This document contains 23 multiple choice questions about cost-volume-profit (CVP) analysis concepts such as break-even point, contribution margin, fixed and variable costs, operating leverage, and margin of safety. It tests understanding of how to calculate break-even point in units and dollars, the relationship between costs and volume, and assumptions of CVP analysis like constant prices and sales mix.
Financial management unit 3 Financing and Dividend DecisionGanesha Pandian
This document provides an overview of financial management topics including leverages, capital structure, and dividend decisions. It begins with definitions and types of operating and financial leverages, and how to calculate their degrees. It then discusses capital structure theories including the Net Income, Net Operating Income, and Modigliani-Miller approaches. Finally, it covers factors influencing dividend policy decisions and different types of dividend policies and payouts. In summary, the document is a lecture on financing and dividend decisions, analyzing leverage, capital structure optimization, and dividend policies.
The document summarizes key concepts from a chapter on cost-volume-profit (CVP) analysis. It covers CVP assumptions and terminology, essential features of CVP analysis including determining the break-even point, incorporating income taxes into CVP, using CVP for decision making and sensitivity analysis, and adapting CVP for alternative cost structures. Examples are provided to illustrate calculating break-even units and revenues, conducting sensitivity analysis using spreadsheets, and evaluating different rental options for a software company using CVP analysis.
Intermediate Accounting Chapter 1 about Financial Reporting
and Accounting Standards
After studying this chapter, you should be able to:
Describe the growing importance of global financial markets and its relation to financial reporting.
Explain the objective of financial reporting.
Identify the major policy-setting bodies and their role in the standard-setting process.
Discuss the challenges facing financial reporting.
This document provides an overview of financial statement analysis. It begins by defining business analysis as the process of evaluating a company's prospects and risks, which includes analyzing its environment, strategies, and financial position. Financial statement analysis is then introduced as applying analytical tools to financial statements to derive useful estimates for business analysis. The chapter outlines the major components of business analysis and the role of financial statements. It previews various tools for financial statement analysis, including comparative analysis, ratio analysis, and cash flow analysis. The objectives are to explain the relationship between financial statement analysis and business analysis, describe how financial statements reflect business activities, and introduce basic analysis techniques.
The document summarizes accounting concepts related to partnerships in 3 chapters. It includes:
1) An assignment classification table that matches learning objectives, questions, exercises and problems to the appropriate level of difficulty and estimated completion time.
2) A description table that provides more details on specific problems, exercises and their difficulty level and time allotment.
3) A correlation chart that maps the chapter's study objectives, questions, and exercises to Bloom's Taxonomy and whether they involve concepts (C), principles (P), procedures (S) or applications (A).
Financial management unit 3 Financing and Dividend DecisionGanesha Pandian
This document provides an overview of financial management topics including leverages, capital structure, and dividend decisions. It begins with definitions and types of operating and financial leverages, and how to calculate their degrees. It then discusses capital structure theories including the Net Income, Net Operating Income, and Modigliani-Miller approaches. Finally, it covers factors influencing dividend policy decisions and different types of dividend policies and payouts. In summary, the document is a lecture on financing and dividend decisions, analyzing leverage, capital structure optimization, and dividend policies.
The document summarizes key concepts from a chapter on cost-volume-profit (CVP) analysis. It covers CVP assumptions and terminology, essential features of CVP analysis including determining the break-even point, incorporating income taxes into CVP, using CVP for decision making and sensitivity analysis, and adapting CVP for alternative cost structures. Examples are provided to illustrate calculating break-even units and revenues, conducting sensitivity analysis using spreadsheets, and evaluating different rental options for a software company using CVP analysis.
Intermediate Accounting Chapter 1 about Financial Reporting
and Accounting Standards
After studying this chapter, you should be able to:
Describe the growing importance of global financial markets and its relation to financial reporting.
Explain the objective of financial reporting.
Identify the major policy-setting bodies and their role in the standard-setting process.
Discuss the challenges facing financial reporting.
This document provides an overview of financial statement analysis. It begins by defining business analysis as the process of evaluating a company's prospects and risks, which includes analyzing its environment, strategies, and financial position. Financial statement analysis is then introduced as applying analytical tools to financial statements to derive useful estimates for business analysis. The chapter outlines the major components of business analysis and the role of financial statements. It previews various tools for financial statement analysis, including comparative analysis, ratio analysis, and cash flow analysis. The objectives are to explain the relationship between financial statement analysis and business analysis, describe how financial statements reflect business activities, and introduce basic analysis techniques.
