Multiple Choice Questions
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 above.
Answer:
E LO: 1 Type: RC
2. 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.
Answer:
A LO: 1 Type: RC
3. 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.
Answer:
B LO: 1 Type: RC
4. 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.
Answer:
A LO: 1 Type: N
5. Which of the following would take place if a
company were able to reduce its variable cost per unit?
Contribution
Margin
|
Break-even
Point
|
|||
A.
|
Increase
|
Increase
|
||
B.
|
Increase
|
Decrease
|
||
C.
|
Decrease
|
Increase
|
||
D.
|
Decrease
|
Decrease
|
||
E.
|
Increase
|
No effect
|
||
Answer:
B LO: 1 Type: N
6. Which of the following would take place if a
company experienced an increase in 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 above events would
occur.
Answer:
B LO: 1 Type: N
7. Assuming no change in sales volume, an
increase in a firm's per-unit contribution margin would:
A. increase net income.
B. decrease net income.
C. have no effect on net income.
D. increase fixed costs.
E. decrease fixed costs.
Answer:
A LO: 1 Type: N
8. 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. pursue more than one of the above actions.
Answer:
B LO: 1 Type: N
9. A company has fixed costs of $900 and a
per-unit contribution margin of $3.
Which of the following statements is (are) 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 make money at the rate of $3 per unit.
D. The firm will definitely lose money in this
situation.
E. Statements "A" and "C"
are true.
Answer:
E LO: 1 Type: N
10. 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, the bottom-line 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 those in choices
"A," "B," and "C" but one that can be derived
based on the information presented.
Answer:
B LO: 1
Type: A
11. At a volume of 15,000 units, Boston reported
sales revenues of $600,000, variable costs of $225,000, and fixed costs of
$120,000. The company's contribution
margin per unit is:
A. $17.
B. $25.
C. $47.
D. $55.
E. an amount other than those above.
Answer:
B LO: 1 Type: A
12. A recent income statement of Banks Corporation
reported the following data:
Sales revenue
|
$8,000,000
|
Variable costs
|
5,000,000
|
Fixed costs
|
2,200,000
|
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. an
amount other than those above.
Answer: B LO: 1
Type: A
13. A recent income statement of Fox Corporation
reported the following data:
Sales revenue
|
$3,600,000
|
Variable costs
|
1,600,000
|
Fixed costs
|
1,000,000
|
If
these data are based on the sale of 10,000 units, the break-even point would
be:
A. 2,000 units.
B. 2,778 units.
C. 3,600 units.
D. 5,000 units.
E. an amount other than those above.
Answer:
D LO: 1 Type: A
14. A recent income statement of Yale Corporation
reported the following data:
Sales revenue
|
$2,500,000
|
Variable costs
|
1,500,000
|
Fixed costs
|
800,000
|
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. an amount other than those above.
Answer:
A LO: 1 Type: A
15. Lawton, 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, Lawton'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 those given
above.
Answer: C LO: 1
Type: A
16. Green, 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. an amount other than those above.
Answer:
B LO: 1 Type: A
17. 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. an amount other than those above.
Answer:
C LO: 1 Type: A
18. Strand 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 those in choices
"A," "B," and "C" but one that can be derived
based on the information presented.
Answer: B LO: 1
Type: A
19. 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. an amount other than those above.
Answer:
D LO: 1 Type: A
20. 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.
Answer:
D LO: 2 Type: RC
21. At a volume level of 500,000 units, Sullivan
reported the following information:
Sales price
|
$60
|
Variable cost per unit
|
20
|
Fixed cost per unit
|
4
|
The
company's contribution-margin ratio is:
A. 0.33.
B. 0.40.
C. 0.60.
D. 0.67.
E. an amount other than those above.
Answer:
D LO: 2 Type: A
22. Which of the following expressions can be
used to calculate the break-even point with the contribution-margin ratio
(CMR)?
A. CMR ÷ fixed costs.
B. CMR x fixed costs.
C. Fixed costs ÷ CMR.
D. (Fixed costs + variable costs) x CMR.
E. (Sales revenue - variable costs) ÷ CMR.
Answer:
C LO: 2 Type: RC
Use the
following to answer questions 23-30:
23. Line A is the:
A. total revenue line.
B. fixed cost line.
C. variable cost line.
D. total cost line.
E. profit line.
Answer:
A LO: 3 Type: RC
24. Line C represents the level of:
A. fixed cost.
B. variable cost.
C. semivariable cost.
D. total cost.
E. mixed cost.
Answer:
A LO: 3 Type: RC
25. The slope of line A is equal to the:
A. fixed cost per unit.
B. selling price per unit.
C. profit per unit.
D. semivariable cost per unit.
E. unit contribution margin.
Answer:
B LO: 3 Type: RC
26. The slope of line B is equal to the:
A. fixed cost per unit.
B. selling price per unit.
C. variable cost per unit.
D. profit per unit.
E. unit contribution margin.
Answer:
C LO: 3 Type: RC
27. The vertical distance between the total cost
line and the total revenue line represents:
A. fixed cost.
B. variable cost.
C. profit or loss at that volume.
D. semivariable cost.
E. the safety margin.
Answer:
C LO: 3 Type: RC
28. Assume that the firm whose cost structure is
depicted in the figure expects to produce a loss for the upcoming period. The loss would be shown on the graph:
A. by the area immediately above the break-even
point.
