Chapter 8: Cost-Volume-Profit Analysis MULTIPLE CHOICE UE!TIO"!
1. CVP analy analysis sis can be used used to study study the the effect effect of: of: A. changes changes in selling selling prices prices on on a company' company'ss profitabili profitability. ty. B. changes changes in variable variable costs costs on on a company company's 's profitabil profitability ity.. C. changes changes in fixed costs costs on a company' company'ss profitabi profitability lity.. . changes changes in produc productt sales mix on a compan company's y's profitab profitability ility.. !. all all of of the the abov above. e. Ans"er: ! #$: 1 %ype: &C . %he brea()e brea()even ven point point is is that level level of activity activity "here: "here: A. total total reven revenue ue e*ual e*ualss total total cost. cost. B. variab variable le cost cost e*uals e*uals fixed fixed cost cost.. C. total total contribut contribution ion margin margin e*uals e*uals the sum of of variable variable cost plus plus fixed fixed cost. . sales revenue revenue e*uals e*uals total total variable variable cost. !. prof profit it is is grea greate terr than than +er +ero. o. Ans"er: A #$: 1 %ype: &C ,. %he unit unit contribut contribution ion margin margin is calcula calculated ted as the differe difference nce bet"een: bet"een: A. sellin selling g price price and fixe fixed d cost cost per unit. unit. B. selling selling price and variable variable cost per unit. unit. C. sellin selling g price price and prod product uct cost cost per per unit. unit. . fixed cost per unit unit and variab variable le cost cost per unit. unit. !. fixed cost per unit and produ product ct cost cost per per unit. unit. Ans"er: B #$: 1 %ype: &C -. hich of the follo"ing follo"ing "ould produce the largest increase increase in the the contribution contribution margin per unit/ A. A 0 increa increase se in in selli selling ng pric price. e. B. A 12 12 decre decrease ase in in selli selling ng pric price. e. C. A 1- 1- incre increase ase in vari variabl ablee cost. cost. . A 10 10 decrea decrease se in in fixe fixed d cost cost.. !. A , increa increase se in the the numb number er of unit unitss sold. sold. Ans"er: A #$: 1 %ype: 3
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2. hich of the follo"ing follo"ing "ould ta(e place if a company company "ere able able to reduce reduce its variable variable cost per unit/ Contribution Brea()even 4argin Point A. 5ncrease 5ncrease B. 5ncrease ecrease C. ecrease 5ncrease . ecrease ecrease !. 5ncrease 3o effect Ans"er: B #$: 1 %ype: 3 6. hich of the follo"ing follo"ing "ould ta(e place if a company company experienced an increase in fixed costs/ A. 3et incom incomee "oul "ould d incr increas ease. e. B. %he brea brea()e ()even ven poin pointt "ould "ould incre increase ase.. C. %he contr contribu ibutio tion n margin margin "ould "ould incr increas ease. e. . %he contributi contribution on margin margin "ould "ould decrease. decrease. !. 4ore 4ore than than one of of the above above even events ts "ould "ould occu occur. r. Ans"er: B #$: 1 %ype: 3 0. Assuming no change in sales volume7 volume7 an increase in a firm's firm's per)unit contribution margin "ould: "ould: A. incr increa ease se net net inc incom ome. e. B. decr decrea ease se net net inco income me.. C. have have no no effe effect ct on net net inco income. me. . incr increa ease se fix fixed ed cos costs ts.. !. decr decrea ease se fixe fixed d cost costs. s. Ans"er: A #$: 1 %ype: 3 8. A company company that desires desires to to lo"er its its brea()even brea()even point point should should strive strive to: A. decrea decrease se sellin selling g prices prices.. B. redu reduce ce var varia iabl blee cost costs. s. C. incr increa ease se fixe fixed d cos costs ts.. . sell sell more ore unit units. s. !. pursue pursue more more than than one one of the the above above acti actions ons.. Ans"er: B #$: 1 %ype: 3 9. A company company has fixed fixed costs costs of 9;; 9;; and and a per)unit per)unit contribu contribution tion margin margin of of ,. hich hich of the follo"ing statements is
contribu >contributes> tes> , to"ard to"ard coverin covering g the fixed fixed costs costs of 9;;. B. %he situati situation on describe described d is not possib possible le and there there must must be an error. error. C. $nce the the brea()even brea()even point point is reached reached77 the company company "ill "ill ma(e money money at the rate of , per per unit. . %he firm firm "ill "ill definite definitely ly lose lose money in this this situat situation. ion. !. ?tatem ?tatement entss >A> >A> and and >C> are true. true. Ans"er: ! #$: 1 %ype: 3
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2. hich of the follo"ing follo"ing "ould ta(e place if a company company "ere able able to reduce reduce its variable variable cost per unit/ Contribution Brea()even 4argin Point A. 5ncrease 5ncrease B. 5ncrease ecrease C. ecrease 5ncrease . ecrease ecrease !. 5ncrease 3o effect Ans"er: B #$: 1 %ype: 3 6. hich of the follo"ing follo"ing "ould ta(e place if a company company experienced an increase in fixed costs/ A. 3et incom incomee "oul "ould d incr increas ease. e. B. %he brea brea()e ()even ven poin pointt "ould "ould incre increase ase.. C. %he contr contribu ibutio tion n margin margin "ould "ould incr increas ease. e. . %he contributi contribution on margin margin "ould "ould decrease. decrease. !. 