The document summarizes accounting concepts related to partnerships in 3 chapters. It includes:
1) An assignment classification table that matches learning objectives, questions, exercises and problems to the appropriate level of difficulty and estimated completion time.
2) A description table that provides more details on specific problems, exercises and their difficulty level and time allotment.
3) A correlation chart that maps the chapter's study objectives, questions, and exercises to Bloom's Taxonomy and whether they involve concepts (C), principles (P), procedures (S) or applications (A).
This document discusses auditing sales and receivables. It covers audit objectives for transactions and balances related to sales, cash receipts, and sales adjustments. Key objectives are ensuring sales and receivables exist and are complete, accurate, properly cut-off, and classified. The document also discusses control risk assessment, substantive testing procedures like analytical procedures, tests of details of transactions and balances, and confirmation of receivables. The major focus of auditing sales and receivables is on revenue recognition and valuation of receivables.
- Budgets are quantitative expressions of plans used for planning and control. They are used to translate organizational goals into operational terms.
- Control involves setting standards, monitoring actual performance, and taking corrective action. Budgets are used for control by comparing actual outcomes to planned outcomes.
- Reasons for budgeting include planning, decision making, benchmarking, and improving communication and coordination.
ch02 - Conceptual Framework for Financial Reporting.pptNicolasErnesto2
The conceptual framework establishes fundamental concepts that guide standard-setting and financial reporting more broadly. It is being jointly developed by the IASB and FASB and consists of three levels: the objective of financial reporting, qualitative characteristics, and specific concepts. The objective is to provide useful information to capital providers. Key qualitative characteristics include relevance and faithful representation. The framework also outlines basic elements, assumptions, principles, and constraints that guide accounting practices. It aims to create consistency and coherence in financial reporting standards over time.
Fin man 5 break even point and leverage analysisJimmi Sinton
This document provides an overview and examples of break-even analysis for a financial management class. It defines break-even analysis as a method to determine the sales volume needed for total revenue to equal total costs. It also discusses how to calculate break-even points in units and dollars, how to set target earnings levels, and provides homework on calculating break-even points under different cost and price scenarios.
This document contains a chapter summary and test bank for an IT auditing textbook. It includes 36 multiple choice and true/false questions that test understanding of key concepts around auditing and internal controls. Some of the main topics covered include the COSO and COBIT frameworks, components of internal controls like preventative and detective controls, the roles of internal and external auditors, and concepts like audit risk and tests of controls.
- Process costing is used for products that are similar and produced continuously, while job-order costing is used for unique jobs.
- Process costing accumulates costs by department rather than individual jobs. Costs flow through manufacturing accounts like Work in Process and are ultimately transferred to Finished Goods.
- Equivalent units of production considers partially completed units by calculating a percentage of completion and combining it with fully completed units to determine total production for the period.
Managerial Accounting Garrison Noreen Brewer Chapter 01Asif Hasan
This document summarizes key concepts from Chapter 1 of a managerial accounting textbook. It discusses the four functions of management: planning, organizing, directing/motivating, and controlling. For planning, it describes identifying alternatives and selecting plans to further organizational objectives. For controlling, it discusses ensuring plans are followed using performance reports. It also outlines concepts like just-in-time systems, total quality management, and process reengineering that are part of the changing business environment faced by managers. Finally, it discusses guidelines from the Institute of Management Accountants for ethical behavior by management accountants.
Governmental entities special funds and government wide financial statementssellyhood
This chapter discusses the various fund types used in governmental accounting including governmental funds (general fund, special revenue funds, debt service funds, capital projects funds, permanent funds), proprietary funds (enterprise funds, internal service funds), and fiduciary funds (pension trust funds, investment trust funds, private-purpose trust funds, agency funds). It covers the financial statements required for each fund type and introduces the government-wide financial statements required under GASB 34, including the statement of net assets and statement of activities. The chapter concludes with a discussion of auditing requirements for governmental entities.
The term ‘cost’ has a wide variety of meanings. Different people use this term in different senses for different purposes. For example, while buying a book, you generally ask, “how much does it cost”? Here the cost means price.
The costing terminology of the Institute of Cost and Works Accountants,London defines cost as “the amount of expenditure incurred on or attributable to a given thing”.
Costing is the technique and process of ascertaining costs. In simple words costing is a systematic procedure of determining the unit cost of product/service.