B. by the area immediately below the total cost
line.
C. by the area diagonally to the right of the
break-even point.
D. by the area diagonally to the left of the
break-even point.
E. in some other area not mentioned above.
Answer:
D LO: 3 Type: RC
29. At a given sales volume, the vertical
distance between the fixed cost line and the total cost line represents:
A. fixed cost.
B. variable cost.
C. profit or loss at that volume.
D. semivariable cost.
E. the safety margin.
Answer:
B LO: 3 Type: RC
30. Assume that the firm whose cost structure is
depicted in the figure expects to produce a profit for the upcoming accounting
period. The profit would be shown on the
graph by the letter:
A. D.
B. E.
C. F.
D. G.
E. H.
Answer:
D LO: 3 Type: RC
Use the
following to answer questions 31-32:
31. Line A is the:
A. fixed cost line.
B. variable cost line.
C. total cost line.
D. total revenue line.
E. profit line.
Answer:
E LO: 3 Type: N
32. The triangular area between the horizontal
axis and Line A, to the right of 4,000, represents:
A. fixed cost.
B. variable cost.
C. profit.
D. loss.
E. sales revenue.
Answer:
C LO: 3 Type: RC
33. A recent income statement of Oslo Corporation
reported the following data:
Units sold
|
8,000
|
Sales revenue
|
$7,200,000
|
Variable costs
|
4,000,000
|
Fixed costs
|
1,600,000
|
If
the company desired to earn a target net profit of $480,000, it would have to
sell:
A. 1,200 units.
B. 2,800 units.
C. 4,000 units.
D. 5,200 units.
E. an amount other than those above.
Answer: D LO: 4
Type: A
34. Yellow, 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 have to
achieve to earn a target net profit of $240,000?
A. $400,000.
B. $500,000.
C. $600,000.
D. $750,000.
E. $900,000.
Answer:
C LO: 4 Type: A
Use the
following to answer questions 35-37:
Archie 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.
35. Archie:
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.
Answer:
C LO: 1 Type: A
36. Each unit that the company sells will:
A. increase overall profitability by $20.
B. increase overall profitability by $30.
C. increase overall profitability by $50.
D. increase overall profitability by some other
amount.
E. decrease overall profitability by $5.
Answer:
A LO: 1 Type: A
37. In order to produce a target profit of
$22,000, Archie's dollar sales must total:
A. $8,440.
B. $21,100.
C. $1,000,000.
D. $1,055,000.
E. an amount other than those above.
Answer:
D LO: 4 Type: A
38. 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.
Answer:
C LO: 4 Type: RC
39. Maxie's budget for the upcoming year revealed
the following figures:
Sales revenue
|
$840,000
|
Contribution margin
|
504,000
|
Net income
|
54,000
|
If
the company's break-even sales total $750,000, Maxie's safety margin would be:
A. $(90,000).
B. $90,000.
C. $246,000.
D. $336,000.
E. $696,000.
Answer:
B LO: 4 Type: A
40. 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.
Answer:
D LO: 4 Type: N
41. Dana 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 profitability.
C. a $240,000 drop in profitability.
D. a $400,000 drop in profitability.
E. a change in profitability other than those
above.
Answer:
C LO: 4 Type: A
42. Grimes is studying the profitability of a
change in operation and has gathered the following information:
Current
Operation
|
Anticipated
Operation
|
|||
Fixed costs
|
$38,000
|
$48,000
|
||
Selling price
|
$16
|
$22
|
||
Variable cost
|
$10
|
$12
|
||
Sales (units)
|
9,000
|
6,000
|
||
Should
Grimes 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.
Answer:
C LO: 4 Type: A
43. Gleason 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?
Drop in
Sales Price
|
Increase in
Sales Volume
|
|
A.
|
Increase
|
Increase
|
B.
|
Increase
|
Decrease
|
C.
|
Increase
|
No
effect
|
D.
|
Decrease
|
Increase
|
E.
|
Decrease
|
Decrease
|
Answer:
C LO: 4 Type: A
44. 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.
Answer:
C LO: 5 Type: N
45. O'Dell
sells three products: R, S, and T. Budgeted
information for the upcoming accounting period follows.
Product
|
Sales Volume (Units)
|
Selling Price
|
Variable Cost
|
||
R
|
16,000
|
$14
|
$9
|
||
S
|
12,000
|
10
|
6
|
||
T
|
52,000
|
11
|
8
|
||
The company's weighted-average unit
contribution margin is:
A. $3.00.
B. $3.55.
C. $4.00.
D. $19.35.
E. an
amount other than those above.