4ore 4ore than than one of of the above above even events ts "ould "ould occu occur. r. Ans"er: B #$: 1 %ype: 3 0. Assuming no change in sales volume7 volume7 an increase in a firm's firm's per)unit contribution margin "ould: "ould: A. incr increa ease se net net inc incom ome. e. B. decr decrea ease se net net inco income me.. C. have have no no effe effect ct on net net inco income. me. . incr increa ease se fix fixed ed cos costs ts.. !. decr decrea ease se fixe fixed d cost costs. s. Ans"er: A #$: 1 %ype: 3 8. A company company that desires desires to to lo"er its its brea()even brea()even point point should should strive strive to: A. decrea decrease se sellin selling g prices prices.. B. redu reduce ce var varia iabl blee cost costs. s. C. incr increa ease se fixe fixed d cos costs ts.. . sell sell more ore unit units. s. !. pursue pursue more more than than one one of the the above above acti actions ons.. Ans"er: B #$: 1 %ype: 3 9. A company company has fixed fixed costs costs of 9;; 9;; and and a per)unit per)unit contribu contribution tion margin margin of of ,. hich hich of the follo"ing statements is contribu >contributes> tes> , to"ard to"ard coverin covering g the fixed fixed costs costs of 9;;. B. %he situati situation on describe described d is not possib possible le and there there must must be an error. error. C. $nce the the brea()even brea()even point point is reached reached77 the company company "ill "ill ma(e money money at the rate of , per per unit. . %he firm firm "ill "ill definite definitely ly lose lose money in this this situat situation. ion. !. ?tatem ?tatement entss >A> >A> and and >C> are true. true. Ans"er: ! #$: 1 %ype: 3
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1;. ?anderson sells sells a single product product for 2; that has a variable cost cost of ,;. @ixed costs costs amount to 2 per unit "hen anticipated anticipated sales targets are met. met. 5f the company sells one unit unit in excess of its brea()even volume7 the bottom)line bottom)line profit "ill "ill be: A. 12. B. ;. C. 2;. . an amount amount that cannot cannot be derived derived based based on the the information information present presented. ed. !. an amount amount other other than those those in in choices choices >A7> >B7> >B7> and >C> >C> but one one that can can be derived derived based based on the information presented. Ans"er: B #$: 1 %ype: A 11. At a volume of 127;;; 127;;; units7 units7 Boston reported reported sales sales revenues revenues of 6;;7;;; 6;;7;;;77 variable variable costs of 27;;;7 and fixed costs of 1;7;;;. %he company's contribution contribution margin per unit is: A. 10. B. 2. C. -0. . 22. !. an amo amount unt other other than than those those above. above. Ans"er: B #$: 1 %ype: A 1. A recent income statement statement of Ban(s Corporation reported the follo"ing data: ?ales revenue Variable costs @ixed costs
87;;;7;;; 27;;;7;;; 7;;7;;;
5f these data are based on the sale of ;7;;; units7 the contribution margin per unit "ould be: A. -;. B. 12;. C. 9;. . ,6;. !. an amount amount other other than than those above. Ans"er: B #$: 1 %ype: A
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1,. A recent income statement of @ox Corporation reported the follo"ing data: ?ales revenue Variable costs @ixed costs
,76;;7;;; 176;;7;;; 17;;;7;;;
5f these data are based on the sale of 1;7;;; units7 the brea()even point "ould be: A. 7;;; units. B. 7008 units. C. ,76;; units. . 27;;; units. !. an amount other than those above. Ans"er: #$: 1 %ype: A 1-. A recent income statement of ale Corporation reported the follo"ing data: ?ales revenue Variable costs @ixed costs
72;;7;;; 172;;7;;; 8;;7;;;
5f these data are based on the sale of 27;;; units7 the brea()even sales "ould be: A. 7;;;7;;;. B. 7;67;;;. C. 72;;7;;;. . 1;7;;;7;;;. !. an amount other than those above. Ans"er: A #$: 1 %ype: A 12. #a"ton7 5nc.7 sells a single product for 1. Variable costs are 8 per unit and fixed costs total ,6;7;;; at a volume level of 6;7;;; units. Assuming that fixed costs do not change7 #a"ton's brea()even point "ould be: A. ,;7;;; units. B. -27;;; units. C. 9;7;;; units. . negative because the company loses on every unit sold. !. a positive amount other than those given above. Ans"er: C #$: 1 %ype: A
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16. reen7 5nc.7 sells a single product for ;. Variable costs are 8 per unit and fixed costs total 1;7;;; at a volume level of 27;;; units. Assuming that fixed costs do not change7 reen's brea()even sales "ould be: A. 16;7;;;. B. ;;7;;;. C. ,;;7;;;. . -8;7;;;. !. an amount other than those above. Ans"er: B #$: 1 %ype: A 10. $rion recently reported sales revenues of 8;;7;;;7 a total contribution margin of ,;;7;;;7 and fixed costs of 18;7;;;. 5f sales volume amounted to 1;7;;; units7 the company's variable cost per unit must have been: A. 1. B. ,. C. 2;. . 9. !. an amount other than those above. Ans"er: C #$: 1 %ype: A 18. ?trand has a brea()even point of 1;7;;; units. 5f the firm's sole product sells for -; and fixed costs total -8;7;;;7 the variable cost per unit must be: A. -. B. ,6. C. --. . an amount that cannot be derived based on the information presented. !. an amount other than those in choices >A7> >B7> and >C> but one that can be derived based on the information presented. Ans"er: B #$: 1 %ype: A 19. &ibco Co.7 ma(es and sells only one product. %he unit contribution margin is 6 and the brea() even point in unit sales is -7;;;. %he company's fixed costs are: A. -7;;;. B. 1-7-;;. C. -;7;;;. . 1--7;;;. !. an amount other than those above. Ans"er: #$: 1 %ype: A
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;. %he contribution)margin ratio is: A. the difference bet"een 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. . unit contribution margin divided by the selling price. !. unit contribution margin divided by fixed cost per unit. Ans"er: #$: %ype: &C 1. At a volume level of 2;;7;;; units7 ?ullivan reported the follo"ing information: ?ales price Variable cost per unit @ixed cost per unit
6; ; -
%he company's contribution)margin ratio is: A. ;.,,. B. ;.-;. C. ;.6;. . ;.60. !. an amount other than those above. Ans"er: #$: %ype: A . hich of the follo"ing expressions can be used to calculate the brea()even point "ith the contribution)margin ratio
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Hilton, Managerial Accounting, Seventh Edition
Ese the follo"ing to ans"er *uestions ,),;: C o s t-V o l u m e - P ro f it G ra p h
"
$100,000 G
!