The document discusses intercompany transactions and how to account for them in consolidated financial statements. Specifically, it addresses how to account for intercompany sales of inventory between affiliates. When inventory is sold at cost between affiliates, no profit or loss is recognized. However, if it is sold at a markup, the profit is considered unrealized for consolidation purposes until the inventory is resold to an unrelated party. The profit must be removed from the income statement and inventory balance on the balance sheet to eliminate the effect of the intercompany transaction for consolidation. Several examples are provided to illustrate the accounting entries for downstream and upstream inventory sales between affiliates.
This document provides an overview of the equity method of accounting for investments. It describes the equity method criteria, accounting procedures, and journal entries. The key points are:
1. The equity method is used when an investor has significant influence over an investee, usually owning 20-50% of the voting shares.
2. Under the equity method, the investment account increases with the investee's earnings and decreases with dividends. Income is recognized based on the investor's share of the investee's earnings.
3. Example journal entries are provided to record an investor recognizing income from and dividends received from an investee under the equity method.
This document provides solutions to problems from chapters 1 and 2 of a managerial economics textbook. It addresses questions related to maximizing profit and revenue for firms through analyzing demand, costs, and pricing decisions. The summaries analyze key factors like demand curves, marginal revenue, marginal costs, and how equating MR=MC determines optimal output levels.
This document provides solutions to discussion questions and problems from chapters 1-5 of the textbook "Accounting Information Systems (13th Edition)" by Romney and Steinbart. It addresses topics such as the value of information, systems development techniques, relational databases, and computer fraud. The solutions describe key concepts, provide examples, and involve applying the material to hypothetical business scenarios and accounting systems. The document is intended to help students learn by reviewing answers to questions about AIS topics covered in the early chapters of the textbook.
This document provides an overview of key concepts in managerial accounting. It begins by listing six learning objectives, including explaining distinguishing features of managerial accounting, identifying management's three broad functions, and defining manufacturing costs. It then discusses topics like the functions of management in planning, directing, and controlling; the three classes of manufacturing costs; and the differences between product and period costs. The document also summarizes how a manufacturing income statement differs from a merchandising statement and how the cost of goods manufactured is determined. Diagrams and examples are provided to illustrate key concepts.
This document discusses management control systems and responsibility centers. It defines management control as ensuring resources are used efficiently and effectively to accomplish organizational goals. Responsibility centers are organizational units headed by managers responsible for activities and objectives. There are several types of responsibility centers including engineered expense centers, discretionary expense centers, profit centers, and revenue centers. The document outlines the characteristics, budgeting processes, and performance measurement for each type. It also addresses challenges with administrative centers, R&D centers, and discretionary expenses.
1) The document discusses various capital budgeting decisions that involve incremental analysis, including accepting a special order, making or buying components, selling or processing a product further, repairing/replacing equipment, and eliminating an unprofitable segment.
2) Incremental analysis identifies the financial impacts of alternative courses of action by focusing on relevant costs and revenues that change between the options.
3) Fixed costs may or may not be relevant depending on the decision, while only incremental/variable costs and revenues are considered in the analysis.
1. The document discusses different inventory valuation methods including FIFO, LIFO, and weighted average cost.
2. FIFO assumes the oldest inventory units are sold first, LIFO assumes the newest units are sold first, and weighted average cost calculates an average unit cost of all inventory.
3. Each method has advantages and disadvantages related to matching costs and revenues, profit calculation, and reflecting current market prices. The appropriate method depends on the type of business and goals of the financial statements.
This document discusses job costing, including its definition, purpose, characteristics, applicability, differences from process costing, basic terminology, the seven steps of job costing, related journal entries, and an example problem involving actual, normal, and variance costing for a job. Job costing involves collecting and assigning costs to identifiable jobs or orders, and is used when production involves made-to-order or custom goods of short duration. It helps with planning, cost control, and decision making.
3.management accounting vs financial accountingRajesh Bhushan
Financial accounting records historical transactions to assess financial position and profit/loss, provides information to external users, follows accounting principles, and results are published. Management accounting helps management formulate policies and plans using both monetary and non-monetary data, provides quicker internal reporting not governed by strict principles, and is not audited or published. Key differences are financial accounting focuses on historical data for external reporting while management accounting uses approximate future-oriented data for internal management decision making.
This document discusses fraud and principles of internal control. It begins by introducing the learning objectives which are to discuss fraud and internal control principles, apply them to cash, identify bank account control features, and explain cash reporting. It then defines fraud and lists the three factors that contribute to fraudulent activity. Several principles of internal control are outlined, including establishing responsibility, segregating duties, documentation procedures, physical controls, and independent internal verification. Examples are provided to illustrate how missing specific controls enabled several fraud scenarios.