Answer: B
LO: 5 Type: A
46. Wells 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. An amount other than those above.
E. Cannot be determined based on the information
presented.
Answer:
A LO: 5 Type: A
Use the following
to answer questions 47-50:
Lamar &
Co., makes and sells two types of shoes, Plain and Fancy. Data concerning these products are as
follows:
Plain
|
Fancy
|
||||
Unit selling
price
|
$20.00
|
$35.00
|
|||
Variable cost
per unit
|
12.00
|
24.50
|
|||
Sixty percent
of the unit sales are Plain, and annual fixed expenses are $45,000.
47. The weighted-average unit contribution margin
is:
A. $4.80.
B. $9.00.
C. $9.25.
D. $17.00.
E. an amount other than those above.
Answer:
B LO: 5 Type: A
48. Assuming that the sales mix remains constant,
the total number of units that the company must sell to break even is:
A. 2,432.
B. 2,647.
C. 4,737.
D. 5,000.
E. an amount other than those above.
Answer:
D LO: 5 Type: A
49. Assuming that the sales mix remains constant,
the number of units of Plain that the company must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.
Answer:
B LO: 5 Type: A
50. Assuming that the sales mix remains constant,
the number of units of Fancy that the company must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.
Answer:
A LO: 5 Type: A
51. 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 of the above are assumptions that
underlie cost-volume-profit analysis.
Answer:
E LO: 6 Type: RC
52. 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.
Answer:
C LO: 6 Type: RC
53. 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.
Answer:
A LO: 6 Type: N
54. 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.
Answer:
C LO: 7 Type: RC
55. 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.
Answer:
B LO: 7 Type: RC
56.
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.
Answer: B LO: 7
Type: RC
57. 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.
Answer:
B LO: 8 Type: RC
58. A manager who wants to determine the
percentage impact on net 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.
Answer:
C LO: 8 Type: RC
59. Which of the following calculations can be
used to measure a company's degree of operating leverage?
A. Contribution margin ÷ sales.
B. Contribution margin ÷ net income.
C. Sales ÷ contribution margin.
D. Sales ÷ net income.
E. Sales ÷ fixed costs.
Answer:
B LO: 8 Type: RC
60. 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?
Relative Use of Fixed
Costs as Opposed to
Variable Costs
|
Percentage Change in
Income Caused by
a Change in Sales
|
|||
A.
|
Greater
for Becker
|
Greater
for Becker
|
||
B.
|
Greater
for Becker
|
Lower
for Becker
|
||
C.
|
Greater
for Becker
|
Equal
for both
|
||
D.
|
Lower
for Becker
|
Greater
for Becker
|
||
E.
|
Lower
for Becker
|
Lower
for Becker
|
||
Answer:
A LO: 8 Type: RC
61. The following information relates to Day
Company:
Sales revenue
|
$12,000,000
|
Contribution margin
|
4,800,000
|
Net income
|
800,000
|
Day's
operating leverage factor is:
A. 0.067.
B. 0.167.
C. 0.400.
D. 2.500.
E. 6.000.
Answer: E LO: 8
Type: A
62. The following information relates to Paterno
Company:
Sales revenue
|
$10,000,000
|
Contribution margin
|
4,000,000
|
Net income
|
1,000,000
|
If
a manager at Paterno desired to determine the percentage impact on net 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.
Answer:
D LO: 8 Type: A, N
Use the
following to answer questions 63-64:
Edco Company
produced and sold 45,000 units of a single product last year, with the
following results:
Sales revenue
|
$1,350,000
|
Manufacturing
costs:
|
|
Variable
|
585,000
|
Fixed
|
270,000
|
Selling
costs:
|
|
Variable
|
40,500
|
Fixed
|
54,000
|
Administrative
costs:
|
|
Variable
|
184,500
|
Fixed
|
108,000
|
63. Edco's operating leverage factor was:
A. 4.
B. 5.
C. 6.
D. 7.
E. 8.
Answer:
B LO: 8 Type: A
64. If Edco'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. An amount other than those above.
Answer:
D LO: 8 Type: A
65. When advanced manufacturing systems are
installed, what effect does such installation usually have on fixed costs and
the break-even point?
Fixed Costs
|
Break-even Point
|
||
A.
|
Increase
|
Increase
|
|
B.
|
Increase
|
Decrease
|
|
C.
|
Decrease
|
Increase
|
|
D.
|
Decrease
|
Decrease
|
|
E.
|
Do not change
|
Does not
change
|
|
Answer:
A LO: 8 Type: RC
66. 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.
Answer:
B LO: 10 Type: N
67. 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.
Answer:
D LO: 11 Type: A
68. Barney, 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:
Sales revenue
|
$1,350,000
|
Variable costs
|
810,000
|
Fixed costs
|
432,000
|
How
many units must Barney sell to earn an after-tax profit of $180,000?
