Exam 3: Fundamentals of Cost-Volume-Profit Analysis

The degree of operating leverage can be calculated as:

A decrease in the margin of safety would be caused by a(n):

The sales manager of Springdale Enterprises is considering expanding sales by producing three different versions of its product. Each will be targeted by the marketing department to different income levels and will be produced from three different qualities of materials. After reviewing the sales forecasts, the sales department feels that 40% of units sold will be the original product, 35% will be new model #1 and the remainder will be new model #2. The following information has been assembled by the sales department and the production department. Original Model \#1 Model \#2 Sales price (per unit) \ 100.00 \ 70.00 \ 50.00 Material cost 45.00 30.00 20.00 Direct labor 20.00 15.00 10.00 Variable overhead 15.00 11.25 7.50 The fixed costs associated with the manufacture of these three products are $175,000 per year. Required: Determine the number of units of each product that would be sold at the break-even point.

A company's break-even point will not be increased by:

Given the following data: Per Unit Total Sales \ 15 \ 45,000 Less variable expenses 9 27,000 Contribution margin 6 18,000 Less fixed expenses 12,000 Operating profit \ 6,000 If sales decrease by 500 units, by what percent would fixed costs have to be reduced by to maintain current operating profit?

Galena Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The market covers both new unit purchases as well as replacement canopies. Galena developed its 2021 business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected to be $200, and the annual fixed costs were budgeted at $100,000. The goal for Galena 's after-tax operating profits was $240,000; the company's effective tax rate is 40%. While Galena '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 2021, only 350 units had been sold at the established price, with variable costs as planned. It was clear that the 2021 after-tax operating profit goal would not be reached unless some corrective actions were taken. Galena 's president assigned a management committee to analyze the situation and develop several alternative courses of action. The following mutually exclusive alternatives were presented to the president: (1) Reduce the sales price by $40. The sales department predicts that with the significantly reduced price, 2,700 units can be sold during the remainder of 2021. Total fixed and variable unit costs will stay as budgeted. (2) Lower variable costs per unit by $25 through the use of less expensive materials and lightly modified manufacturing techniques. The sales price will also be reduced by $30. These changes can be expected to yield sales of 2,200 for the remainder of 2021. (3) Cut fixed costs by $10,000 and lower the sales price by 5%. Variable costs per unit will be unchanged. Sales of 2,000 units can be expected for the remainder of 2021. Required: (a) If no changes are made to the selling price or cost structure, determine the number of units that Galena must sell in order to break even. (b) If no changes are made to the selling price or cost structure, determine the number of units that Galena must sell in order to achieve its after-tax operating profit objective. (c) Determine which one of the alternatives Galena should select to achieve its after-tax operating profit objective. Be sure to support your selection with appropriate computations.

Goodson Inc. produces and sells a single product. The company has provided its contribution format income statement for March. Sales (4,500 units ) \ 427,500 Variable costs 265,500 Contribution margin 162,000 Fixed costs 135,300 Operating profit \ 26,700 If the company sells 4,300 units, its operating profit should be closest to:

The Frances Manufacturing Company sells two products, FRN and CES. FRN has a higher contribution margin ratio than CES. If the product mix shifts towards CES, the company's break-even point in total units (i.e., FRN plus CES) will increase.

Pines Inc. produces and sells two products. During the most recent month, Product DQ393's sales were $25,000 and its variable costs were $5,750. Product BA999's sales were $40,000 and its variable costs were $9,850. The company's fixed costs were $48,310. Required: a. Determine the overall break-even point for the company. b. If the sales mix shifts toward Product DQ393, with no change in total sales, what will happen to the break-even point for the company? Explain.

Gardner Corporation manufactures skateboards and is in the process of preparing next year's budget. The pro forma income statement for the current year is presented below. Sales \ 1,500,000 Cost of sales: Direct Material \ 250,000 Direct labor 150,000 Variable Overhead 75,000 Fixed Overhead 100,000 575,000 Gross Profit \ 925,000 Selling and G\&A Variable 200,000 Fixed 250,000 450,000 Operating Income \ 475,000 - The break-even point (rounded to the nearest dollar) for Gardner Corporation for the current year is:

Xi-Tech, Inc. is considering the introduction of a new music player with the following price and cost characteristics: Sales price \ 125 each Variable costs 75 each Fixed costs 180,00 per year Required: (a) How many units must Xi-Tech sell to break even? (b) How many units must Xi-Tech sell to make an operating profit of $120,000 for the year? (c) If projected sales are 7,500 units, what is the margin of safety in units?

The Teri Aki Diner is a new buffet-style restaurant offering stir-fry and Thai dishes. The buffet has a fixed price of $8.50 per person. The estimated food costs are $2.00 per person, regardless of volume. Fixed costs are related to the number of buffet lines that are maintained, with the estimated costs as follows: Monthly volume Fixed Costs 1 line 0-4,000 \ 30,000 2 lines 4,001-6,000 \ 37,000 3 lines 6,001-7,500 \ 40,000 Required: Determine the break-even point(s).

Fortune Tools produces and sells two products. Data concerning these products for the most recent month appear below: Product XYZ Product VAR Sales \ 14,000 \ 27,000 Variable costs \ 6,720 \ 12,550 Fixed costs for the entire company were $17,570. Required: a. Determine the overall break-even point for the company. b. If the sales mix shifts toward Product XYZ, with no change in total sales, what will happen to the break-even point for the company? Explain.

A company's break-even point will not be changed by:

Champion Corporation produces and sells a single product. In April, the company sold 1,700 units. Its total sales were $153,000, its total variable costs were $79,900, and its total fixed costs were $56,800. Required: a. Construct the company's contribution format income statement for April in good form. b. Redo the company's contribution format income statement assuming that the company sells 1,600 units.

Both total revenues (TR) and total costs (TC) are likely to be affected by changes in the output.

You have been provided with the following information: Per Unit Total Sales \1 5 \4 5,000 Less variable expenses 9 27,000 Contribution margin 6 18,000 Less fixed expenses 12,000 Operating profit \6 ,000 If sales decrease by 500 units, how much will fixed costs have to be reduced by to maintain the current operating profit of $6,000?

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 contribution margin ratio for the current year is:

Morgan Designs manufactures decorative iron railings. In preparing for next year's operations, management has developed the following estimates: Total Per Unit Sales (20,000 units) \ 1,000,000 \ 50.00 Direct materials \ 200,000 \ 10.00 Direct labor (variable) \ 50,000 \ 2.50 Manufacturing overhead: Variable \ 70,000 \ 3.50 Fixed \ 80,000 \ 4.00 Selling \& administrative: Variable \ 100,000 \ 5.00 Fixed \ 30,000 \ 1.50 Required: Compute the following items: a. Unit contribution margin. b. Contribution margin ratio. c. Break-even in dollar sales. d. Margin of safety percentage. e. If the sales volume increases by 20%, with no change in total fixed costs, what will be the change in operating profit? f. If the per unit variable production costs increase by 15%, and fixed selling and administrative costs increase by 12%, what will be the new break-even point in dollar sales?

A company has provided the following data: Sales 3,000 Units Sales price \ 7 per unit Variable cost \ 50 per unit Fixed cost \ 25,000 If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, operating profit will: