Exam 3: Fundamentals of Cost-Volume-Profit Analysis

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

Luxus, Inc. employs 45 sales personnel to market its line of luxury automobiles. The average car sells for $23,000, and a 6% commission is paid to the salesperson. Luxus, Inc. is considering a change to the commission arrangement where the company would pay each salesperson a salary of $2,000 per month plus a commission of 2% of the sales made by that salesperson. The amount of total monthly car sales at which Luxus, Inc. would be indifferent as to which plan to select is:

Liu Sales has two store locations. Sanford has fixed costs of $250,000 per month and a contribution margin ratio of 35%. Orlando has fixed costs of $400,000 per month and a contribution margin ratio of 65%. At what sales volume would the two stores have equal profits or losses?

Razor Inc. manufactures industrial components. One of its products used as a subcomponent in auto manufacturing is Fluoro2211. The selling price and cost per unit data for 9,000 units of Fluoro2211 are as follows. Per Unit Data Selling Price \ 150 Direct Materials 20 Direct Labor 15 Variable Manufacturing Overhead 12 Fixed Manufacturing Overhead 30 Variable Selling 3 Fixed Selling and Admnistrative 10 Total Costs 90 Operating Margin \6 0 During the next year, sales of Fluoro2211 are expected to be 10,000 units. All costs will remain the same except for fixed manufacturing overhead, which will increase by 20%, and direct materials, which will increase by 10%. The selling price per unit for next year will be $160. Based on these data, Razor Inc.'s total contribution margin for next year will be: (CMA adapted)

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%. What is the break-even sales volume for Store A?

Data concerning Fowler Corporation's single product appear below: Per Unit Percent of Sales Selling price \ 210 100\% Variable costs 126 60\% Contribution margin \ 84 40\% Fixed costs are $444,000 per month. The company is currently selling 7,000 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $2. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly operating profit of this change if fixed costs are unaffected?

Nation Inc. sells three products. Last month's results are as follows: 1 2 Revenues \2 00,000 \3 00,000 \ 300,000 Variable costs 80,000 280,000 160,000 Total fixed costs are $100,000 marketing and $125,000 administrative. Required: (a) What was the operating profit last month? (b) What is Nation's break-even sales volume (at the given mix)? (c) What is Nation's margin of safety?

Morrel Co. produces and sells a single product. The company's income statement for the most recent month is given below: Sales ( 6,000 units at \ 40 per unit) \2 40,000 Less manufacturing costs: Direct materials \ 48,000 Direct labor (variable) 60,000 Variable factory overhead 12,000 Fixed factory overhead 30,000 150,000 Gross margin \9 0,000 Less selling and other costs: Variable selling and other costs 24,000 Fixed selling and other costs 42,000 66,000 Operating profit \2 4,000 There are no beginning or ending inventories. Required: a. Compute the company's monthly break-even point in units of product. b. What would the company's monthly operating profit be if sales increased by 25% and there is no change in total fixed costs? c. What dollar sales must the company achieve in order to earn an operating profit of $50,000 per month? d. The company has decided to automate a portion of its operations. The change will reduce direct labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead. Compute the new break-even point in units.

In multi-product cost-volume-profit (CVP) analysis, the fixed product mix method and the weighted-average contribution margin method yield different break-even points.

Honeysuckle Manufacturing has the following data: Selling Price \ 60 Variable manufacturing cost \ 33 Fixed manufacturing cost \ 250,000 per month Variable selling \& administrative costs \ 9 Fixed selling \& administrative costs \ 120,000 per month - What dollar sales volume does Honeysuckle need to break even?

The more important the decision, the more the manager will want to ensure that the assumptions made for CVP analysis are applicable.

An increase in an organization's fixed costs will result in a lower margin of safety, assuming all other costs and sales remain unchanged.

The Beach Party packages horseradish and mustards in a factory that can operate one, two, or three shifts. The product sells for $10 a case and has variable costs of $4 per case. Fixed costs are related to the number of shifts that are operated, with the estimated costs as follows: Daily volume Fixed Costs 1. shift 0-2,000 \ 3,000 2 shifts 2,001-4,000 \ 5,700 3 shifts 4,001-6,000 \ 8,200 Required: (a) Determine the break-even point(s). (b) If Beach Party can sell all it can produce, how many shifts should be operated?

If both the variable cost per unit and the selling price per unit decrease, the new contribution margin ratio in relation to the old contribution margin ratio will be:

Tower Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable cost per unit both increase 5% and fixed costs do not change, what is the effect on the contribution margin per unit and the contribution margin ratio? Contribution margin per unit Contribution margin ratio A. No change No change B. Increase Increase C. Increase No change D. Increase Decrease

Cost-volume-profit (CVP) analysis assumes that the production volume equals sales volume so that any changes in unit prices can be ignored.

Chita Corporation produces and sells a single product. The company's contribution format income statement for January appears below: Sales (5,500 units ) \ 297,000 Variable costs 165,000 Contribution margin 132,000 Fixed costs 105,300 Operating profit \ 26,700 Required: Redo the company's contribution format income statement assuming that the company sells 5,700 units.

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

You have been provided with the following information: Total Sales \ 90,000 Less Variable expenses 54,000 Contribution margin 36,000 Less fixed expenses 24,000 Operating profit \ 12,000 - If sales decrease by 10%, what level of fixed costs will maintain the current operating profit?

The Terrence Co. manufactures two products, Baubles and Trinkets. The following are projections for the coming year: How many Baubles will be sold at the break-even point, assuming that the facilities are jointly used with the sales mix remaining constant?