Exam 12: Cost-Volume-Profit Analysis

Mulvey Corporation manufactures hand painted vases. The company currently sells 50,000 units per year. The company's revenues and costs follow: Required: a. Calculate Mulvey's before-tax break-even point in units and sales dollars. b. Calculate Mulvey's contribution margin ratio. c. Calculate Mulvey's variable cost ratio. d. Calculate Mulvey's margin of safety in units and sales dollars. e. Calculate Mulvey's degree of operating leverage. f. Using your answer from (e), determine what impact a 30% increase in sales volume would have on pretax profits. Use an income statement to prove your answer by calculating the pretax profits at the new sales volume level.

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Question 1

Correct Answer:

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a. ($30 - $10 - $8)X - ($340,000 + $140,000) = $0
$12X - $480,000 = $0
$12X = $480,000
X = 40,000 units
40,000 units x $30 = $1,200,000
b. Contribution margin per unit = $30 - $10 - $8 = $12
Contribution margin ratio = $12 ÷ $30 = 40%
c. Total variable cost per unit = $10 + $8 = $18 per unit
Variable cost ratio = $18 ÷ $30 = 60%
or
Variable cost ratio = 100% - CM% = 100% - 40% = 60%
d. Margin of safety in units = 50,000 - 40,000 = 10,000 units
Margin of safety in dollars = 10,000 units x $30 = $300,000
e. Total contribution margin = $12 x 50,000 units = $600,000
Pretax profit = $600,000 - ($340,000 + $140,000) = $600,000 - $480,000 = $120,000
Degree of operating leverage = $600,000 ÷ $120,000 = 5
f. Impact on profit = DOL x % increase in sales = 5 x 0.30 = 1.5%
Proof:

Increase in pretax profit = $300,000 - $120,000 = $180,000
Increase in profits = $180,000 ÷ $120,000 = 1.5 times

If a company's contribution margin increases and its fixed costs remain constant, break-even point will decrease.

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Question 2

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Use the following information to answer questions Wild Bear Corp. sells tents for $250. The company produced and sold 5,000 tents in 2010 and incurred the following costs: Variable production cost per tent $125 Fixed production cost $195,000 Variable selling expense per tent $25 Fixed selling and administrative cost $135,000 The company had expected to sell 3,900 units in 2010. Wild Boar's tax rate is 30%. -What was Wild Bear's margin of safety in dollars for 2010?

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Question 3

Correct Answer:

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The contribution margin ratio is always computed on a per-unit basis.

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Question 4

A company could determine the effect that a 10% variable cost increase would have on total production costs by using

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Question 5

Use the following information to answer questions Reliable Furniture manufactures recliners selling for $500 each. Variable costs per unit are $175 for direct material, $125 for direct labor, $35 for variable production overhead, and $15 for variable selling and administrative costs. Annual fixed costs are $200,000 for production overhead and $100,000 for selling and administrative costs. The company applies fixed production overhead to recliners based on a capacity of 20,000 units per year. -Reliable Furniture's contribution margin ratio is

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Question 6

A graph that shows profit and loss amounts at specific volume levels is a

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Question 7

The contribution margin ratio is equal to (selling price - variable costs) divided by selling price.

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Question 8

If a company's sales revenue is $500,000 and its break-even sales are $300,000, then its margin of safety is 1.67.

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Question 9

On a break-even graph, total fixed cost is plotted as a line horizontal to the x-axis.

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Question 10

The break-even point is shown on a BEP graph as the point at which the

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Question 11

If a company's contribution margin remains constant and its fixed costs decrease, then break-even point will increase.

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Question 12

Managers of businesses are primarily interested in the break-even point because it provides

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Question 13

Break-even point and cost-volume-profit analysis are both based on the income statement formula.

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Question 14

In 2010, Brown Dog sold 20,000 units of its product at $50 per unit. The following information is also available: What was Brown Dog's degree of operating leverage in 2010?

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Question 15

Use the following information to answer questions 32 - 34: In 2010, Printext estimates that for every two printers sold, the company will sell six ink cartridges. The products have a 2:6 ratio. Fixed production costs are $150,000 and fixed selling costs are $50,000. Printext's selling prices and variable expenses information are as follows: -If the sales mix changed to 3:5 and Printext sold 2.700 printers, the company will incur a

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Question 16

The measure that reflects an organization's variable and fixed cost relationship and indicates how a percentage change in sale from the current level will impact impact profits is called the

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Question 17

Decisions about pricing a special order at less than "normal" selling price per unit should be made solely on the basis of the net profit or loss that might be generated from the special order.

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Question 18

Use the following information to answer questions Boca Inc.'s current product selling price is $70, variable cost per unit is $35, total fixed costs are $1,430,000, and sales volume is 150,000 units. -The company estimates that a $10 reduction in selling price and an $80,000 increase in advertising will cause sales volume to increase by 20,000 units. What is the incremental profit or loss?

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Question 19

Use the following information to answer questions Reliable Furniture manufactures recliners selling for $500 each. Variable costs per unit are $175 for direct material, $125 for direct labor, $35 for variable production overhead, and $15 for variable selling and administrative costs. Annual fixed costs are $200,000 for production overhead and $100,000 for selling and administrative costs. The company applies fixed production overhead to recliners based on a capacity of 20,000 units per year. -If the company wants to earn a before-tax profit of $600,000, how many recliners must be sold?

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Question 20

Showing 1 - 20 of 77

If a company's contribution margin increases and its fixed costs remain constant, break-even point will decrease.

The contribution margin ratio is always computed on a per-unit basis.

A company could determine the effect that a 10% variable cost increase would have on total production costs by using

A graph that shows profit and loss amounts at specific volume levels is a

The contribution margin ratio is equal to (selling price - variable costs) divided by selling price.

If a company's sales revenue is $500,000 and its break-even sales are $300,000, then its margin of safety is 1.67.

On a break-even graph, total fixed cost is plotted as a line horizontal to the x-axis.

The break-even point is shown on a BEP graph as the point at which the

If a company's contribution margin remains constant and its fixed costs decrease, then break-even point will increase.

Managers of businesses are primarily interested in the break-even point because it provides

Break-even point and cost-volume-profit analysis are both based on the income statement formula.

In 2010, Brown Dog sold 20,000 units of its product at $50 per unit. The following information is also available: What was Brown Dog's degree of operating leverage in 2010?

The measure that reflects an organization's variable and fixed cost relationship and indicates how a percentage change in sale from the current level will impact impact profits is called the

Decisions about pricing a special order at less than "normal" selling price per unit should be made solely on the basis of the net profit or loss that might be generated from the special order.

An Introduction to the Role of Accounting in the Business World

Concepts and Elements Underlying Accounting

The Mechanics of Double-Entry Bookkeeping

Cash, Short-Term Investments and Accounts Receivable

Inventory

Long-Term Assets: Property, Plant Equipment and Intangibles

Liabilities

Stockholders Equity

The Corporate Income Statement and Financial Analysis

Statement of Cash Flows

Managerial Accounting

The Master Budget

Activity-Based Management and Performance Measurementreward

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