80,000
#
60,000
C
40,000
%
20,000
0
1,000
2 ,0 0 0
3,000
4 ,0 0 0
5,000
U n it s
,. #ine A is the: A. total revenue line. B. fixed cost line. C. variable cost line. . total cost line. !. profit line. Ans"er: A #$: , %ype: &C -. #ine C represents the level of: A. fixed cost. B. variable cost. C. semivariable cost. . total cost. !. mixed cost. Ans"er: A #$: , %ype: &C 2. %he slope of line A is e*ual to the: A. fixed cost per unit. B. selling price per unit. C. profit per unit. . semivariable cost per unit. !. unit contribution margin. Ans"er: B #$: , %ype: &C
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6. %he slope of line B is e*ual to the: A. fixed cost per unit. B. selling price per unit. C. variable cost per unit. . profit per unit. !. unit contribution margin. Ans"er: C #$: , %ype: &C 0. %he vertical distance bet"een the total cost line and the total revenue line represents: A. fixed cost. B. variable cost. C. profit or loss at that volume. . semivariable cost. !. the safety margin. Ans"er: C #$: , %ype: &C 8. Assume that the firm "hose cost structure is depicted in the figure expects to produce a loss for the upcoming period. %he loss "ould be sho"n on the graph: A. by the area immediately above the brea()even point. B. by the area immediately belo" the total cost line. C. by the area diagonally to the right of the brea()even point. . by the area diagonally to the left of the brea()even point. !. in some other area not mentioned above. Ans"er: #$: , %ype: &C 9. At a given sales volume7 the vertical distance bet"een the fixed cost line and the total cost line represents: A. fixed cost. B. variable cost. C. profit or loss at that volume. . semivariable cost. !. the safety margin. Ans"er: B #$: , %ype: &C ,;. Assume that the firm "hose cost structure is depicted in the figure expects to produce a profit for the upcoming accounting period. %he profit "ould be sho"n on the graph by the letter: A. . B. !. C. @. . . !. F. Ans"er: #$: , %ype: &C
20
Hilton, Managerial Accounting, Seventh Edition
Ese the follo"ing to ans"er *uestions ,1),: P ro f i t -V o l u m e G ra p h $40,000
"
20,000
0 2,000
4,000
6,000
U n it s
20,000
40,000
60,000
,1. #ine A is the: A. fixed cost line. B. variable cost line. C. total cost line. . total revenue line. !. profit line. Ans"er: ! #$: , %ype: 3 ,. %he triangular area bet"een the hori+ontal axis and #ine A7 to the right of -7;;;7 represents: A. fixed cost. B. variable cost. C. profit. . loss. !. sales revenue. Ans"er: C #$: , %ype: &C
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,,. A recent income statement of $slo Corporation reported the follo"ing data: Enits sold ?ales revenue Variable costs @ixed costs
87;;; 07;;7;;; -7;;;7;;; 176;;7;;;
5f the company desired to earn a target net profit of -8;7;;;7 it "ould have to sell: A. 17;; units. B. 78;; units. C. -7;;; units. . 27;; units. !. an amount other than those above. Ans"er: #$: - %ype: A ,-. ello"7 5nc.7 sells a single product for 1;. Variable costs are - per unit and fixed costs total 1;7;;; at a volume level of 1;7;;; units. hat dollar sales level "ould ello" have to achieve to earn a target net profit of -;7;;;/ A. -;;7;;;. B. 2;;7;;;. C. 6;;7;;;. . 02;7;;;. !. 9;;7;;;. Ans"er: C #$: - %ype: A Ese the follo"ing to ans"er *uestions ,2),0: Archie sells a single product for 2;. Variable costs are 6; of the selling price7 and the company has fixed costs that amount to -;;7;;;. Current sales total 167;;; units. ,2. Archie: A. "ill brea()even by selling 87;;; units. B. "ill brea()even by selling 1,7,,, units. C. "ill brea()even by selling ;7;;; units. . "ill brea()even by selling 17;;;7;;; units. !. cannot brea()even because it loses money on every unit sold. Ans"er: C #$: 1 %ype: A ,6. !ach unit that the company sells "ill: A. increase overall profitability by ;. B. increase overall profitability by ,;. C. increase overall profitability by 2;. . increase overall profitability by some other amount. !. decrease overall profitability by 2. Ans"er: A #$: 1 %ype: A
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Chapter 8
209
,0. 5n order to produce a target profit of 7;;;7 Archie's dollar sales must total: A. 87--;. B. 171;;. C. 17;;;7;;;. . 17;227;;;. !. an amount other than those above. Ans"er: #$: - %ype: A ,8. %he difference bet"een budgeted sales revenue and brea()even sales revenue is the: A. contribution margin. B. contribution)margin ratio. C. safety margin. . target net profit. !. operating leverage. Ans"er: C #$: - %ype: &C ,9. 4axie's budget for the upcoming year revealed the follo"ing figures: ?ales revenue Contribution margin 3et income
8-;7;;; 2;-7;;; 2-7;;;
5f the company's brea()even sales total 02;7;;;7 4axie's safety margin "ould be: A. <9;7;;;=. B. 9;7;;;. C. -67;;;. . ,,67;;;. !. 6967;;;. Ans"er: B #$: - %ype: A -;. 5f a company desires to increase its safety margin7 it should: A. increase fixed costs. B. decrease the contribution margin. C. decrease selling prices7 assuming the price change "ill have no effect on demand. . stimulate sales volume. !. attempt to raise the brea()even point. Ans"er: #$: - %ype: 3
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Hilton, Managerial Accounting, Seventh Edition
-1. ana sells a single product at ; per unit. %he firm's most recent income statement revealed unit sales of 1;;7;;;7 variable costs of 8;;7;;;7 and fixed costs of -;;7;;;. 5f a - drop in selling price "ill boost unit sales volume by ;7 the company "ill experience: A. no change in profit because a ; drop in sales price is balanced by a ; increase in volume. B. an 8;7;;; drop in profitability. C. a -;7;;; drop in profitability. . a -;;7;;; drop in profitability. !. a change in profitability other than those above. Ans"er: C #$: - %ype: A -. rimes is studying the profitability of a change in operation and has gathered the follo"ing information:
