Deck 7: Cost-Volume-Profit Analysis

Question 1

CVP analysis can be used to study the effect of:

A) changes in selling prices on a company's profitability.
B) changes in variable costs on a company's profitability.
C) changes in fixed costs on a company's profitability.
D) changes in product sales mix on a company's profitability.
E) All of the other answers are correct.

Answer 1

E

Question 2

Cost-volume-profit analysis is based on certain general assumptions. One of these assumptions is that product prices will remain constant as volume varies within the relevant range.

Answer 2

True

Question 3

A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the following statements is true?

A) Each unit "contributes" $3 toward covering the fixed costs of $900.
B) The situation described is not possible and there must be an error.
C) Once the break-even point is reached; the company will increase income at the rate of $3 per unit.
D) The firm will definitely lose money in this situation.
E) Each unit "contributes" $3 toward covering the fixed costs of $900 and once the break-even point is reached, the company will increase income at the rate of $3 per unit.

Answer 3

E

Question 4

A company that desires to lower its break-even point should strive to:

A) decrease selling prices.
B) reduce variable costs.
C) increase fixed costs.
D) sell more units.
E) achieve more than one of the other answers listed.

Question 5

Which of the following would occurs if a company increases its variable cost per unit?

A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Question 6

Assuming no change in sales volume, an increase in company's per-unit contribution margin would:

A) increase income.
B) decrease income.
C) have no effect on income.
D) increase fixed costs.
E) decrease fixed costs.

Question 7

The difference between budgeted sales revenue and break-even sales revenue is the operating leverage.

Question 8

The extent to which an organization uses fixed costs in its cost structure is measured by financial leverage.

Question 9

A recent income statement of Black Corporation reported the following data: $\begin{array}{lr}\text { Sales revenue } & \$ 8,000,000 \\\text { Variable costs } & 5,000,000 \\\text { Fixed costs } & 2,200,000\end{array}$ If these data are based on the sale of 20,000 units, the contribution margin per unit would be:

A) $40.
B) $150.
C) $290.
D) $360.
E) None of the other answers is correct.

Question 10

The break-even point is that level of activity where:

A) total revenue equals total cost.
B) variable cost equals fixed cost.
C) total contribution margin equals the sum of variable cost plus fixed cost.
D) sales revenue equals total variable cost.
E) profit is greater than zero.

Question 11

Sanderson sells a single product for $50 that has a variable cost of $30. Fixed costs amount to $5 per unit when anticipated sales targets are met. If the company sells one unit in excess of its break-even volume, profit will be:

A) $15.
B) $20.
C) $50.
D) an amount that cannot be derived based on the information presented.
E) an amount other than $15, $20, or $50 and one that can be derived based on the information presented.

Question 12

The unit contribution margin is calculated as the difference between:

A) selling price and fixed cost per unit.
B) selling price and variable cost per unit.
C) selling price and product cost per unit.
D) fixed cost per unit and variable cost per unit.
E) fixed cost per unit and product cost per unit.

Question 13

At a volume of 20,000 units, Dries reported sales revenues of $1,000,000, variable costs of $300,000, and fixed costs of $260,000. The company's break-even point in units is:

A) 7,027 (rounded).
B) 8,667 (rounded).
C) 9,286 (rounded).
D) 7,429 (rounded).
E) None of the other answers is correct.

Question 14

The break-even point is that level of activity where total revenue equals total cost.

Question 15

Which of the following occurs if a company experiences an increase in its fixed costs?

A) Net income would increase.
B) The break-even point would increase.
C) The contribution margin would increase.
D) The contribution margin would decrease.
E) More than one of the other answers would occur.

Question 16

Which of the following would produce the largest increase in the contribution margin per unit?

A) A 7% increase in selling price.
B) A 15% decrease in selling price.
C) A 14% increase in variable cost.
D) A 17% decrease in fixed cost.
E) A 23% increase in the number of units sold.

Question 17

Which of the following occurs if a company experiences a decrease in its fixed costs?

