Question 1

Dorian Company produces and sells a single product. The product sells for $60 per unit and has a contribution margin ratio of 40%. The company's monthly fixed expenses are $28,800.

-If Dorian Company desires a monthly operating income equal to 10% of sales,what will its monthly sales have to be?

Accepted Answer

A)  $90,000. 
B)  $45,600. 
C)  $120,000. 
D)  $96,000.

Question 2

Austin Manufacturing had the following operating data for the year just ended:
$\begin{array}{|l|r|}
\hline \text { Selling price per unit } & \$ 60 \text { per unit } \
\hline \text { Variable expense per unit } & \$ 22 \text { per unit } \
\hline \text { Fixed expenses } & \$ 504,000 \
\hline
\end{array}$
Management plans to improve the quality of its only product by replacing a component that costs $3.50 with a higher-grade component that costs $5.50,and renting a packing machine for $18,000 a year.If the desired target operating profit is $288,000,how many units must the company sell?

Accepted Answer

A)  19,300 units. 
B)  21,316 units. 
C)  22,500 units. 
D)  20,842 units.

Question 3

A product sells for $20 per unit and has a contribution margin ratio of 40%.Fixed expenses total $240,000 annually.How many units of the product must be sold to yield an operating income of $60,000?

Accepted Answer

A)  37,500 units. 
B)  40,000 units. 
C)  65,000 units. 
D)  30,000 units.

Question 4

North Company sells a single product.The product has a selling price of $30 per unit and variable expenses are 70% of sales.If the company's fixed expenses total $60,000 per year,then what will be its break-even?

Accepted Answer

A)  $60,000. 
B)  $85,714. 
C)  $42,000. 
D)  $200,000.

Question 5

Last year,Twins Company reported $750,000 in sales (25,000 units)and an operating income of $25,000.At the break-even point,the company's total contribution margin equals $500,000.Based on this information,which of the following statements is true?

Accepted Answer

A)  The company's contribution margin ratio is 40%. 
B)  The company's break-even point is 24,000 units. 
C)  The company's variable expense per unit is $9. 
D)  The company's variable expenses are 60% of sales.

Question 6

Arthur Company had the following data for the year just ended:
$\begin{array}{|l|r|}
\hline \text { Sales } & 4,000 \text { units } \
\hline \text { Sales price } & \$ 60 \text { per unit } \
\hline \text { Variable cost } & \$ 18 \text { per unit } \
\hline \text { Fixed costs } & \$ 42,000 \
\hline
\end{array}$

-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 7

Dorian Company produces and sells a single product. The product sells for $60 per unit and has a contribution margin ratio of 40%. The company's monthly fixed expenses are $28,800.

-What is the variable expense per unit?

Accepted Answer

A)  $31.20 per unit. 
B)  $24.00 per unit. 
C)  $36.00 per unit. 
D)  $28.80 per unit.

Question 8

The total contribution margin decreases if sales volume remains the same and which of the following occurs?

Accepted Answer

A)  Fixed expenses increase. 
B)  Fixed expenses decrease. 
C)  Variable expense per unit increases. 
D)  Variable expense per unit decreases.

Question 9

Kilimanjaro Company (KC)makes and sells one product: dehydrated meals for backpacking.Both the average sales price per meal and the average variable cost per meal remain constant regardless of the number meals prepared and sold.Reported sales and after-tax operating income for Year 8 were 25,000 meals and $72,000,respectively.Fixed costs depend on number of meals prepared and sold,as the following schedule shows:
 $$\begin{array} { | r | r | r | r | } 
\hline  { \begin{array} { l } 
\text { Runge of Number of Meals Prepared } \
\text { and Sold }
\end{array} } & \
\hline \text { Minimum } & \text { Maximum } & \begin{array} { r } 
\text { Incremental fixed } \
\text { cast }
\end{array} & \text { Tatal fixed cast } \
\hline 0 & 32,000 & \$ 80,000 & \$ 80,000 \
\hline 32,001 & 56,000 & 160,000 & 240,000 \
\hline 56,001 & 76,000 & 240,000 & 480,000 \
\hline
\end{array}$$ 
KC expects the cost structure and average selling price per meal for Year 8 NOT to change in Year 9.Maximum plant capacity will also remain at 76,000 meals in Year 9.The company can sell every meal it prepares and its marginal income tax rate of 40 percent for Year 8 will also remain unchanged in Year 9.
Required:
a)Calculate the dollar contribution margin per meal for Year 8 when 25,000 meals were prepared and sold.
b)Calculate KC's expected break-even point for Year 9 for EACH of the THREE ranges of meals preparation and sales.If there is no break-even point for a given range of meals preparation and sales level state so,including a brief (but clear)explanation.
c)Calculate the number of meals KC must prepare and sell in Year 9 to maximize its after-tax operating income.
d)Calculate KC's (i)degree of operating leverage and (ii)margin of safety percentage for Year 8 when 25,000 meals were prepared and sold.
e)Using ONLY the degree of operating leverage number you just calculated in part (d)above,calculate the expected dollar amount increase or decrease in before-tax operating income if KC expects to prepare and sell 22,500 meals in Year 9.(NOTE: No credit will be given for answers that include preparation of an income statement for the 22,500 meals.)