@ixed costs ?elling price Variable cost ?ales
Current $peration ,87;;; 16 1; 97;;;
Anticipated $peration -87;;; 1 67;;;
?hould rimes ma(e the change/ A. es7 the company "ill be better off by 67;;;. B. 3o7 because sales "ill drop by ,7;;; units. C. 3o7 because the company "ill be "orse off by -7;;;. . 3o7 because the company "ill be "orse off by 7;;;. !. 5t is impossible to Gudge because additional information is needed. Ans"er: C #$: - %ype: A -,. leason sells a single product at 1- per unit. %he firm's most recent income statement revealed unit sales of 8;7;;;7 variable costs of 8;;7;;;7 and fixed costs of 26;7;;;. 4anagement believes that a , drop in selling price "ill boost unit sales volume by ;. hich of the follo"ing correctly depicts ho" these t"o changes "ill affect the company's brea()even point/ rop in 5ncrease in ?ales Price ?ales Volume A. 5ncrease 5ncrease B. 5ncrease ecrease C. 5ncrease 3o effect . ecrease 5ncrease !. ecrease ecrease Ans"er: C #$: - %ype: A
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--. All other things being e*ual7 a company that sells multiple products should attempt to structure its sales mix so the greatest portion of the mix is composed of those products "ith the highest: A. selling price. B. variable cost. C. contribution margin. . fixed cost. !. gross margin. Ans"er: C #$: 2 %ype: 3 -2. $'ell sells three products: &7 ?7 and %. Budgeted information for the upcoming accounting period follo"s. Product & ? %
?ales Volume
?elling Price 11; 11
Variable Cost 9 6 8
%he company's "eighted)average unit contribution margin is: A. ,.;;. B. ,.22. C. -.;;. . 19.,2. !. an amount other than those above. Ans"er: B #$: 2 %ype: A -6. ells Corporation has the follo"ing sales mix for its three products: A7 ;H B7 ,2H and C7 -2. @ixed costs total -;;7;;; and the "eighted)average contribution margin is 1;;. Fo" many units of product A must be sold to brea()even/ A. 8;;. B. -7;;;. C. ;7;;;. . An amount other than those above. !. Cannot be determined based on the information presented. Ans"er: A #$: 2 %ype: A
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Ese the follo"ing to ans"er *uestions -0)2;: #amar I Co.7 ma(es and sells t"o types of shoes7 Plain and @ancy. ata concerning these products are as follo"s:
Enit selling price Variable cost per unit
Plain ;.; ; 1.;;
@ancy ,2.; ; -.2 ;
?ixty percent of the unit sales are Plain7 and annual fixed expenses are -27;;;. -0. %he "eighted)average unit contribution margin is: A. -.8;. B. 9.;;. C. 9.2. . 10.;;. !. an amount other than those above. Ans"er: B #$: 2 %ype: A -8. Assuming that the sales mix remains constant7 the total number of units that the company must sell to brea( even is: A. 7-,. B. 76-0. C. -70,0. . 27;;;. !. an amount other than those above. Ans"er: #$: 2 %ype: A -9. Assuming that the sales mix remains constant7 the number of units of Plain that the company must sell to brea( even is: A. 7;;;. B. ,7;;;. C. ,7,02. . 27;;;. !. 2762. Ans"er: B #$: 2 %ype: A 2;. Assuming that the sales mix remains constant7 the number of units of @ancy that the company must sell to brea( even is: A. 7;;;. B. ,7;;;. C. ,7,02. . 27;;;. !. 2762.
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Ans"er: A #$: 2 %ype: A
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Hilton, Managerial Accounting, Seventh Edition
21. hich of the follo"ing underlying assumptions form
Chapter 8
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22. hich of the follo"ing does not typically appear on a contribution income statement/ A. 3et income. B. ross margin. C. Contribution margin. . %otal variable costs. !. %otal fixed costs. Ans"er: B #$: 0 %ype: &C 26. hich of the follo"ing does not typically appear on an income statement prepared by using a traditional format/ A. Cost of goods sold. B. Contribution margin. C. ross margin. . ?elling expenses. !. Administrative expenses. Ans"er: B #$: 0 %ype: &C 20. %he extent to "hich an organi+ation uses fixed costs in its cost structure is measured by: A. financial leverage. B. operating leverage. C. fixed cost leverage. . contribution leverage. !. efficiency leverage. Ans"er: B #$: 8 %ype: &C 28. A manager "ho "ants to determine the percentage impact on net income of a given percentage change in sales "ould multiply the percentage increaseJdecrease in sales revenue by the: A. contribution margin. B. gross margin. C. operating leverage factor. . safety margin. !. contribution)margin ratio. Ans"er: C #$: 8 %ype: &C 29. hich of the follo"ing calculations can be used to measure a company's degree of operating leverage/ A. Contribution margin sales. B. Contribution margin net income. C. ?ales contribution margin. . ?ales net income. !. ?ales fixed costs. Ans"er: B #$: 8 %ype: &C
21
Hilton, Managerial Accounting, Seventh Edition
6;. ou are analy+ing Bec(er Corporation and 3e"ton Corporation and have concluded that Bec(er has a higher operating leverage factor than 3e"ton. hich one of the follo"ing choices correctly depicts <1= the relative use of fixed costs
17;;;7;;; -78;;7;;; 8;;7;;;
ay's operating leverage factor is: A. ;.;60. B. ;.160. C. ;.-;;. . .2;;. !. 6.;;;. Ans"er: ! #$: 8 %ype: A 6. %he follo"ing information relates to Paterno Company: ?ales revenue Contribution margin 3et income
1;7;;;7;;; -7;;;7;;; 17;;;7;;;
5f a manager at Paterno desired to determine the percentage impact on net income of a given percentage change in sales7 the manager "ould multiply the percentage increaseJdecrease in sales revenue by: A. ;.2. B. ;.-;. C. .2;. . -.;;. !. 1;.;;. Ans"er: #$: 8 %ype: A7 3
Chapter 8
21!