A) Income would decrease.
B) The break-even point would decrease.
C) The contribution margin would increase.
D) The contribution margin would decrease.
E) More than one of the other answers would occur.

Question 18

The break-even point is that level of activity where:

A) variable cost equals fixed cost.
B) contribution margin equals fixed cost.
C) total contribution margin equals the sum of variable cost plus fixed cost.
D) sales revenue equals total variable cost.
E) sales revenue equals fixed cost.

Question 19

The contribution-margin ratio is calculated as unit contribution margin divided by the selling price per unit.

Question 20

At a volume of 20,000 units, Dries reported sales revenues of $1,000,000, variable costs of $300,000, and fixed costs of $260,000. The company's contribution margin per unit is:

A) $22.
B) $28.
C) $35.
D) $37.
E) None of the other answers is correct.

Question 21

A recent income statement of Dragonwood Corporation reported the following data: $\begin{array}{lr}\text { Units sold } & \$ 9,000 \\\text { Sales revenue } & \$ 9,600,000 \\\text { Variable costs } & 6,000,000 \\\text { Fixed costs } & 2,600,000\end{array}$ If the company desired to earn a target profit of $1,270,000, it would have to sell:

A) 5,778 units.
B) 8,600 units.
C) 10,160 units.
D) 11,908 units.
E) None of the other answers is correct.

Question 22

A recent income statement of Black Corporation reported the following data: $\begin{array}{lr}\text { Sales revenue } & \$ 8,000,000 \\\text { Variable costs } & 5,000,000 \\\text { Fixed costs } & 2,200,000\end{array}$ If these data are based on the sale of 20,000 units, the break-even point would be:

A) 9,565 units (rounded).
B) 11,000 units (rounded).
C) 7,586 units (rounded).
D) 14,667 units (rounded).
E) None of the other answers is correct.

Question 23

A recent income statement of Suni Corporation reported the following data: $\begin{array}{lr}\text { Sales revenue } & \$ 6,800,000 \\\text { Variable costs } & 2,800,000 \\\text { Fixed costs } & 2,500,000\end{array}$ If these data are based on the sale of 20,000 units, the break-even point would be:

A) 7,500 units.
B) 11,628 units.
C) 12,500 units.
D) 33,333 units.
E) None of the other answers is correct.

Question 24

Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.
Each unit that Narchie sells will:

A) increase profit by $20.
B) increase profit by $30.
C) increase profit by $50.
D) increase profit by some other amount.
E) decrease profit by $5.

Question 25

A recent income statement of Yang Corporation reported the following data: $\begin{array}{lr}\text { Sales revenue } & \$ 2,500,000 \\\text { Variable costs } & 1,500,000 \\\text { Fixed costs } & 800,000\end{array}$ If these data are based on the sale of 5,000 units, the break-even sales would be:

A) $2,000,000.
B) $2,206,000.
C) $2,500,000.
D) $10,000,000.
E) None of the other answers is correct.

Question 26

Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.
In order to produce a target profit of $22,000, Narchie's dollar sales must total:

A) $8,440.
B) $21,100.
C) $1,000,000.
D) $1,055,000.
E) None of the other answers is correct.

Question 27

Brooklyn sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Brooklyn's unit sales are 200 units less than anticipated, its breakeven point will:

A) increase by $12 per unit sold.
B) decrease by $12 per unit sold.
C) increase by $8 per unit sold.
D) decrease by $8 per unit sold.
E) not change.

Question 28

Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.
Narchie:

A) will break-even by selling 8,000 units.
B) will break-even by selling 13,333 units.
C) will break-even by selling 20,000 units.
D) will break-even by selling 1,000,000 units.
E) cannot break-even because it loses money on every unit sold.

Question 29

Lawson, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not change, Lawson's break-even point would be:

A) 30,000 units.
B) 45,000 units.
C) 90,000 units.
D) negative because the company loses $2 on every unit sold.
E) a positive amount other than the specific amounts given.

