Exam 5: Cost Behavior and Cost-Volume-Profit Analysis

A product is sold for $45 and has variable costs of $33 per unit. The total fixed costs for the firm are $180,600. If the firm desires to earn a pretax income of $77,400, how many units must be sold?

The high-low method is used to derive the variable cost per unit and total fixed costs using just the highest and lowest volume levels.

Isaacson Co. has total fixed costs of $240,000 and a contribution margin ratio of 40%. If rent expense increases by $5,000, how much will total sales revenue have to increase to cover this increase in costs?

Kent Co. manufactures a product that sells for $50.00. Fixed costs are $260,000 and variable costs are $24.00 per unit. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. Compute the revised break-even point in dollars with the purchase of the new machine.

Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company's sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm's annual fixed costs total $6,500,000, calculate the firm's break-even point in total sales dollars.

Dividing a mixed cost into its separate fixed and variable cost components cannot be done in cost-volume-profit analysis.

Zola Co. has a contribution margin ratio of 40% and would like to determine whether an additional advertising expenditure of $4,000 would increase sales by $8,000. Calculate the increase or decrease in net income that would result from this change, and comment on whether Zola should purchase the additional advertising.

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be:

During a recent fiscal year, Creek Company reported pretax income of $125,000, a contribution margin ratio of 25% and total contribution margin of $400,000. Total variable costs must have been:

The difference between the unit sales price and the unit variable cost of an item is defined as the ________.

Locus Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Locus Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?

Curvilinear costs increase as volume of activity increases, but at a nonconstant rate.

Barclay Bikes manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company's sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm's annual fixed costs total $6,500,000, calculate the firm's selling price per composite unit.

Three methods to separate costs into fixed and variable are the ________, ________, and ________ methods.

On a typical cost-volume-profit chart, unit sales are shown on the horizontal axis and both dollars of sales and dollars of costs are represented on the vertical axis.

The following information is available for a company's utility cost for operating its machines over the last four months. Using the high-low method, the estimated variable cost per machine hour for utilities is:

To calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and sales price.

Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Compute the break-even point in dollars.

As production volume increases, fixed cost per unit of output remains constant.

Describe and compare the three cost estimation methods used to develop a cost equation.