A. 42,000.
B. 45,000.
C. 51,000.
D. 61,000.
E. An amount other than those above.
Answer:
D LO: 11 Type: A
EXERCISES
Basic CVP
Relationships
69. 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
company $3 to make and deliver each pizza.
Required:
A.
How
many pizzas must Vince's sell to break even?
B.
How
many pizzas must the company sell to earn a target net profit of $54,000?
C.
If
budgeted sales total 9,900 pizzas, how much is the company's safety margin?
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.
LO: 1,
4 Type: RC, A
Answer:
A.
|
Selling price per pizza
|
$9
|
|
Less:
Variable cost per pizza
|
3
|
||
Unit
contribution margin
|
$6
|
||
Break-even pizzas: $48,000 ¸ $6 = 8,000
|
|||
B.
|
Pizzas to earn $54,000: ($48,000 + $54,000) ÷ $6 = 17,000
|
||
C.
|
Safety margin: (9,900 x $9) - (8,000 x $9) = $17,100
|
||
D.
|
The contribution margin is the amount that each unit
(pizza) contributes toward covering fixed cost and producing a profit. Once a company's fixed costs are covered,
operating income will increase by the amount of the contribution margin. Mathematically, it is computed as the
difference between selling price and the variable cost per unit.
|
||
Basic CVP
Relationships
70. 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.
How
many tours must the company conduct in a month to break even?
B.
Compute
the sales revenue needed to produce a target net profit of $36,000 per month.
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.
LO: 1, 2,
4 Type: A, N
Answer:
A.
|
Selling
price per tour
|
$150
|
|||
Less:
Variable cost per tour
|
60
|
||||
Unit
contribution margin
|
$ 90
|
||||
Break-even
tours: ($702,000 ¸ 12 months) ¸ $90 = 650
|
|||||
B.
|
Tours to
earn $36,000: [($702,000 ÷ 12 months) + $36,000] ÷ $90 = 1,050
|
||||
C.
|
Contribution
margin ratio: $90 ÷ $150 = 0.6
|
||||
D.
|
1.
|
Increase
|
|||
2.
|
Decrease
|
||||
3.
|
No effect
|
||||
CVP:
Analysis of Operations
71.
Thompson
Company is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows.
No. 65
|
No. 66
|
|||
Annual fixed
costs
|
$220,000
|
$340,000
|
||
Variable cost
per unit
|
33
|
25
|
||
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. Thompson 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?
LO: 1,
4 Type: A
Answer:
A.
|
Selling price
|
$50
|
Less:
Variable cost [$25 + ($50 x 10%)]
|
30
|
|
Unit contribution
margin
|
$20
|
|
Break-even
units: $340,000 ÷ $20 = 17,000
Break-even
sales: 17,000 x $50 = $850,000
|
||
B.
|
No. 65
|
No. 66
|
||||||
Sales*
|
$1,250,000
|
$1,250,000
|
||||||
Less:
Variable costs**
|
950,000
|
750,000
|
||||||
Contribution
margin
|
$ 300,000
|
$ 500,000
|
||||||
Less:
Fixed costs
|
220,000
|
340,000
|
||||||
Operating
income
|
$ 80,000
|
$ 160,000
|
||||||
*25,000 x $50
|
||||||||
**No. 65: 25,000 x [$33 + ($50 x 10%)]; No. 66: 25,000 x
[$25 + ($50 x 10%)]
|
||||||||
Product no.
66 is more profitable: $160,000 vs. $80,000
|
||||||||
C.
|
X = Number of
units
($50 - $38)X
- $220,000 = ($50 - $30)X - $340,000
$12X -
$220,000 = $20X - $340,000
$8X =
$120,000
X = 15,000
units
|
|||||||
Break-Even Analysis,
Decision Making
72. The Bruggs & Strutton 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.
Sales
|
$1,600,000
|
Less:
Cost of goods sold
|
1,120,000
|
Gross
margin
|
$ 480,000
|
Less:
Operating expenses
|
100,000
|
Net
income
|
$ 380,000
|
Cost
of goods sold consists of $800,000 of variable costs and $320,000 of fixed
costs. Operating expenses consist of
$40,000 of variable costs and $60,000 of fixed costs.
Required:
A.
Calculate
the break-even point in units and sales dollars.
B.
Calculate
the safety margin.
C.
Bruggs
& Strutton 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.
LO: 4 Type: A
Answer:
A.
|
Sales
|
$1,600,000
|
||||
Less:
Variable costs ($800,000 + $40,000)
|
840,000
|
|||||
Contribution
margin
|
$ 760,000
|
|||||
Unit
contribution margin: $760,000 ÷ 40,000 units = $19
Break-even
point in units: ($320,000 + $60,000) ÷ $19 = 20,000 units
Unit selling
price: $1,600,000 ÷ 40,000 units = $40
Break-even
point in dollars: 20,000 units x $40 = $800,000
|
||||||
B.
|
Safety
margin: $1,600,000 - $800,000 = $800,000
|
|||||
C.
|
Sales
(6,000 x $25)
|
$ 150,000
|
||||
Less:
Variable costs at $20.46*
|
122,760
|
|||||
Increase
in profit
|
$ 27,240
|
|||||
*($800,000 + $40,000) ÷ 40,000 units = $21.00; $21.00 -
$0.54 = $20.46
|
||||||
Impact of Operating
Changes
73. Oakmark 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. All
other things being equal, 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. All other things
being equal, if management desires to keep the firm's current break-even point,
what must happen to Oakmark'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 net 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.