Question 30

The contribution-margin ratio is:

A) the difference between the selling price and the variable cost per unit.
B) fixed cost per unit divided by variable cost per unit.
C) variable cost per unit divided by the selling price.
D) unit contribution margin divided by the selling price.
E) unit contribution margin divided by fixed cost per unit.

Question 31

Ribco Co. makes and sells only one product. The unit contribution margin is $6 and the break-even point in unit sales is 24,000. The company's fixed costs are:

A) $4,000.
B) $14,400.
C) $40,000.
D) $144,000.
E) None of the other answers is correct.

Question 32

At a volume level of 500,000 units, Sullivan reported the following information: $\begin{array}{lr}\text { Sales price } & \$ 60 \\\text { Variable cost per unit } & 20 \\\text { Fixed cost per unit } & 4\end{array}$ The company's contribution-margin ratio is closest to:

A) 0.33.
B) 0.40.
C) 0.60.
D) 0.67.
E) None of the other answers is correct.

Question 33

Brooklyn sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. Brooklyn's safety margin in units is:

A) (13,400).
B) 0.
C) 1,600.
D) 13,600.
E) None of the other answers is correct.

Question 34

The difference between budgeted sales revenue and break-even sales revenue is the:

A) contribution margin.
B) contribution-margin ratio.
C) safety margin.
D) target net profit.
E) operating leverage.

Question 35

Yellow Dot, Inc. sells a single product for $10. Variable costs are $4 per unit and fixed costs total $120,000 at a volume level of 10,000 units. What dollar sales level would Yellow Dot have to achieve to earn a target profit of $240,000?

A) $400,000.
B) $500,000.
C) $600,000.
D) $750,000.
E) $900,000.

Question 36

Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the company has fixed costs that amount to $400,000. Current sales total 16,000 units.
If Narchie sells 24,000 units, its safety margin will be:

A) $200,000.
B) $400,000.
C) $1,000,000.
D) $1,200,000.
E) None of the other answers is correct.

Question 37

Orion recently reported sales revenues of $800,000, a total contribution margin of $300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the company's variable cost per unit must have been:

A) $12.
B) $32.
C) $50.
D) $92.
E) None of the other answers is correct.

Question 38

Strayer has a break-even point of 120,000 units. If the firm's sole product sells for $40 and fixed costs total $480,000, the variable cost per unit must be:

A) $4.
B) $36.
C) $44.
D) an amount that cannot be derived based on the information presented.
E) an amount other than $4, $36 or $44, but one that can be derived based on the information presented.

Question 39

Maxine's budget for the upcoming year revealed the following figures: $\begin{array}{lr}\text { Sales revenue } & \$ 840,000 \\\text { Contribution margin } & 504,000 \\\text { Income } & 54,000\end{array}$ If the company's break-even sales total $750,000, Maxine's safety margin would be:

A) $(90,000).
B) $90,000.
C) $246,000.
D) $336,000.
E) $696,000.

Question 40

Grey, Inc. sells a single product for $20. Variable costs are $8 per unit and fixed costs total $120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change, Green's break-even sales would be:

A) $160,000.
B) $200,000.
C) $300,000.
D) $480,000.
E) None of the other answers is correct.

Question 41

Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows: $$\begin{array} { l c l } & \text { Plain } & \text { Fancy } \\\text { Unit selling price } & \$ 20.00 & \$ 35.00 \\\text { Variable cost per unit } & 12.00 & 24.50\end{array}$$ Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
Assuming that the sales mix remains constant, the number of units of Fancy that Jamal must sell to break even is:

A) 2,000.
B) 3,000.
C) 3,375.
D) 5,000.
E) 5,625.

Question 42

Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows: $$\begin{array} { l c l } & \text { Plain } & \text { Fancy } \\\text { Unit selling price } & \$ 20.00 & \$ 35.00 \\\text { Variable cost per unit } & 12.00 & 24.50\end{array}$$ Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
The weighted-average unit contribution margin is:

A) $4.80.
B) $9.00.
C) $9.25.
D) $17.00.
E) None of the other answers is correct.