Accepted Answer

The answer of Kilimanjaro Company (KC)makes and sells one product:...

Question 10

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows:$\begin{array}{|l|r|}
\hline \text { Selling price } & \$ 40 \text { per unit } \
\hline \text { Variable manufacturing cost } & \$ 20 \text { per unit } \
\hline \text { Variable selling \& administrative expenses } & \$ 6 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 208,000 \text { per year } \
\hline \text { Fixed selling \& administrative expenses } & \$ 324,000 \text { per year } \
\hline
\end{array}$

-In the current year,the company sold 43,000 units.Due to competition,management will be forced to lower the selling price by 10% next year.How many units must be sold next year to earn the same operating income as was earned in the current year?

Accepted Answer

A)  50,000 units. 
B)  53,200 units. 
C)  58,800 units. 
D)  60,200 units.

Question 11

Tanner Company's most recent contribution format income statement is presented below:
 $\begin{array}{|l|r|}
\hline \text { Sales } & \$ 75,000 \
\hline \text { Less: variable expenses } & \underline{45,000} \
\hline \text { Contribution margin } & 30,000 \
\hline \text { Less: fixed expenses } & \underline{36,000} \
\hline \text { Operating income } & (\$ 6,000) \
\hline
\end{array}$ 
The company sells its only product for $15 per unit.There were no beginning or ending inventories.
Required:
a)Compute the company's break-even point in units sold.
b)Compute the total variable expenses at the break-even point.
c)How many units would have to be sold to earn a target operating income of $9,000?
d)The sales manager is convinced that a $6,000 increase in the advertising budget would increase total sales by $25,000.Would you advise the increased advertising outlay?

Accepted Answer

The answer of Tanner Company's most recent contribution format income...

Question 12

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows:$\begin{array}{|l|r|}
\hline \text { Selling price } & \$ 40 \text { per unit } \
\hline \text { Variable manufacturing cost } & \$ 20 \text { per unit } \
\hline \text { Variable selling \& administrative expenses } & \$ 6 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 208,000 \text { per year } \
\hline \text { Fixed selling \& administrative expenses } & \$ 324,000 \text { per year } \
\hline
\end{array}$

-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 13

The following data relate to a company that produces and sells a travel guide that is updated monthly:
$\begin{array} { | l | r | } 
\hline \text { Fixed costs: } & \
\hline \text { Copy editing } & \$ 6,000 \
\hline \text { Art work } & \$ 2,000 \
\hline \text { Typesetting } & \$ 72,000 \
\hline
\end{array}$
$\begin{array} { | l | l | } 
\hline \text { Variable costs: } & \
\hline \text { Printing and binding } & \$ 3.20 \text { per copy } \
\hline \text { Bookstore discounts } & \$ 4.00 \text { per copy } \
\hline \text { Salespersons' commissions } & \$ 0.50 \text { per copy } \
\hline \text { Author's royalties } & \$ 2.00 \text { per copy }\\hline 
\end{array}$Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.

-What is the break-even point in units?

Accepted Answer

A)  8,247 books. 
B)  7,767 books. 
C)  7,407 books. 
D)  6,504 books.

Question 14

Which of the following is defined as the difference between total sales in dollars and total variable expenses?

Accepted Answer

A)  Margin of safety. 
B)  Operating income. 
C)  The gross margin. 
D)  The contribution margin.

Question 15

Roberts Company sells a single product at a selling price of $55 per unit.Variable costs are $30.25 per unit,and fixed costs are $113,850.What is Roberts Company's break-even point?

