Exam 3: Fundamentals of Cost-Volume-Profit Analysis

Raines Company's sales are $750,000 with operating profits of $130,000. If the contribution margin ratio is 40%, what did the fixed costs amount to?

Corey Company has a margin of safety percentage of 20%. The break-even point is $200,000 and the variable costs are 45% of sales. Given this information, the operating profit is:

If the fixed costs for a product increase and the variable costs (as a percentage of sales dollars) increase, what will be the effect on the contribution margin ratio and the break-even point, respectively? Contributim Margin Ratio Break-even Point A. Decrease Increase B. Increase Decrease C. Decrease Decrease D. Increase Increase

Lake Sales had $2,200,000 in sales last month. The contribution margin ratio was 30% and operating profits were $180,000. -What is Lake's margin of safety in sales dollars?

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 - For the coming year, the management of Gardner Corporation anticipates a 10 percent increase in sales, a 12 percent increase in variable costs, and a $45,000 increase in fixed costs. The break-even point for next year (rounded to the nearest dollar) would be:

Broken Arrow Inc. produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price \ 190 100\% Variable costs 57 30\% Contribution margin \ 133 70\% Fixed costs are $226,000 per month. The company is currently selling 2,000 units per month. Required: The marketing manager would like to cut the selling price by $12 and increase the advertising budget by $13,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 200 units. What should be the overall effect on the company's monthly operating profit of these changes?

Cost-volume-profit (CVP) analysis is more complicated for organizations with multiple products because typically each product has a different contribution margin ratio.

John Martin, now retired, owns the Corner Barber Shop. He employs five (5) barbers and pays each a base rate of $500 per month. One of the barbers serves as the manager and receives an extra $300 per month. In addition to the base rate, each barber also receives a commission of $3 per haircut. A barber can do as many as 20 haircuts a day, but the average is 14 haircuts per day. The Corner Barber Shop is a corporation with a 30% tax rate and is open 24 days a month. Other costs are incurred as follows: Advertising \ 200 per month Rent \ 400 per month Barber Supplies \ 10.9 per haircut Utilities \ 175 per month plus \ 0.35 per haircut Magazines \ 125 per month Cleaning Sunplies \ 0.15 per haircut. John currently charges $8 per haircut. Required: (a) John wants to earn $2,160 in after-tax operating profits. Compute the number of haircuts that must be given to reach this goal in June. (b) In June, only 1,500 haircuts were given. Compute the price per haircut that John should have charged in June to earn $2,160 in after-tax operating profits.

All other things the same, which of the following would be true of the contribution margin and variable costs of a company with high fixed costs and low variable costs as compared to a company with low fixed costs and high variable costs? Contribution Margin Variable Costs A. Higher Higher B. Lower Higher C. Higher Lower D. Lower Lower

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 - For the coming year, the management of Evergreen Corporation anticipates a 5 percent decrease in sales, a 10 percent increase in all variable costs, and a $45,000 increase in fixed costs. The operating profit for next year would be:

If an organization's fixed costs are $2,400, tax rate is 40%, and contribution margin is $5,200, then its after-tax operating profits are $1,680.

Volare, Inc. has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows: Capital-Intensive Labor-Intensive Variable manufacturing cost per unit \ 14.00 \ 17.60 Fixed manufacturing cost per year \ 2,440,000 \ 1,320,000 The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative costs of the new product are $500,000. The variable selling and administrative costs are $2 per unit regardless of how the new product is manufactured. Required: a. Calculate the break-even point in units if Volare, Inc. uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. b. Determine the unit sales volume at which the operating profit is the same for the two manufacturing methods. c. Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. d. What is your recommendation to management concerning which manufacturing method to use?

In the most recent month, Faulkner Corporation's total contribution margin was $208,000 and its operating profit $39,400. Required: a. Compute the degree of operating leverage to two decimal places. b. Using the degree of operating leverage, estimate the percentage change in operating profit that should result from a 1% increase in sales.

Present the profit equation and define all of the terms.

Why and how do managers simplify analyses for achieving a given level of profit with two products or services?

Cost A is a fixed cost, while B is a variable cost. During the current year, the volume of output has decreased. In terms of cost per unit of output, we would expect that:

Microsoft Excel® is ideally suited for analyzing alternative CVP scenarios using its "What-If Analysis" function.

Gena Manufacturing Company has a fixed cost of $225,000 for the production of tubes. Estimated sales are 150,000 units. A before tax profit of $125,000 is desired by the controller. If the tubes sell for $5 each, what unit contribution margin is required to attain the profit target?

On January 1, 2020, Randolph Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Randolph's budgeted break-even point and budgeted margin of safety? (CPA adapted) Budgeted Break-even Point Budgeted Margin of Safety A. Increase Increase B. Increase Decrease C. Decrease Decrease D. Decrease Increase

You have been provided with the following information regarding the Ralston Manufacturing Company: Sales price \5 0 Variable manufacturing cost per unit 24 Fixed manufacturing costs per unit 12 Variable marketing cost per unit 6 Fixed administrative costs per unit 3 This information is based on forecasted sales of 30,000 units. Required: (a) What is the expected operating profit for the upcoming year? (b) What is the break-even point in units? (c) If $160,000 of operating profit is desired, how many units must be sold?