Question 43

Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows: $$\begin{array} { l c l } & \text { Plain } & \text { Fancy } \\\text { Unit selling price } & \$ 20.00 & \$ 35.00 \\\text { Variable cost per unit } & 12.00 & 24.50\end{array}$$ Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
Assuming that the sales mix remains constant, the total number of units that Jamal must sell to break even is:

A) 2,432.
B) 2,647.
C) 4,737.
D) 5,000.
E) None of the other answers is correct.

Question 44

Danielle sells a single product at $20 per unit. The firm's most recent income statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of $400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company will experience:

A) no change in profit because a 20% drop in sales price is balanced by a 20% increase in volume.
B) an $80,000 drop in profit.
C) a $240,000 drop in profit.
D) a $400,000 drop in profit.
E) None of the other answers is correct.

Question 45

Wellcom Corporation has the following sales mix for its three products: A, 20%; B, 35%; and C, 45%. Fixed costs total $400,000 and the weighted-average contribution margin is $100. How many units of product A must be sold to break-even?

A) 800.
B) 4,000.
C) 20,000.
D) None of the other answers is correct.
E) Cannot be determined based on the information presented.

Question 46

Grime-X is studying the profitability of a change in operation and has gathered the following information: $\begin{array}{lrr}&\text { Current } & \text { Anticipated } \\&\text { Operation } & \text { Operation }\\\text { Fixed costs } & \$ 38,000 & \$ 48,000 \\\text { Selling price } & \$ 16 & \$ 22 \\\text { Variable cost } & \$ 10 & \$ 12 \\\text { Sales (units) } & 9,000 & 6,000\end{array}$ Should Grime-X make the change?

A) Yes, the company will be better off by $6,000.
B) No, because sales will drop by 3,000 units.
C) No, because the company will be worse off by $4,000.
D) No, because the company will be worse off by $22,000.
E) It is impossible to judge because additional information is needed.

Question 47

The assumptions on which cost-volume-profit analysis is based appear to be most valid for businesses:

A) over the short run.
B) over the long run.
C) over both the short run and the long run.
D) in periods of sustained profits.
E) in periods of increasing sales.

Question 48

If a company desires to increase its safety margin, it should:

A) increase fixed costs.
B) decrease the contribution margin.
C) decrease selling prices, assuming the price change will have no effect on demand.
D) stimulate sales volume.
E) attempt to raise the break-even point.

Question 49

Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as follows: $$\begin{array} { l c l } & \text { Plain } & \text { Fancy } \\\text { Unit selling price } & \$ 20.00 & \$ 35.00 \\\text { Variable cost per unit } & 12.00 & 24.50\end{array}$$ Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
Assuming that the sales mix remains constant, the number of units of Plain that Jamal must sell to break even is:

A) 2,000.
B) 3,000.
C) 3,375.
D) 5,000.
E) 5,625.

Question 50

Which of the following underlying assumptions form(s) the basis for cost-volume-profit analysis?

A) Revenues and costs behave in a linear manner.
B) Costs can be categorized as variable, fixed, or semivariable.
C) Worker efficiency and productivity remain constant.
D) In multiproduct organizations, the sales mix remains constant.
E) All the other answers are assumptions that underlie cost-volume-profit analysis.

Question 51

All other things being equal, a company that sells multiple products should attempt to structure its sales mix so the greatest portion of the mix is composed of those products with the highest:

A) selling price.
B) variable cost.
C) contribution margin.
D) fixed cost.
E) gross margin.

Question 52

The extent to which an organization uses fixed costs in its cost structure is measured by:

A) financial leverage.
B) operating leverage.
C) fixed cost leverage.
D) contribution leverage.
E) efficiency leverage.

Question 53

Which of the following does not typically appear on a contribution income statement?

A) Net income.
B) Gross margin.
C) Contribution margin.
D) Total variable costs.
E) Total fixed costs.