Ese the follo"ing to ans"er *uestions 6,)6-: !dco Company produced and sold -27;;; units of a single product last year7 "ith the follo"ing results: ?ales revenue 4anufacturing costs: Variable @ixed ?elling costs: Variable @ixed Administrative costs: Variable @ixed
17,2;7;;; 2827;;; 0;7;;; -;72;; 2-7;;; 18-72;; 1;87;;;
6,. !dco's operating leverage factor "as: A. -. B. 2. C. 6. . 0. !. 8. Ans"er: B #$: 8 %ype: A 6-. 5f !dco's sales revenues increase 127 "hat "ill be the percentage increase in income before income taxes/ A. 12. B. -2. C. 6;. . 02. !. An amount other than those above. Ans"er: #$: 8 %ype: A 62. hen advanced manufacturing systems are installed7 "hat effect does such installation usually have on fixed costs and the brea()even point/ @ixed Costs Brea()even Point A. 5ncrease 5ncrease B. 5ncrease ecrease C. ecrease 5ncrease . ecrease ecrease !. o not change oes not change Ans"er: A #$: 8 %ype: &C
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66. hich of the follo"ing statements is
5 only. 55 only. 555 only. 5 and 55. 55 and 555.
Ans"er: B #$: 1; %ype: 3 60. A company7 subGect to a -; tax rate7 desires to earn 2;;7;;; of after)tax income. Fo" much should the firm add to fixed costs "hen figuring the sales revenues necessary to produce this income level/ A. ;;7;;;. B. ,;;7;;;. C. 2;;7;;;. . 8,,7,,,. !. 172;7;;;. Ans"er: #$: 11 %ype: A 68. Barney7 5nc.7 is subGect to a -; income tax rate. %he follo"ing data pertain to the period Gust ended "hen the company produced and sold -27;;; units: ?ales revenue Variable costs @ixed costs
17,2;7;;; 81;7;;; -,7;;;
Fo" many units must Barney sell to earn an after)tax profit of 18;7;;;/ A. -7;;;. B. -27;;;. C. 217;;;. . 617;;;. !. An amount other than those above. Ans"er: #$: 11 %ype: A
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E#E$CI!E! %asi& CVP $elationships
69. Vince's Pi++a delivers pi++as to dormitories and apartments near a maGor state university. %he company's annual fixed costs are -87;;;. %he sales price averages 97 and it costs the company , to ma(e and deliver each pi++a. &e*uired: A. Fo" many pi++as must Vince's sell to brea( even/ B. Fo" many pi++as must the company sell to earn a target net profit of 2-7;;;/ C. 5f budgeted sales total 979;; pi++as7 ho" much is the company's safety margin/ . Vince's assistant manager7 an accounting maGor7 has suggested that the firm should try to increase the contribution margin per pi++a. !xplain the meaning of >contribution margin> in layman's terms. #$: 17 - %ype: &C7 A Ans"er: A. ?elling price per pi++a #ess: Variable cost per pi++a Enit contribution margin
9 , 6
Brea()even pi++as: -87;;; ÷ 6 K 87;;;
220
B.
Pi++as to earn 2-7;;;: <-87;;; D 2-7;;;= 6 K 107;;;
C.
?afety margin: <979;; x 9= ) <87;;; x 9= K 1071;;
.
%he contribution margin is the amount that each unit
Hilton, Managerial Accounting, Seventh Edition
%asi& CVP $elationships
0;. ?eventh Feaven ta(es tourists on helicopter tours of Fa"aii. !ach tourist buys a 12; tic(etH the variable costs average 6; per person. ?eventh Feaven has annual fixed costs of 0;7;;;. &e*uired: A. Fo" many tours must the company conduct in a month to brea( even/ B. Compute the sales revenue needed to produce a target net profit of ,67;;; per month. C. Calculate the contribution margin ratio. . etermine "hether the actions that follo" "ill increase7 decrease7 or not affect the company's brea()even point. 1.A decrease in tour prices. .%he termination of a salaried cler(
12; 6; 9;
Brea()even tours: <0;7;;; ÷ 1 months= ÷ 9; K 62; B.
%ours to earn ,67;;;: L<0;7;;; 1 months= D ,67;;;M 9; K 17;2;
C.
Contribution margin ratio: 9; 12; K ;.6
.
1 . . , .
Chapter 8
5ncrease ecrease 3o effect
221
CVP: Analysis of Operations
01. %hompson Company is considering the development of t"o products: no. 62 or no. 66. 4anufacturing cost information follo"s.
Annual fixed costs Variable cost per unit
3o. 62 ;7;;; ,,
3o. 66 ,-;7;;; 2
&egardless of "hich product is introduced7 the anticipated selling price "ill be 2; and the company "ill pay a 1; sales commission on gross dollar sales. %hompson "ill not carry an inventory of these items. &e*uired: A. hat is the brea()even sales volume
2; ,; ;
Brea()even units: ,-;7;;; ; K 107;;; Brea()even sales: 107;;; x 2; K 82;7;;;
B. ?alesN #ess: Variable costsNN Contribution margin #ess: @ixed costs $perating income
3o. 62 172;7;;; 92;7;;; ,;;7;;; ;7;;; 8;7;;;
3o. 66 172;7;;; 02;7;;; 2;;7;;; ,-;7;;; 16;7;;;
N27;;; x 2; NN3o. 62: 27;;; x L,, D <2; x 1;=MH 3o. 66: 27;;; x L2 D <2; x 1;=M Product no. 66 is more profitable: 16;7;;; vs. 8;7;;; C.
