Exam 3: Fundamentals of Cost-Volume-Profit Analysis

Clifford Co. manufactures and sells adjustable windows for remodeling homes and new housing. Clifford developed its budget for the current year assuming that the windows would sell at a price of $500 each. The variable costs for each window were forecasted to be $250 and the annual fixed costs were forecasted to be $130,000. Clifford had targeted a profit of $450,000. While Clifford's sales usually increase during the second quarter, the May financial statements reported that sales were not meeting expectations. For the first five months of the year, only 400 units had been sold at the established price, with variable cost as planned, and it was clear that the target profit for the year would not be reached unless some actions were taken. Clifford's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following three alternatives were presented to the president, only one of which can be selected. ∙ Reduce the selling price by $50. The marketing department forecasts that with the lower price, 3,200 units could be sold during the remainder of the year. ∙ Lower variable costs per unit by $30 through the use of less expensive materials. Because of the difference in materials, the selling price would have to be lowered by $40 and sales of 2,600 units for the remainder of the year are forecast. ∙ Cut fixed costs by $15,000 and lower the selling price by 5 percent. Sales of 2,200 units would be expected for the remainder of the year. Required: a. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to break-even. b. If no changes are made to the selling price or cost structure, estimate the number of units that must be sold during the year to attain the target profit of $450,000. c. Determine which of the alternatives Clifford's president should select to maximize profit.

Market Sales had $1,200,000 in sales last month. The variable cost ratio was 60% and operating profits were $80,000. -What is Market's margin of safety in sales dollars?

Blues Corporation produces and sells a single product whose selling price is $240.00 per unit and whose variable cost is $86.40 per unit. The company's fixed cost is $720,384 per month. Required: Determine the monthly break-even point in both units and dollar sales.

Eastwick produces and sells three products. Last month's results are as follows: P1 P2 P3 Revenues \1 00,000 \2 00,000 \2 00,000 Variable costs 40,000 140,000 80,000 - Fixed costs total $200,000. What is Eastwick's break-even sales volume? (Assume the current product mix.)

Evergreen Corporation manufactures circuit boards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below. Sales \3 ,500,000 Cost of sales: Direct Material \ 500,000 Direct labor 250,000 Variable Overhead 275,000 Fixed Overhead 600,000 1,625,000 Gross Profit \1 ,875,000 Selling and General \& Admin. Exp. Variable 750,000 Fixed 250,000 1,000,000 Operating Income \8 75,000 - The break-even point (rounded to the nearest dollar) for Evergreen Corporation for the current year is:

Explain the difference between the break-even point, the margin of safety, and operating leverage.

Obtuse Company's fixed costs total $150,000, its variable cost ratio is 60% and its variable costs are $4.50 per unit. Based on this information, the break-even point in units is:

Bokay Creations has budgeted annual fixed costs of $240,000 and an estimated variable cost ratio of 60%. Required: (a) Compute Bokay's break-even point in sales dollars. (b) Compute Bokay's margin of safety if the company expects to earn revenues of $800,000. (c) Compute Bokay's expected operating profit at the $800,000 revenue.

Which of the following would not cause the break-even point to change?

Discuss the role of assumptions that decision makers must consider when relying on CVP analysis.

Which of the following would not cause the break-even point to change?

At the break-even point, the total contribution margin equals total: (CPA adapted)

The break-even point for an organization with a low operating leverage will be relatively higher than the break-even point for an organization with a high operating leverage.

Boxer Inc. expects its sales in June to be $111,000. The company's contribution margin ratio is 65% and its fixed monthly costs are $64,000. Required: Estimate the company's operating profit for June, assuming that the fixed monthly costs do not change.

Renee Tyne, now retired, owns the Downtown Beauty Shop. She employs five (5) stylists and pays each a base rate of $500 per month. One of the stylists serves as the manager and receives an extra $300 per month. In addition to the base rate, each stylist also receives a commission of $3 per haircut. A stylist can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Downtown Beauty Shop is open 24 days a month. You can safely ignore income taxes. Other costs are incurred as follows: Advertising \ 200 per month Rent \ 400 per month Beauty Supplies \ 0.90 per haireut Utilities \ 175 per month plus \ 0.35 per haircut Magazines \ 25 per month Clearing Supplies \ 0.15 per haircut Renee currently charges $8 per haircut. Required: (a) Compute the break-even point in (1) number of haircuts, (2) total sales dollars, and (3) as a percentage of capacity. (b) In July, 1,400 haircuts were given. Compute the operating profits for the month. (c) Renee wants a $2,160 operating profit in August. Compute the number of haircuts that must be given in order to achieve this goal. (d) If 1,500 haircuts are given in August, compute the selling price that would have to be charged in order to have $2,160 in operating profits.

Eastwick produces and sells three products. Last month's results are as follows: P1 P2 P3 Revenues \1 00,000 \2 00,000 \2 00,000 Variable costs 40,000 140,000 80,000 - Fixed costs total $200,000. What sales volume would generate an operating profit of $150,000? (Assume the current product mix.)

Alden Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price \ 190 100\% Variable costs 38 20\% Contribution margin 152 80\% Fixed costs are $110,000 per month. The company is currently selling 1,000 units per month. Required: Management is considering using a new component that would increase the variable cost per unit by $56. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly operating profit of this change if fixed costs are unaffected?

Artis Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. -At what sales volume would the two stores have equal profits or losses?

Dorcan Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break-even. The after tax net income last year was $5,040. Donnelly's expectations for the coming year include the following: (CMA adapted) ∙ The sales price of the T-shirts will be $10. ∙ Variable cost to manufacture will increase by one-third. ∙ Fixed costs will increase by 10%. ∙ The income tax rate of 40% will be unchanged. Based on a $10 selling price per unit and if Dorcan Corporation wishes to earn $37,800 in after tax net income for the coming year, the company's sales volume in dollars must be:

You have been provided with the following information regarding the Pharma Manufacturing Company: Sales price \2 5 Variable manufacturing cost per unit 12 Variable marketing cost per unit 3 Fixed manufacturing costs 180,000 Fixed administrative costs 40,000 This information is based on forecasted sales of 25,000 units. Required: (a) What are the expected operating profits for the upcoming year? (b) What is the break-even point in units? (c) What is the break-even point in dollars? (d) If $80,000 of operating profits is desired, how many units must be sold? (e) How much in sales dollars is required to generate operating profits of $75,000?