LO: 1,
4 Type: A
Answer:
A.
|
Case no. 1:
|
||||
Selling price per unit: $4,900,000 ÷
70,000 units = $70
Unit contribution margin: $70 - $20 =
$50
Current break-even point: $2,800,000 ÷
$50 = 56,000 units
New level of fixed cost: X ÷ $50 =
52,000 units; X = $2,600,000
Fixed costs must decrease by $200,000
($2,800,000 - $2,600,000).
|
|||||
Case no. 2:
|
|||||
To keep the same break-even point, the
contribution margin must remain at $50.
Thus, the selling price must increase to $72 to offset the $2 hike in
variable cost.
|
|||||
Break-even:
Fixed cost ÷ $48 = 56,000 units; fixed cost = $2,688,000
Fixed
costs must fall by $112,000 ($2,800,000 - $2,688,000) if the selling price remains
constant.
|
|||||
B.
|
1.
|
Decrease
|
|||
2.
|
Increase
|
||||
3.
|
No
effect
|
||||
Impact of
Operating Changes
74. Wilcox 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 Wilcox'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).
Per-Unit
Contribution
Margin
|
Break-Even
Point
|
||
1.
|
______
|
______
|
|
2.
|
______
|
______
|
|
3.
|
______
|
______
|
|
4.
|
______
|
______
|
|
5.
|
______
|
______
|
LO: 1,
4 Type: N
Answer:
Per-Unit
Contribution
Margin
|
Break-Even Point
|
||
1.
|
INC
|
DEC
|
|
2.
|
DEC
|
INC
|
|
3.
|
NE
|
NE
|
|
4.
|
NE
|
DEC
|
|
5.
|
INC
|
II
|
Impact of
Operating Changes
75.
Gladstone
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 Gladstone's $68,000 target
net profit.
5. An increase in sales commissions on the break-even point and the
contribution margin.
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.
LO: 1,
4 Type: N
Answer:
1.
|
Decrease
|
4.
|
Decrease
|
2.
|
No effect
|
5.
|
Increase, decrease
|
3.
|
Decrease
|
6.
|
Decrease, decrease
|
Cost-Volume-Profit
Analysis, Multiple Products
76. Boise Company manufactures and sells three
products: Good, Better, and Best. Annual
fixed costs are $3,315,000, and data about the three products follow.
Good
|
Better
|
Best
|
||||||
Sales mix in
units
|
30%
|
50%
|
20%
|
|||||
Selling price
|
$250
|
$350
|
$500
|
|||||
Variable cost
|
100
|
150
|
250
|
|||||
Required:
A.
Determine
the weighted-average unit contribution margin.
B.
Determine
the break-even volume in units for each product.
C.
Determine
the total number of units that must be sold to obtain a profit for the company
of $234,000.
D.
Assume
that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%,
respectively. Will the number of units
required to break-even increase or decrease?
Explain. Hint: Detailed
calculations are not needed to obtain the proper solution.
LO: 5 Type: A, N
Answer:
A.
|
Good
|
Better
|
Best
|
||||||||
Selling price
|
$250
|
$350
|
$500
|
||||||||
Less: Variable cost
|
100
|
150
|
250
|
||||||||
Contribution margin
|
$150
|
$200
|
$250
|
||||||||
Good: $150 x 30%
|
$ 45
|
||||||||||
Better: $200 x 50%
|
100
|
||||||||||
Best: $250 x 20%
|
50
|
||||||||||
Weighted-average CM
|
$195
|
||||||||||
B.
|
Break-even
volume: $3,315,000 ÷ $195 = 17,000 units
Good: 17,000
x 30% = 5,100 units
Better:
17,000 x 50% = 8,500 units
Best: 17,000
x 20% = 3,400 units
|
||||||||||
C.
|
Volume to
earn $234,000: ($3,315,000 + $234,000) ¸ $195 = 18,200 units
|
||||||||||
D.
|
The number of
units required would increase since a greater proportion of lower-contribution-margin
units (specifically, Good) would be sold.
|
||||||||||
Cost-Volume-Profit
Analysis, Multiple Products
77. Alphabet Corporation sells three products: J,
K, and L. The following information was
taken from a recent budget:
J
|
K
|
L
|
||||
Unit sales
|
40,000
|
130,000
|
30,000
|
|||
Selling price
|
$60
|
$80
|
$75
|
|||
Variable cost
|
40
|
65
|
50
|
|||
Total
fixed costs are anticipated to be $2,450,000.
Required:
A.
Determine
Alphabet's sales mix.