222
O K 3umber of units <2; ) ,8=O ) ;7;;; K <2; ) ,;=O ) ,-;7;;; 1O ) ;7;;; K ;O ) ,-;7;;; 8O K 1;7;;; O K 127;;; units
Hilton, Managerial Accounting, Seventh Edition
%rea'-E(en Analysis) *e&ision Ma'in+
0. %he Bruggs I ?trutton Company manufactures an engine for carpet cleaners called the >?nooper.> Budgeted cost and revenue data for the >?nooper> are given belo"7 based on sales of -;7;;; units. ?ales #ess: Cost of goods sold ross margin #ess: $perating expenses 3et income
176;;7;;; 171;7;;; -8;7;;; 1;;7;;; ,8;7;;;
Cost of goods sold consists of 8;;7;;; of variable costs and ,;7;;; of fixed costs. $perating expenses consist of -;7;;; of variable costs and 6;7;;; of fixed costs. &e*uired: A. Calculate the brea()even point in units and sales dollars. B. Calculate the safety margin. C. Bruggs I ?trutton received an order for 67;;; units at a price of 2.;;. %here "ill be no increase in fixed costs7 but variable costs "ill be reduced b y ;.2- per unit because of cheaper pac(aging. etermine the proGected increase or decrease in profit from the order. #$: - %ype: A Ans"er: A. ?ales #ess: Variable costs <8;;7;;; D -;7;;;= Contribution margin
176;;7;;; 8-;7;;; 06;7;;;
Enit contribution margin: 06;7;;; -;7;;; units K 19 Brea()even point in units: <,;7;;; D 6;7;;;= 19 K ;7;;; units Enit selling price: 176;;7;;; -;7;;; units K -; Brea()even point in dollars: ;7;;; units x -; K 8;;7;;; B.
?afety margin: 176;;7;;; ) 8;;7;;; K 8;;7;;;
C.
?ales <67;;; x 2= #ess: Variable costs at ;.-6N 5ncrease in profit
12;7;;; 1706; 07-;
N<8;;7;;; D -;7;;;= -;7;;; units K 1.;;H 1.;; ) ;.2- K ;.-6
Chapter 8
223
Impa&t of Operatin+ Chan+es
0,. $a(mar( recently sold 0;7;;; units7 generating sales revenue of -79;;7;;;. %he company's variable cost per unit and total fixed cost amounted to ; and 78;;7;;;7 respectively. 4anagement is in the process of studying the dollar impact of various transactions and events7 and desires ans"ers to the follo"ing independent cases: Ca"e no# 1$ 4anagement "ants to lo"er the firm's brea()even point to 27;;; units. All other things being e*ual7 "hat must happen to fixed costs to achieve this obGective/ Ca"e no# 2$ %he company anticipates a hi(e in the variable cost per unit. All other things being e*ual7 if management desires to (eep the firm's current brea()even point7 "hat must happen to $a(mar('s selling price/ 5f selling price remains constant7 "hat must happen to the firm's total fixed costs/
&e*uired: A. Ans"er the t"o cases raised by management. B. etermine the impact
224
1. ecrease . 5ncrease ,. 3o effect
Hilton, Managerial Accounting, Seventh Edition
Impa&t of Operatin+ Chan+es
0-. ilcox Company is studying the impact of the follo"ing: 1.An increase in sales price. .An increase in the variable cost per unit. ,. An increase in the number of units sold
1 . . , . . 2 .
Per)Enit Contribution 4argin QQQQQQ
Brea()!ven Point QQQQQQ
QQQQQQ
QQQQQQ
QQQQQQ
QQQQQQ
QQQQQQ
QQQQQQ
QQQQQQ
QQQQQQ
#$: 17 - %ype: 3 Ans"er: Per)Enit Contribution 4argin 1. 53C . !C ,. 3! -. 3! 2. 53C
Chapter 8
Brea()!ven Point !C 53C 3! !C 55
225
Impa&t of Operatin+ Chan+es
02. ladstone Company is studying the impact of the follo"ing: 1. . ,. -.
An increase in sales price on the brea()even point. A decrease in fixed costs on the contribution margin. An increase in the contribution margin on the brea()even point. A decrease in the variable cost per unit on the sales volume needed to achieve ladstone's 687;;; target net profit. 2. An increase in sales commissions on the brea()even point and the contribution margin. 6. A decrease in anticipated advertising outlays on fixed cost and the brea()even point. &e*uired: etermine the impact of these operating changes
22
.
3o effect
,.
ecrease
. 2 . 6 .
ecrease 5ncrease7 decrease ecrease7 decrease
Hilton, Managerial Accounting, Seventh Edition
Cost-Volume-Profit Analysis) Multiple Pro,u&ts
06. Boise Company manufactures and sells three products: ood7 Better7 and Best. Annual fixed costs are ,7,127;;;7 and data about the three products follo".
?ales mix in units ?elling price Variable cost
ood ,; 2;
Better 2; ,2;
1;;
12;
Best ; 2; ; 2;
&e*uired: A. etermine the "eighted)average unit contribution margin. B. etermine the brea()even volume in units for each product. C. etermine the total number of units that must be sold to obtain a profit for the company of ,-7;;;. . Assume that the sales mix for ood7 Better7 and Best is changed to 2;7 ,;7 and ;7 respectively. ill the number of units re*uired to brea()even increase or decrease/ !xplain. Fint: etailed calculations are not needed to obtain the proper solution. #$: 2 %ype: A7 3 Ans"er: A. ?elling price #ess: Variable cost Contribution margin ood: 12; x ,; Better: ;; x 2; Best: 2; x ; eighted)average C4
ood 2; 1;; 12;
Better ,2; 12; ;;
Best 2;; 2; 2;
-2 1;; 2; 192
B.
Brea()even volume: ,7,127;;; 192 K 107;;; units ood: 107;;; x ,; K 271;; units Better: 107;;; x 2; K 872;; units Best: 107;;; x ; K ,7-;; units
C.