Question 54

Cost-volume-profit analysis is based on certain general assumptions. Which of the following is not one of these assumptions?

A) Product prices will remain constant as volume varies within the relevant range.
B) Costs can be categorized as fixed, variable, or semivariable.
C) The efficiency and productivity of the production process and workers will change to reflect manufacturing advances.
D) Total fixed costs remain constant as activity changes.
E) Unit variable cost remains constant as activity changes.

Question 55

Which of the following does not typically appear on an income statement prepared by using a traditional format?

A) Cost of goods sold.
B) Contribution margin.
C) Gross margin.
D) Selling expenses.
E) Administrative expenses.

Question 56

A manager who wants to determine the percentage impact on income of a given percentage change in sales would multiply the percentage increase/decrease in sales revenue by the:

A) contribution margin.
B) gross margin.
C) operating leverage factor.
D) safety margin.
E) contribution-margin ratio.

Question 57

The contribution income statement differs from the traditional income statement in which of the following ways?

A) The traditional income statement separates costs into fixed and variable components.
B) The traditional income statement subtracts all variable costs from sales to obtain the contribution margin.
C) Cost-volume-profit relationships can be analyzed more easily from the contribution income statement.
D) The effect of sales volume changes on profit is readily apparent on the traditional income statement.
E) The contribution income statement separates costs into product and period categories.

Question 58

Cleason sells a single product at $14 per unit. The firm's most recent income statement revealed unit sales of 80,000, variable costs of $800,000, and fixed costs of $560,000. Management believes that a $3 drop in selling price will boost unit sales volume by 20%. Which of the following correctly depicts how these two changes will affect the company's break-even point?

A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Question 59

Brooklyn sells a single product to wholesalers. The company's budget for the upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and total fixed costs of $360,000. If Brooklyn's unit sales are 300 units more than anticipated, its break-even point will:

A) increase by $12 per unit sold.
B) decrease by $12 per unit sold.
C) increase by $8 per unit sold.
D) decrease by $8 per unit sold.
E) not change.

Question 60

O'Dale sells three products: R, S, and T. Budgeted information for the upcoming accounting period follows. The company's weighted-average unit contribution margin is:

A) $3.00.
B) $3.55.
C) $4.00.
D) $19.35.
E) None of the other answers is correct.

Question 61

Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the period just ended when the company produced and sold 45,000 units: $$\begin{array} { l r } \text { Sales revenue } & \$ 1,350,000 \\\text { Variable costs } & 810,000 \\\text { Fixed costs } & 432,000\end{array}$$ How many units must Barrey sell to earn an after-tax profit of $225,000?

A) 67,250.
B) 62,250.
C) 61,000.
D) 51,000.
E) None of the other answers is correct.

Question 62

Which of the following statements is (are) true regarding a company that has implemented flexible manufacturing systems and activity-based costing?
I) The company has erred, as these two practices used in conjunction with one another will severely limit the firm's ability to analyze costs over the relevant range.
II) Costs formerly viewed as fixed under traditional-costing systems may now be considered variable with respect to changes in cost drivers such as number of setups, number of material moves, and so forth.
III) As compared with the results obtained under a traditional-costing system, the concept of break-even analysis loses meaning.

A) I only.
B) II only.
C) III only.
D) I and II.
E) II and III.

Question 63

Edmonco Company produced and sold 45,000 units of a single product last year, with the following results: $\begin{array}{lr}\text { Sales revenue } & \$ 1,350,000 \\\text { Manufacturing costs: } & \\\quad \text { Variable } & 585,000 \\\text { Fixed } & 270,000 \\\text { Selling costs: } & \\\quad \text { Variable } & 40,500 \\\quad \text { Fixed } & 54,000 \\\text { Administrative costs: } & \\\quad \text { Variable } & 184,500 \\\text { Fixed } & 108,000\end{array}$ If Edmonco's sales revenues increase 15%, what will be the percentage increase in income before income taxes?