B.
Determine
the weighted-average contribution margin.
C.
Calculate
the number of units of J, K, and L that must be sold to break even.
D.
If
Alphabet desires to increase company profitability, should it attempt to
increase or decrease the sales of product K relative to those of J and L? Briefly explain.
LO: 5 Type: A, N
Answer:
A.
|
Sales mix:
40,000 + 130,000 + 30,000 = 200,000 units
|
J:
40,000 ÷ 200,000 = 20%
|
|
K:
130,000 ÷ 200,000 = 65%
|
|
L:
30,000 ÷ 200,000 = 15%
|
|
B.
|
Unit
contribution margins:
|
J
|
K
|
L
|
|||||||
Selling
price
|
$60
|
$80
|
$75
|
||||||
Less:
Variable cost
|
40
|
65
|
50
|
||||||
Contribution
margin
|
$20
|
$15
|
$25
|
||||||
J: $20 x 20%
|
$ 4.00
|
||||||||
K:
$15 x 65%
|
9.75
|
||||||||
L:
$25 x 15%
|
3.75
|
||||||||
Weighted-average
CM
|
$17.50
|
||||||||
C.
|
Break-even volume: $2,450,000 ÷ $17.50 =
140,000 units
J: 140,000 x 20% =
28,000 units
K: 140,000 x 65% =
91,000 units
L: 140,000 x 15% =
21,000 units
|
||||||||
D.
|
As measured in units, K has 65% of the
company's sales mix. Unfortunately,
though, K is Alphabet's least profitable product ($15 contribution margin vs.
$20 and $25). To increase overall
profitability, the firm should strive to decrease sales of K relative to
those of J and L.
|
||||||||
Traditional
and Contribution Income Statements
78. Price Publications, Inc., produces and sells
business books. The results of the
company's operations for the year ended December 31, 20x1, are given below.
Sales revenue
|
$400,000
|
Manufacturing
costs:
|
|
Fixed
|
100,000
|
Variable
|
200,000
|
Selling
costs:
|
|
Fixed
|
10,000
|
Variable
|
20,000
|
Administrative
costs:
|
|
Fixed
|
24,000
|
Variable
|
6,000
|
Required:
A.
Prepare
a traditional income statement for the company.
B.
Prepare
a contribution income statement for the company.
C.
Which
income statement (traditional or contribution) would an operating manager most
likely use to study changes in operating income that are caused by changes in
sales? Why?
LO: 7 Type: A, N
Answer:
A.
|
Sales
|
$400,000
|
|||
Less:
Cost of goods sold
|
300,000
|
||||
Gross
margin
|
$100,000
|
||||
Less
operating expenses:
|
|||||
Selling
|
$30,000
|
||||
Administrative
|
30,000
|
60,000
|
|||
Net
income
|
$ 40,000
|
||||
B.
|
Sales
|
$400,000
|
|||
Less variable expenses:
|
|||||
Manufacturing
|
$200,000
|
||||
Selling
|
20,000
|
||||
Administrative
|
6,000
|
226,000
|
|||
Contribution margin
|
$174,000
|
||||
Less fixed expenses:
|
|||||
Manufacturing
|
$100,000
|
||||
Selling
|
10,000
|
||||
Administrative
|
24,000
|
134,000
|
|||
Net income
|
$ 40,000
|
||||
C.
|
The
contribution statement would be used because the fixed and variable costs
must be separated in order to measure the effect of a volume change on total
costs. Unfortunately, a traditional
income statement does not provide the necessary information.
|
||||
Traditional
and Contribution Income Computations
79.
High
Point Corporation reported sales revenues of $1,850,000 for the period just
ended. Cost of goods sold, selling
expenses, and administrative expenses totaled $1,200,000, $280,000, and
$170,000, respectively. A detailed
analysis of the latter three amounts revealed respective fixed cost components
of $780,000, $60,000, and $130,000.
Required:
A.
Determine
the amounts that High Point would report on a traditional income statement for
(1) gross margin, (2) contribution margin, and (3) net income.
B.
Determine
the amounts that High Point would report on a contribution income statement for
(1) gross margin, (2) contribution margin, and (3) net income.
C.
Which
of the two income statements (traditional or contribution) is more useful for
studying a company's cost-volume-profit relationships.
