by 20%,and all other factors remain the same,what will the outcome be for operating income?

Accepted Answer

A)  Increase by $61,000. 
B)  Increase by $20,000. 
C)  Increase by $3,500. 
D)  Increase by $11,000.

Question 16

Wilson Company prepared the following preliminary budget assuming no advertising expenditures:

Based on a market study,the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10%,if $100,000 were spent on advertising.Assuming that these changes are incorporated in its budget,what should be the budgeted operating income?

Accepted Answer

A)  $175,000. 
B)  $190,000. 
C)  $205,000. 
D)  $365,000.

Question 17

Hooper Corporation produces and sells two models of vacuum cleaners, Standard and Deluxe. The company records show the following monthly data relating to these two products:

-If the expected monthly sales in units were divided equally between the two models (900 Standard and 900 Deluxe),where would the break-even level of sales be as compared to the expected sales mix?

Accepted Answer

A)  The same as with the expected sales mix. 
B)  Higher than with the expected sales mix. 
C)  Lower than with the expected sales mix. 
D)  Cannot be determined with the available data.

Question 18

The following data relate to a company that produces and sells a travel guide that is updated monthly:

Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.
-What is the contribution margin ratio for the book?

Accepted Answer

A)  71.5%. 
B)  54.0%. 
C)  51.5%. 
D)  51.9%.

Question 19

At a break-even point of 400 units sold,variable expenses were $4,000 and fixed expenses were $2,000.What will the 401st unit sold contribute to operating income?

Accepted Answer

A)  $0. 
B)  $5. 
C)  $10. 
D)  $15.

Question 20

Junsin Corporation's budget for next year appears below. The budget assumes the company will sell 30,000 units.

-What is the break-even point in annual sales dollars?

Accepted Answer

A)  $530,000. 
B)  $350,000. 
C)  $460,000. 
D)  $400,000.

Exam 7: Cost-Volume-Profit Relationships

In two companies making the same product and with the same total sales and total expenses,the contribution margin ratio will tend to be lower in the company with a higher proportion of fixed expenses in its cost structure.

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows: -How many units need to be sold to earn an annual operating income equal to 10% of sales?

The following is Addison Corporation's contribution format income statement for last month: The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month. -How many units would the company have to sell to attain target operating profits of $150,000?

Which of the following is defined as the amount by which a company's sales can decline before operating losses are incurred?

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.

Arthur Company had the following data for the year just ended: -If the company's sales volume increases by 30% next year,all other factors remaining the same,by how much will its operating income increase?

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows: -What is the break-even point in units per year?

The following monthly data are available for the Phelps Company: What are the break-even sales for the month for the company?

The formula for the break-even point is the same as the formula to attain a given target operating profit for the special case where the target operating profit is zero.

The following is Allison Corporation's contribution format income statement for last month: The company has no beginning or ending inventories. The company produced and sold 10,000 units last month. -What is the company's degree of operating leverage?

A company has provided the following data: If the dollar contribution margin per unit is increased by 10%,total fixed cost is decreased by 20%,and all other factors remain the same,what will the outcome be for operating income?

The following data relate to a company that produces and sells a travel guide that is updated monthly: Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July. -What is the contribution margin ratio for the book?

At a break-even point of 400 units sold,variable expenses were $4,000 and fixed expenses were $2,000.What will the 401^st unit sold contribute to operating income?

Junsin Corporation's budget for next year appears below. The budget assumes the company will sell 30,000 units. -What is the break-even point in annual sales dollars?