Accepted Answer

A)  $207,000. 
B)  3,764 units. 
C)  $253,000. 
D)  2,070 units.

Question 16

P.Harrison Limited manufactures and sells highly faddish products directed toward the preteen market.A new product has come onto the market that the company is anxious to manufacture and sell.Enough capacity exists in the company's plant to manufacture a maximum of 35,000 units of the new product each month.Total fixed costs (both manufacturing and non-manufacturing)will amount to $60,000 per month.The company's controller projects an operating loss of $15,000 if the company manufactures and sells 30,000 units of the new product per month.
The marketing department predicts that demand for the new product will exceed the maximum 35,000 units that the company is able to manufacture in its own plant.Additional manufacturing capacity can be rented from another company at a fixed cost of $20,000 per month to manufacture 50,000 units of the new product monthly.The variable costs to manufacture and sell units of the new product made in the rented facility will be higher at $3.75,due to somewhat less efficient operations than in the company's own plant.The new product,however,will sell for $4.50 per unit,regardless of where it is manufactured.
Required:
a)Calculate the monthly break-even sales for the new product in units if the company operates only in its own plant,that is,it manufactures a maximum of 35,000 units.(NOTE: If there is no break-even sales level,state so together with the supporting calculations and reasoning.)
b)Calculate the monthly break-even sales for the new product in units if the company rents the additional manufacturing capacity,that is,it manufactures more than 35,000 units.NOTE: Again,if there is no break-even sales level,state so together with the supporting calculations and reasoning.)
c)Suppose there are NO manufacturing capacity constraints for the manufacture of the new product at either the company's own plant or the rented facility.
(i)At what level of non-zero production and sales (in units)would you expect the company to be indifferent between the two manufacturing facilities?
(ii)Calculate the degree of operating leverage at a monthly sales level of 50,000 units at EACH manufacturing facility.
(iii)Which one of the two manufacturing facilities will be MORE advantageous for the manufacture of the new product,assuming the marketing department predicts very strong and increasing demand for the new product? Explain,strictly on the basis of the degree of operating leverage calculations in Part c (ii)above.

Accepted Answer

The answer of P.Harrison Limited manufactures and sells highly faddish...

Question 17

Green Company's variable expenses are 75% of sales.At a sales level of $400,000,the company's degree of operating leverage is 8.At this sales level,fixed expenses equal which of the following?

Accepted Answer

A)  $87,500. 
B)  $100,000. 
C)  $50,000. 
D)  $75,000.

Question 18

Arthur Company had the following data for the year just ended:
$\begin{array}{|l|r|}
\hline \text { Sales } & 4,000 \text { units } \
\hline \text { Sales price } & \$ 60 \text { per unit } \
\hline \text { Variable cost } & \$ 18 \text { per unit } \
\hline \text { Fixed costs } & \$ 42,000 \
\hline
\end{array}$

-If the company wants to increase its total contribution margin by 40% in the next year,all other factors remaining the same,by how much will it need to increase its sales?

Accepted Answer

A)  $96,000. 
B)  $50,400. 
C)  $67,200. 
D)  $72,000.

Question 19

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 20

The following data relate to a company that produces and sells a travel guide that is updated monthly:
$\begin{array} { | l | r | } 
\hline \text { Fixed costs: } & \
\hline \text { Copy editing } & \$ 6,000 \
\hline \text { Art work } & \$ 2,000 \
\hline \text { Typesetting } & \$ 72,000 \
\hline
\end{array}$
$\begin{array} { | l | l | } 
\hline \text { Variable costs: } & \
\hline \text { Printing and binding } & \$ 3.20 \text { per copy } \
\hline \text { Bookstore discounts } & \$ 4.00 \text { per copy } \
\hline \text { Salespersons' commissions } & \$ 0.50 \text { per copy } \
\hline \text { Author's royalties } & \$ 2.00 \text { per copy }\\hline 
\end{array}$Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.

-What is the degree of operating leverage for July?

Accepted Answer

A)  The same as that for June. 
B)  Higher than that for June. 
C)  Lower than that for June. 
D)  Not determinable.

Exam 4: Cost-Volume-Profit Relationships

Dorian Company produces and sells a single product. The product sells for $60 per unit and has a contribution margin ratio of 40%. The company's monthly fixed expenses are $28,800. -If Dorian Company desires a monthly operating income equal to 10% of sales,what will its monthly sales have to be?