Volume to earn ,-7;;;: <,7,127;;; D ,-7;;;= ÷ 192 K 187;; units
.
%he number of units re*uired "ould increase since a greater proportion of lo"er) contribution)margin units
Enit sales ?elling price Variable cost
-;7;;; 6; -;
R 1,;7;;; 8; 62
# ,;7;;; 02 2;
%otal fixed costs are anticipated to be 7-2;7;;;. &e*uired: A. etermine Alphabet's sales mix. B. etermine the "eighted)average contribution margin. C. Calculate the number of units of 7 R7 and # that must be sold to brea( even. . 5f Alphabet desires to increase company profitability7 should it attempt to increase or decrease the sales of product R relative to those of and #/ Briefly explain. #$: 2 %ype: A7 3 Ans"er: A. ?ales mix: -;7;;; D 1,;7;;; D ,;7;;; K ;;7;;; units : -;7;;; ;;7;;; K ; R: 1,;7;;; ;;7;;; K 62 #: ,;7;;; ;;7;;; K 12 B.
Enit contribution margins:
?elling price #ess: Variable cost Contribution margin : ; x ; R: 12 x 62 #: 2 x 12 eighted)average C4
228
6; -; ;
R 8; 62 12
# 02 2; 2
-.;; 9.02 ,.02 10.2;
C.
Brea()even volume: 7-2;7;;; 10.2; K 1-;7;;; units : 1-;7;;; x ; K 87;;; units R: 1-;7;;; x 62 K 917;;; units #: 1-;7;;; x 12 K 17;;; units
.
As measured in units7 R has 62 of the company's sales mix. Enfortunately7 though7 R is Alphabet's least profitable product <12 contribution margin vs. ; and 2=. %o increase overall profitability7 the firm should strive to decrease sales of R relative to those of and #.
Hilton, Managerial Accounting, Seventh Edition
Tra,itional an, Contriution In&ome !tatements
08. Price Publications7 5nc.7 produces and sells business boo(s. %he results of the company's operations for the year ended ecember ,17 ;x17 are given belo". ?ales revenue 4anufacturing costs: @ixed Variable ?elling costs: @ixed Variable Administrative costs: @ixed Variable
-;;7;;; 1;;7;;; ;;7;;; 1;7;;; ;7;;; -7;;; 67;;;
&e*uired: A. Prepare a traditional income statement for the company. B. Prepare a contribution income statement for the company. C. hich income statement
C.
Chapter 8
?ales #ess variable expenses: 4anufacturing ?elling Administrative Contribution margin #ess fixed expenses: 4anufacturing ?elling Administrative 3et income
-;;7;;; ,;;7;;; 1;;7;;; ,;7;;; ,;7;;;
6;7;;; -;7;;; -;;7;;;
;;7;;; ;7;;; 67;;;
1;;7;;; 1;7;;; -7;;;
67;;; 10-7;;;
1,-7;;; -;7;;;
%he contribution statement "ould be used because the fixed and variable costs must be separated in order to measure the effect of a volume change on total costs. Enfortunately7 a traditional income statement does not provide the necessary information.
229
Tra,itional an, Contriution In&ome Computations
09. Figh Point Corporation reported sales revenues of 1782;7;;; for the period Gust ended. Cost of goods sold7 selling expenses7 and administrative expenses totaled 17;;7;;;7 8;7;;;7 and 10;7;;;7 respectively. A detailed analysis of the latter three amounts revealed respective fixed cost components of 08;7;;;7 6;7;;;7 and 1,;7;;;. &e*uired: A. etermine the amounts that Figh Point "ould report on a traditional income statement for <1= gross margin7 <= contribution margin7 and <,= net income. B. etermine the amounts that Figh Point "ould report on a contribution income statement for <1= gross margin7 <= contribution margin7 and <,= net income. C. hich of the t"o income statements
1 . .
?ales <1782;7;;;= ) cost of goods sold <17;;7;;;= K gross margin <62;7;;;= ;. %he contribution margin is not disclosed on a traditional income statement. ross margin <62;7;;;= ) selling expenses <8;7;;;= ) administrative expenses <10;7;;;= K net income <;;7;;;= ;. ross margin is not disclosed on a contribution income statement. Variable expenses K total expenses ) fixed expenses: Cost of goods sold: 17;;7;;; ) 08;7;;; ?elling expenses: 8;7;;; ) 6;7;;; Administrative expenses: 10;7;;; ) 1,;7;;; %otal variable expenses
-;7;;; ;7;;; -;7;;; 68;7;;;
?ales <1782;7;;;= ) variable expenses <68;7;;;= K contribution margin <1710;7;;;= , . C.