LO: 7 Type: A, N
Answer:
A.
|
1.
|
Sales ($1,850,000) - cost of goods sold ($1,200,000) = gross
margin ($650,000)
|
|||
2.
|
$0. The contribution
margin is not disclosed on a traditional income statement.
|
||||
3.
|
Gross margin ($650,000) - selling expenses ($280,000) -
administrative expenses ($170,000) = net income ($200,000)
|
||||
B.
|
1.
|
$0. Gross margin is not
disclosed on a contribution income statement.
|
|||
2.
|
Variable expenses = total expenses - fixed expenses:
|
||||
Cost of goods sold: $1,200,000 -
$780,000
|
$420,000
|
||||
Selling expenses: $280,000 - $60,000
|
220,000
|
||||
Administrative expenses: $170,000 -
$130,000
|
40,000
|
||||
Total variable expenses
|
$680,000
|
||||
Sales ($1,850,000) - variable expenses ($680,000) = contribution
margin ($1,170,000)
|
|||||
3.
|
Contribution margin ($1,170,000) - fixed expenses ($780,000 +
$60,000 + $130,000 = $970,000) = net income ($200,000)
|
||||
C.
|
Contribution income statement
|
||||
Cost
Structure, Operating Leverage
80. Once upon a time, two brothers (Barry and
Larry) dreamt about owning and operating companies in the same line of
business. Barry believed in maintaining
a very large, highly efficient manual labor force; Larry, on the other hand,
favored automated-production processes.
One business was located in Madison and the other was located in
Austin. Recent data follow.
Madison
|
Austin
|
||||||
Sales
|
$2,000,000
|
$2,000,000
|
|||||
Contribution margin
|
1,700,000
|
400,000
|
|||||
Net income
|
150,000
|
150,000
|
|||||
Required:
A.
Which
of the two businesses, Madison or Austin, has the highest level of (1) variable
cost and (2) highest level of fixed cost?
Explain how you determined your answer.
B.
Determine
the probable owner of the firm located in (1) Madison and (2) Austin. Briefly explain your logic.
C.
Compute
the operating leverage factor for Madison and Austin.
D.
Suppose
that both Madison and Austin had the opportunity to increase sales by 10%. Which of the two locations would experience a
larger percentage change in net income?
Why?
LO: 8 Type: A, N
Answer:
A.
Given
that both locations have identical sales, Austin has a higher level of variable
cost ($1,600,000 vs. $300,000) as indicated by a smaller contribution
margin. Madison, in contrast, has a
higher amount of fixed cost ($1,550,000 vs. $250,000) because of the larger
contribution margin and a net income equal to that of Austin.
B.
Operations
with sizable labor forces have high variable costs; conversely, automated
facilities give rise to high fixed costs (e.g., depreciation, lease payments,
maintenance). Thus, Barry's philosophy
is most closely associated with the Austin facility, and Larry's seems
consistent with the cost structure in Madison.
C.
Madison:
$1,700,000 ÷ $150,000 = 11.33
Austin:
$400,000 ÷ $150,000 = 2.67
D.
Madison
would experience a larger percentage change in net income because it is more
highly leveraged than Austin.
Mathematically, the percentage change in income can be computed by
multiplying the operating leverage factor by the percentage change in sales
revenue.
Operating
Leverage
81. Metropolitan Enterprises is studying the
addition of a new product that would have an expected selling price of $160 and
expected variable cost of $100.
Anticipated demand is 8,000 units.
A
new salesperson must be hired because the company's current sales force is
working at capacity. Two compensation
plans are under consideration:
Plan 1: An annual salary of $32,000 plus
10% commission based on gross sales dollars
Plan 2: An annual salary of $140,000 and no commission
Required:
A.
What
is meant by the term "operating leverage"?
B.
Calculate
the contribution margin and net income of the two plans at 8,000 units.
C.
Compute
the operating leverage factor of the two plans at 8,000 units. Which of the two plans is more highly
leveraged? Why?
D.
Assume
that a general economic downturn occurred during year no. 2, with product
demand falling from 8,000 to 6,400 units.
By using the operating leverage factors, determine and show which plan
would produce a larger percentage decrease in net income.
LO: 8 Type: A, N
Answer:
A.
|
Operating leverage refers to the use of fixed
costs in an organization's overall cost structure. An organization that has a relatively high
proportion of fixed costs and low proportion of variable costs has a high
degree of operating leverage.
|
|||||||
B.
|
Plan 1
|
Plan 2
|
||||||
Sales revenue: 8,000 units x $160
|
$1,280,000
|
$1,280,000
|
||||||
Less variable costs:
|
||||||||
Product
cost: 8,000 units x $100
|
$ 800,000
|
$ 800,000
|
||||||
Sales
commissions: $1,280,000 x 10%
|
128,000
|
0
|
||||||
Total
variable cost
|
$ 928,000
|
$ 800,000
|
||||||
Contribution margin
|
$ 352,000
|
$ 480,000
|
||||||
Fixed costs
|
32,000
|
140,000
|
||||||
Net income
|
$ 320,000
|
$ 340,000
|
||||||
C.
|
Plan 1: $352,000 ÷ $320,000 = 1.1
Plan 2: $480,000 ÷ $340,000 = 1.41
Plan 2 has the higher degree of operating
leverage because it has the higher operating
leverage factor.
|
|||||||
D.
|
Metropolitan would experience a larger
percentage decrease in income if it adopts Plan 2. This situation arises because Plan 2 has a
higher degree of operating leverage.