A) 15%.
B) 45%.
C) 60%.
D) 75%.
E) None of the other answers is correct.

Question 64

Vince's Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $48,000. The sales price averages $9, and it costs the firm $3 to make and deliver each pizza.
Required:
A.
A. How many pizzas must Vince's sell to break even?
B. How many pizzas must the company sell to earn a target profit of $54,000?
C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin in dollars?
D. Vince's assistant manager, an accounting major, has suggested that the firm should try to increase the contribution margin per pizza. Explain the meaning of "contribution margin" in layman's terms.

Question 65

Edmonco Company produced and sold 45,000 units of a single product last year, with the following results: Edmonco's operating leverage factor was:

A) 4.
B) 5.
C) 6.
D) 7.
E) 8.

Question 66

You are analyzing Becker Corporation and Newton Corporation and have concluded that Becker has a higher operating leverage factor than Newton. Which one of the following choices correctly depicts (1) the relative use of fixed costs (as opposed to variable costs) for the two companies and (2) the percentage change in income caused by a change in sales?

A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Question 67

Hitchcock Company is studying the impact of the following:
1. An increase in sales price.
2. An increase in the variable cost per unit.
3. An increase in the number of units sold (note: each unit produces a $6 contribution margin).
4. A decrease in fixed costs.
5. A proposed change in the method of compensation for salespeople, away from commissions based on gross sales dollars and toward higher monthly salaries.
Required:
Determine the impact of each of these operating changes on Hitchcock's per-unit contribution margin and break-even point by completing the chart that follows. Your responses should be Increase (INC), Decrease (DEC), No Effect (NE), or Insufficient Information to Judge (II).

Question 68

The Braggs & Strutting' Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of 40,000 units.
Cost of goods sold consists of $810,000 of variable costs and $310,000 of fixed costs. Operating expenses consist of $30,000 of variable costs and $70,000 of fixed costs.
Required:
A. Calculate the break-even point in units and sales dollars.
B. Calculate the safety margin (in dollars).
C. Braggs & Struttin' received an order for 6,000 units at a price of $25.00. There will be no increase in fixed costs, but variable costs will be reduced by $0.54 per unit because of cheaper packaging. Determine the projected increase or decrease in profit from the order, assuming there is no opportunity costs.

Question 69

Thomlinson Company is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows.
Regardless of which product is introduced, the anticipated selling price will be $50 and the company will pay a 10% sales commission on gross dollar sales. Thomlinson will not carry an inventory of these items.
Required:
A. What is the break-even sales volume (in dollars) on product no. 66?
B. Which of the two products will be more profitable at a sales level of 25,000 units?
C. At what unit-volume level will the profit/loss on product no. 65 equal the profit/loss on product no. 66?

Question 70

Which of the following calculations can be used to measure a company's degree of operating leverage?

A) Contribution margin ÷ sales.
B) Contribution margin ÷ income.
C) Sales ÷ contribution margin.
D) Sales ÷ income.
E) Sales ÷ fixed costs.

Question 71

The following information relates to Dazie Company: $\begin{array}{lr}\text { Sales revenue } & \$ 12,000,000 \\\text { Contribution margin } & 4,800,000 \\\text { Income } & 800,000\end{array}$ Dazie's operating leverage factor is closest to:

A) 0.067.
B) 0.167.
C) 0.400.
D) 2.500.
E) 6.000.

Question 72

Elmton recently sold 70,000 units, generating sales revenue of $4,900,000. The company's variable cost per unit and total fixed cost amounted to $20 and $2,800,000, respectively. Management is in the process of studying the dollar impact of various transactions and events, and desires answers to the following independent cases:
Case no. 1: Management wants to lower the firm's break-even point to 52,000 units. If all other costs remain constant, what must happen to fixed costs to achieve this objective?
Case no. 2: The company anticipates a $2 hike in the variable cost per unit. If all other costs remain constant and management desires to maintain the firm's current break-even point, what must happen to Elmton's selling price? If selling price remains constant, what must happen to the firm's total fixed costs?
Required:
A. Answer the two cases raised by management.
B. Determine the impact (increase, decrease, or no effect) of the following operating changes on the items cited:
1. An increase in variable selling costs on income.
2. A decrease in direct material cost on the unit contribution margin.
3. A decrease in the number of units sold on the break-even point.

