Exam 3: Fundamentals of Cost-Volume-Profit Analysis

An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.Low variable costs and higher fixed cost cause an organization's operating leverage to be high.

Cost-volume-profit (CVP)analysis assumes that the production volume equals sales volume so that any changes in unit prices can be ignored.A basic assumption of cost-volume-profit analysis is that changes in inventory are ignored,or put another way,inventory is held constant.

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.$5,200 - 2,400 = 2,800 - (2,800 × 40%)= $1,680.

Fowler 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?

Acme 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?

The following costs have been estimated based on sales of 30,000 units: What selling price will yield a contribution margin of 40%?

Which of the following would not cause the break-even point to change?

You have been provided with the following information: If sales increase by 10%,what level of fixed costs will yield a 20% increase in profits?

Cost-volume-profit (CVP)analysis is more complicated for organizations with multiple products because typically each product has a different contribution margin ratio.Multiple products makes in necessary to develop a weighted-average contribution margin in order to calculate break even.

XYZ 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?

Donnelly 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 Donnelly Corporation must sell to break even in the coming year is:

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

The following information pertains to Syl Co.: What is Syl's break-even point in sales dollars? (CPA adapted)

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:

The margin of safety percentage is computed as:

You have been provided with the following information: 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?

KR Sales had $1,200,000 in sales last month.The variable cost ratio was 60% and operating profits were $80,000.What is KR's margin of safety in sales dollars?

Kator Inc.manufactures industrial components.One of its products used as a subcomponent in auto manufacturing is KB-96.The selling price and cost per unit data for 9,000 units of KB-96 are as follows. During the next year,sales of KB-96 are expected to be 10,000 units.All costs will remain the same except for fixed manufacturing overhead,which will increase by 20%,and material,which will increase by 10%.The selling price per unit for next year will be $160.Based on these data,Kator Inc.'s total contribution margin for next year will be: (CMA adapted)

The amount by which a company's sales can decline before losses are incurred is called the:

Kanmore produces and sells three products.Last month's results are as follows: Fixed costs total $200,000.What is Kanmore's margin of safety? (Assume the current product mix. )