The percentage decreases in profitability can
be figured by multiplying the percentage decrease in sales revenue by the
operating leverage factor. Sales
dropped from 8,000 units to 6,400 units, or 20%. Thus:
Plan 1: 20% x 1.1 =
22.0%
Plan 2: 20% x 1.41 =
28.2%
|
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DISCUSSION QUESTIONS
Cost-Volume-Profit
Analysis
82. The BoSan Corporation makes major household
appliances such as refrigerators, stoves, and dishwashers. Sales are heavily dependent on the number of
housing starts and the level of disposable income. Next year, the number of housing starts in
the Central region is expected to be the same as this year's; however, about
two-thirds of these starts will be for rental apartments as compared to an
historical average of one-third. The
remaining housing starts will be for single-family homes and upscale
condominiums.
BoSan
generally makes two models of each product: Economy (fully functional, but with
few special features) and Prestige (with the most popular special
features). BoSan assumes a product mix
of 40% Economy and 60% Prestige.
Required:
A.
Explain
how a cost-volume-profit (CVP) analysis may be used by management.
B.
One
of the assumptions that underlies CVP analysis is a constant sales mix over the
relevant range of activity. What are
three other assumptions of CVP analysis?
C.
Describe
how the percentage change in rental units could create a problem with BoSan's
CVP analysis.
LO: 1, 5,
6 Type: RC, N
Answer:
A.
CVP
analysis may be used to perform "what if" analyses that allow
management to study the effects of various operating changes on firm
profitability. For example, the effects
of changes in selling price, variable costs, fixed costs, and volume may be
explored by manipulating the CVP model with different values for these items.
B.
Three
additional assumptions for the CVP model are:
·
The
per-unit selling price is constant.
·
Cost
behavior is linear over the relevant range—that is, variable cost per unit is
constant and fixed costs in total are constant.
·
The
number of units manufactured and sold is the same.
C.
The
shift toward more apartments and fewer single-family homes and upscale
condominiums may mean that demand for the Economy models will increase relative
to the demand for Prestige models. The
rental apartment generally will be used for households with lower income.
The shift
in buying habits could create a problem since the CVP model assumes a constant
sales mix. The mix change could
invalidate previous CVP studies.
Contribution
Margin
83. Maddox Corporation's product no. H647 has a
negative contribution margin. How can
such a situation arise? Should the
company continue to stock and sell product no. H647? Explain.
LO: 1 Type: RC, N
Answer:
A negative
contribution arises because selling price is less than variable cost. Several reasons may create this situation:
(1) inefficient operations and, thus, higher costs; (2) a very competitive
marketplace, which has forced the firm to lower its price; and (3) a loss leader
whereby Maddox is purposely taking a loss on product no. H647 with the intent
of stimulating customer demand for other, more profitable products.
Each unit
sold will lower overall profitability so, technically, Maddox should not
continue to sell product no. H647.
However, for reasons (2) and (3) above, the firm might decide otherwise
and stick with this "loser."
Cost
Structure and Operating Leverage
84. Operating leverage is an important concept
for many companies.
Required:
A.
Define
operating leverage.
B.
Assume
that a firm pays no income taxes and is planning to increase its selling
price. If sales volume in units does not
change, what will be the effect on the operating leverage factor? Explain.
C.
Assume
that another firm that pays no income taxes is planning to increase fixed
manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production, the total
manufacturing costs will be unchanged. What
will this change do to the operating leverage factor? Explain.
LO: 8 Type: RC, N
Answer:
A.
Mathematically,
operating leverage is contribution margin divided by net income. The degree of operating leverage indicates a
company's ability to operate with a given amount of fixed cost relative to
variable cost.
B.
The
increase in selling price with no change in units sold will increase both
contribution margin and net income by the same dollar amount. The percentage change in net income will be
greater than the percentage change in contribution margin and, thus, the
operating leverage factor will decrease.
C.
The
decrease in variable costs will increase the contribution margin, but net
income will not change because total costs remain the same. The operating leverage factor will therefore
increase.
Advanced
Manufacturing Effects on Cost-Volume-Profit Relationships
85. Many firms are moving toward flexible
manufacturing systems and adopting the just-in-time (JIT) philosophy.
Required:
A.
How
is cost behavior altered in the typical flexible manufacturing environment as
compared to a traditional manufacturing system?
What is the impact on the break-even point? Explain.
B.
One
of the assumptions underlying cost-volume profit analysis is that sales volume
and production volume are equal. Stated
another way, inventories are assumed to remain constant. Is this assumption likely to be violated
under an ongoing JIT philosophy?
Explain.
LO:
10 Type: RC, N
Answer:
A.
Variable
manufacturing costs typically decrease in a flexible manufacturing environment
and total fixed costs increase.
Automation (along with accompanying depreciation, lease, and maintenance
costs) and fewer people normally account for this change. The break-even point, as a result, often
increases.
B.
When
a company first changes to JIT, there is likely to be a drop-off in
inventories. However, the assumption of
no significant change in inventories will probably not be violated for an
ongoing JIT user. Any accompanying level
changes are not likely to be significant relative to the volume of production
and sales.
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