Question 73

Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the period just ended when the company produced and sold 45,000 units: $$\begin{array} { l r } \text { Sales revenue } & \$ 1,350,000 \\\text { Variable costs } & 810,000 \\\text { Fixed costs } & 432,000\end{array}$$ How many units must Barrey sell to earn an after-tax profit of $180,000?

A) 42,000.
B) 45,000.
C) 51,000.
D) 61,000.
E) None of the other answers is correct.

Question 74

The following information relates to Paternus Company: $\begin{array}{lr}\text { Sales revenue } & \$ 10,000,000 \\\text { Contribution margin } & 4,000,000 \\\text { Income } & 1,000,000\end{array}$ If a manager at Paternus desired to determine the percentage impact on income of a given percentage change in sales, the manager would multiply the percentage increase/decrease in sales revenue by:

A) 0.25.
B) 0.40.
C) 2.50.
D) 4.00.
E) 10.00.

Question 75

Seventh Heaven takes tourists on helicopter tours of Hawaii. Each tourist buys a $150 ticket; the variable costs average $60 per person. Seventh Heaven has annual fixed costs of $702,000.
Required:
A. Compute the average number of tours the company must conduct per month to break even.
B. Compute the average sales revenue needed per month to produce a target average profit of $36,000 per month. See below (answer to "B").
C. Calculate the contribution margin ratio.
D. Determine whether the actions that follow will increase, decrease, or not affect the company's break-even point.
1. A decrease in tour prices.
2. The termination of a salaried clerk (no replacement is planned).
3. A decrease in the number of tours sold.

Question 76

Goldstone Company is studying the impact of the following:
1. An increase in sales price on the break-even point.
2. A decrease in fixed costs on the contribution margin.
3. An increase in the contribution margin on the break-even point.
4. A decrease in the variable cost per unit on the sales volume needed to achieve Goldstone's $68,000 target profit.
5. An increase in sales commissions on the contribution margin and the break-even point.
6. A decrease in anticipated advertising outlays on fixed cost and the break-even point.
Required:
Determine the impact of these operating changes (increase, decrease, no effect) on the item(s) noted.

Question 77

A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income. How much should the firm add to fixed costs when figuring the sales revenues necessary to produce this income level?

A) $200,000.
B) $300,000.
C) $500,000.
D) $833,333.
E) $1,250,000.

Question 78

Miller Company has an operating leverage factor of 5. Which of the following statements is true?
Thus, an 8% change in ______ should result in a 40% change in _____. The respective amounts that change are:

A) An 8% change in income should result in a 40% change in sales revenue.
B) An 8% change in sales revenue should result in a 40% change in income.
C) An 8% change in variable costs should result in a 40% change in contribution margin.
D) An 8% change in fixed costs should result in a 40% change in income.
E) An 8% change in variable costs should result in a 40% change in break-even sales.

Question 79

When advanced manufacturing systems are installed, what effect does such installation usually have on fixed costs and the break-even point?

A) Choice A
B) Choice B
C) Choice C
D) Choice D
E) Choice E

Question 80

The information that follows was obtained from the accounting records of Gladstone Manufacturing during a period when the company sold 100,000 units.
Required:
A. Compute the company's per-unit contribution margin and break-even point in units.
B. How many units must Gladstone sell to produce a target profit of $550,400?
C. Assume that Gladstone was able to reduce the variable cost per unit by $4. What selling price could management charge if it desired to maintain the current break-even point?
D. Depreciation charges of $640,000 are included in the firm's fixed costs of $6,016,000. If these charges were to increase by 10%, what effect, if any, would this cost increase have on the company's contribution margin?