Exam 3: Fundamentals of Cost-Volume-Profit Analysis

Drum Co.has provided the following data concerning its only product: Selling price \ 200 per unit Current sales 18,800 units Break-even sales 14,288 units Required: Compute the margin of safety in both dollars and as a percentage of sales.

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 break-even sales volume?

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

Luxus,Inc.employs 45 sales personnel to market its line of luxury automobiles.The average car sells for $23,000,and a 6 percent commission is paid to the salesperson. Luxus Motors 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 percent of the sales made by that salesperson.The amount of total monthly car sales at which Luxus Motors would be indifferent as to which plan to select is:

Lincoln,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 180,000 peryear Projected sales are 7,500 units per year. (consider each question independent of each other): (a)What will the operating profit be? (b)What is the impact on operating profit if the selling price per unit decreases by 15%? (c)What is the net income if variable costs per unit increase by 15% and Lincoln has a 38% tax rate?

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 $9 • 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,the number of T-shirts Dorcan Corporation must sell to break-even in the coming year is:

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-eren Point A. Decreased Increased B. Increased Decreased C. Decreased Decreased D. Increased Increased

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 protit \ 26,700 If the company sells 4,300 units,its operating profit should be closest to:

An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.

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.

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?

Lamar has the following data: Selling Price Variable manufacturing cost Fixed manutacturing cost. Variable selling \& administrative costs Fixed selling \& administrative costs \ 40 \ 22 \ 150,000 \ 6 \ 120,000 per month per month How many units must Lamar produce and sell in order to break-even?

You have been provided with the following information regarding the Omaha Manufacturing Company: Sales price \ 50 Variable manufacturing cost per unit 24 Variable marketing cost per unit 6 Fixed manutacturing costs 360,000 Fixed administrative costs 80,000 This information is based on forecasted sales of 30,000 units. (a)What is the expected operating profit for the upcoming year? (b)What is the break-even point in units? (c)If $180,000 of operating profit is desired,how many units must be sold?

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:

Why is it important for the profit equation to make a distinction between fixed and variable costs?

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?

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?

The best course of action in sensitive decisions is that the manager should depend upon the cost analyst's CVP analysis without considering alternative assumptions.

Blizzard Corporation's contribution margin ratio is 74% and its fixed monthly costs are $43,000.Assume that the company's sales for October are expected to be $102,000. Required: Estimate the company's operating profit for October,assuming that the fixed monthly costs do not change.

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 B?