230
Contribution margin <1710;7;;;= ) fixed expenses <08;7;;; D 6;7;;; D 1,;7;;; K 90;7;;;= K net income <;;7;;;=
Contribution income statement
Hilton, Managerial Accounting, Seventh Edition
Cost !tru&ture) Operatin+ Le(era+e
8;. $nce upon a time7 t"o brothers
?ales Contribution margin 3et income
4adison 7;;;7;;; 170;;7;;; 12;7;;;
Austin 7;;;7;; ; -;;7;;; 12;7;;;
&e*uired: A. hich of the t"o businesses7 4adison or Austin7 has the highest level of <1= variable cost and <= highest level of fixed cost/ !xplain ho" you determined your ans"er. B. etermine the probable o"ner of the firm located in <1= 4adison and <= Austin. Briefly explain your logic. C. Compute the operating leverage factor for 4adison and Austin. . ?uppose that both 4adison and Austin had the opportunity to increase sales by 1;. hich of the t"o locations "ould experience a larger percentage change in net income/ hy/ #$: 8 %ype: A7 3 Ans"er: A. iven that both locations have identical sales7 Austin has a higher level of variable cost <176;;7;;; vs. ,;;7;;;= as indicated by a smaller contribution margin. 4adison7 in contrast7 has a higher amount of fixed cost <1722;7;;; vs. 2;7;;;= because of the larger contribution margin and a net income e*ual to that of Austin. B. $perations "ith si+able labor forces have high variable costsH conversely7 automated facilities give rise to high fixed costs
Chapter 8
231
Operatin+ Le(era+e
81. 4etropolitan !nterprises is studying the addition of a ne" product that "ould have an expected selling price of 16; and expected variable cost of 1;;. Anticipated demand is 87;;; units. A ne" salesperson must be hired because the company's current sales force is "or(ing at capacity. %"o compensation plans are under consideration: Plan 1: An annual salary of ,7;;; plus 1; commission based on gross sales dollars Plan : An annual salary of 1-;7;;; and no commission &e*uired: A. hat is meant by the term >operating leverage>/ B. Calculate the contribution margin and net income of the t"o plans at 87;;; units. C. Compute the operating leverage factor of the t"o plans at 87;;; units. hich of the t"o plans is more highly leveraged/ hy/ . Assume that a general economic do"nturn occurred during year no. 7 "ith product demand falling from 87;;; to 67-;; units. By using the operating leverage factors7 determine and sho" "hich plan "ould produce a larger percentage decrease in net income. #$: 8 %ype: A7 3 Ans"er: A. $perating leverage refers to the use of fixed costs in an organi+ation's overall cost structure. An organi+ation that has a relatively high proportion of fixed costs and lo" proportion of variable costs has a high degree of operating leverage. B. ?ales revenue: 87;;; units x 16; #ess variable costs: Product cost: 87;;; units x 1;; ?ales commissions: 178;7;;; x 1; %otal variable cost Contribution margin @ixed costs 3et income
Plan 1 178;7;;;
Plan 178;7;;;
8;;7;;; 187;;; 987;;; ,27;;; ,7;;; ,;7;;;
8;;7;;; ; 8;;7;;; -8;7;;; 1-;7;;; ,-;7;;;
C.
Plan 1: ,27;;; ,;7;;; K 1.1 Plan : -8;7;;; ,-;7;;; K 1.-1 Plan has the higher degree of operating leverage because it has the higher operating leverage factor.
.
4etropolitan "ould experience a larger percentage decrease in income if it adopts Plan . %his situation arises because Plan has a higher degree of operating leverage. %he percentage decreases in profitability can be figured by multiplying the percentage decrease in sales revenue by the operating leverage factor. ?ales dropped from 87;;; units to 67-;; units7 or ;. %hus: Plan 1: ; x 1.1 K .;
232
Hilton, Managerial Accounting, Seventh Edition
Plan : ; x 1.-1 K 8.
Chapter 8
233
*I!CU!!IO" UE!TIO"! Cost-Volume-Profit Analysis
8. %he Bo?an Corporation ma(es maGor household appliances such as refrigerators7 stoves7 and dish"ashers. ?ales are heavily dependent on the number of housing starts and the level of disposable income. 3ext year7 the number of housing starts in the Central region is expected to be the same as this year'sH ho"ever7 about t"o)thirds of these starts "ill be for rental apartments as compared to an historical average of one)third. %he remaining housing starts "ill be for single)family homes and upscale condominiums. Bo?an generally ma(es t"o models of each product: !conomy "hat if> analyses that allo" management to study the effects of various operating changes on firm profitability. @or example7 the effects of changes in selling price7 variable costs7 fixed costs7 and volume may be explored by manipulating the CVP model "ith different values for these items. B. %hree additional assumptions for the CVP model are: %he per)unit selling price is constant. • Cost behavior is linear over the relevant rangeSthat is7 variable cost per unit is constant • and fixed costs in total are constant. %he number of units manufactured and sold is the same. • C. %he shift to"ard more apartments and fe"er single)family homes and upscale condominiums may mean that demand for the !conomy models "ill increase relative to the demand for Prestige models. %he rental apartment generally "ill be used for households "ith lo"er income. %he shift in buying habits could create a problem since the CVP model assumes a constant sales mix. %he mix change could invalidate previous CVP studies.
234
Hilton, Managerial Accounting, Seventh Edition
Contriution Mar+in
8,. 4addox Corporation's product no. F6-0 has a negative contribution margin. Fo" can such a situation arise/ ?hould the company continue to stoc( and sell product no. F6-0/ !xplain. #$: 1 %ype: &C7 3 Ans"er: A negative contribution arises because selling price is less than variable cost. ?everal reasons may create this situation: <1= inefficient operations and7 thus7 higher costsH <= a very competitive mar(etplace7 "hich has forced the firm to lo"er its priceH and <,= a loss leader "hereby 4addox is purposely ta(ing a loss on product no. F6-0 "ith the intent of stimulating customer demand for other7 more profitable products. !ach unit sold "ill lo"er overall profitability so7 technically7 4addox should not continue to sell product no. F6-0. Fo"ever7 for reasons <= and <,= above7 the firm might decide other"ise and stic( "ith this >loser.> Cost !tru&ture an, Operatin+ Le(era+e
8-. $perating leverage is an important concept for many companies. &e*uired: A. efine operating leverage. B. Assume that a firm pays no income taxes and is planning to increase its selling price. 5f sales volume in units does not change7 "hat "ill be the effect on the operating leverage factor/ !xplain. C. Assume that another firm that pays no income taxes is planning to increase fixed manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production7 the total manufacturing costs "ill be unchanged. hat "ill this change do to the operating leverage factor/ !xplain. #$: 8 %ype: &C7 3 Ans"er: A. 4athematically7 operating leverage is contribution margin divided by net income. %he degree of operating leverage indicates a company's ability to operate "ith a given a mount of fixed cost relative to variable cost. B. %he increase in selling price "ith no change in units sold "ill increase both contribution margin and net income by the same dollar amount. %he percentage change in net income "ill be greater than the percentage change in contribution margin and7 thus7 the operating leverage factor "ill decrease. C. %he decrease in variable costs "ill increase the contribution margin7 but net income "ill not change because total costs remain the same. %he operating leverage factor "ill therefore increase.
Chapter 8
235