This document provides the full text of the final exam for ECO 550 from Strayer University. It includes multiple choice and problem questions covering chapters 9 through 17 on topics like cost theory, pricing strategy under perfect competition and monopolistic competition, and break-even analysis. The document provides a link to purchase an instant download of the exam solutions.
This document provides the full text of the final exam for ECO 550 from Strayer University. It includes multiple choice and problem questions covering chapters 9 through 17 on topics like cost theory, pricing strategy under perfect competition and monopolistic competition, and break-even analysis. The document provides a link to purchase an instant download of the exam solutions.
This document discusses auditing sales and receivables. It covers audit objectives for transactions and balances related to sales, cash receipts, and sales adjustments. Key objectives are ensuring sales and receivables exist and are complete, accurate, properly cut-off, and classified. The document also discusses control risk assessment, substantive testing procedures like analytical procedures, tests of details of transactions and balances, and confirmation of receivables. The major focus of auditing sales and receivables is on revenue recognition and valuation of receivables.
- Budgets are quantitative expressions of plans used for planning and control. They are used to translate organizational goals into operational terms.
- Control involves setting standards, monitoring actual performance, and taking corrective action. Budgets are used for control by comparing actual outcomes to planned outcomes.
- Reasons for budgeting include planning, decision making, benchmarking, and improving communication and coordination.
ch02 - Conceptual Framework for Financial Reporting.pptNicolasErnesto2
The conceptual framework establishes fundamental concepts that guide standard-setting and financial reporting more broadly. It is being jointly developed by the IASB and FASB and consists of three levels: the objective of financial reporting, qualitative characteristics, and specific concepts. The objective is to provide useful information to capital providers. Key qualitative characteristics include relevance and faithful representation. The framework also outlines basic elements, assumptions, principles, and constraints that guide accounting practices. It aims to create consistency and coherence in financial reporting standards over time.
Fin man 5 break even point and leverage analysisJimmi Sinton
This document provides an overview and examples of break-even analysis for a financial management class. It defines break-even analysis as a method to determine the sales volume needed for total revenue to equal total costs. It also discusses how to calculate break-even points in units and dollars, how to set target earnings levels, and provides homework on calculating break-even points under different cost and price scenarios.
This document contains a chapter summary and test bank for an IT auditing textbook. It includes 36 multiple choice and true/false questions that test understanding of key concepts around auditing and internal controls. Some of the main topics covered include the COSO and COBIT frameworks, components of internal controls like preventative and detective controls, the roles of internal and external auditors, and concepts like audit risk and tests of controls.
- Process costing is used for products that are similar and produced continuously, while job-order costing is used for unique jobs.
- Process costing accumulates costs by department rather than individual jobs. Costs flow through manufacturing accounts like Work in Process and are ultimately transferred to Finished Goods.
- Equivalent units of production considers partially completed units by calculating a percentage of completion and combining it with fully completed units to determine total production for the period.
Managerial Accounting Garrison Noreen Brewer Chapter 01Asif Hasan
This document summarizes key concepts from Chapter 1 of a managerial accounting textbook. It discusses the four functions of management: planning, organizing, directing/motivating, and controlling. For planning, it describes identifying alternatives and selecting plans to further organizational objectives. For controlling, it discusses ensuring plans are followed using performance reports. It also outlines concepts like just-in-time systems, total quality management, and process reengineering that are part of the changing business environment faced by managers. Finally, it discusses guidelines from the Institute of Management Accountants for ethical behavior by management accountants.
Governmental entities special funds and government wide financial statementssellyhood
This chapter discusses the various fund types used in governmental accounting including governmental funds (general fund, special revenue funds, debt service funds, capital projects funds, permanent funds), proprietary funds (enterprise funds, internal service funds), and fiduciary funds (pension trust funds, investment trust funds, private-purpose trust funds, agency funds). It covers the financial statements required for each fund type and introduces the government-wide financial statements required under GASB 34, including the statement of net assets and statement of activities. The chapter concludes with a discussion of auditing requirements for governmental entities.
The term ‘cost’ has a wide variety of meanings. Different people use this term in different senses for different purposes. For example, while buying a book, you generally ask, “how much does it cost”? Here the cost means price.
The costing terminology of the Institute of Cost and Works Accountants,London defines cost as “the amount of expenditure incurred on or attributable to a given thing”.
Costing is the technique and process of ascertaining costs. In simple words costing is a systematic procedure of determining the unit cost of product/service.
The document discusses intercompany transactions and how to account for them in consolidated financial statements. Specifically, it addresses how to account for intercompany sales of inventory between affiliates. When inventory is sold at cost between affiliates, no profit or loss is recognized. However, if it is sold at a markup, the profit is considered unrealized for consolidation purposes until the inventory is resold to an unrelated party. The profit must be removed from the income statement and inventory balance on the balance sheet to eliminate the effect of the intercompany transaction for consolidation. Several examples are provided to illustrate the accounting entries for downstream and upstream inventory sales between affiliates.
This document provides an overview of the equity method of accounting for investments. It describes the equity method criteria, accounting procedures, and journal entries. The key points are:
1. The equity method is used when an investor has significant influence over an investee, usually owning 20-50% of the voting shares.
2. Under the equity method, the investment account increases with the investee's earnings and decreases with dividends. Income is recognized based on the investor's share of the investee's earnings.
3. Example journal entries are provided to record an investor recognizing income from and dividends received from an investee under the equity method.
This document provides solutions to problems from chapters 1 and 2 of a managerial economics textbook. It addresses questions related to maximizing profit and revenue for firms through analyzing demand, costs, and pricing decisions. The summaries analyze key factors like demand curves, marginal revenue, marginal costs, and how equating MR=MC determines optimal output levels.
This document provides solutions to discussion questions and problems from chapters 1-5 of the textbook "Accounting Information Systems (13th Edition)" by Romney and Steinbart. It addresses topics such as the value of information, systems development techniques, relational databases, and computer fraud. The solutions describe key concepts, provide examples, and involve applying the material to hypothetical business scenarios and accounting systems. The document is intended to help students learn by reviewing answers to questions about AIS topics covered in the early chapters of the textbook.
This document provides an overview of key concepts in managerial accounting. It begins by listing six learning objectives, including explaining distinguishing features of managerial accounting, identifying management's three broad functions, and defining manufacturing costs. It then discusses topics like the functions of management in planning, directing, and controlling; the three classes of manufacturing costs; and the differences between product and period costs. The document also summarizes how a manufacturing income statement differs from a merchandising statement and how the cost of goods manufactured is determined. Diagrams and examples are provided to illustrate key concepts.
This document discusses management control systems and responsibility centers. It defines management control as ensuring resources are used efficiently and effectively to accomplish organizational goals. Responsibility centers are organizational units headed by managers responsible for activities and objectives. There are several types of responsibility centers including engineered expense centers, discretionary expense centers, profit centers, and revenue centers. The document outlines the characteristics, budgeting processes, and performance measurement for each type. It also addresses challenges with administrative centers, R&D centers, and discretionary expenses.
1) The document discusses various capital budgeting decisions that involve incremental analysis, including accepting a special order, making or buying components, selling or processing a product further, repairing/replacing equipment, and eliminating an unprofitable segment.
2) Incremental analysis identifies the financial impacts of alternative courses of action by focusing on relevant costs and revenues that change between the options.
3) Fixed costs may or may not be relevant depending on the decision, while only incremental/variable costs and revenues are considered in the analysis.
1. The document discusses different inventory valuation methods including FIFO, LIFO, and weighted average cost.
2. FIFO assumes the oldest inventory units are sold first, LIFO assumes the newest units are sold first, and weighted average cost calculates an average unit cost of all inventory.
3. Each method has advantages and disadvantages related to matching costs and revenues, profit calculation, and reflecting current market prices. The appropriate method depends on the type of business and goals of the financial statements.
This document discusses job costing, including its definition, purpose, characteristics, applicability, differences from process costing, basic terminology, the seven steps of job costing, related journal entries, and an example problem involving actual, normal, and variance costing for a job. Job costing involves collecting and assigning costs to identifiable jobs or orders, and is used when production involves made-to-order or custom goods of short duration. It helps with planning, cost control, and decision making.
3.management accounting vs financial accountingRajesh Bhushan
Financial accounting records historical transactions to assess financial position and profit/loss, provides information to external users, follows accounting principles, and results are published. Management accounting helps management formulate policies and plans using both monetary and non-monetary data, provides quicker internal reporting not governed by strict principles, and is not audited or published. Key differences are financial accounting focuses on historical data for external reporting while management accounting uses approximate future-oriented data for internal management decision making.
This document discusses fraud and principles of internal control. It begins by introducing the learning objectives which are to discuss fraud and internal control principles, apply them to cash, identify bank account control features, and explain cash reporting. It then defines fraud and lists the three factors that contribute to fraudulent activity. Several principles of internal control are outlined, including establishing responsibility, segregating duties, documentation procedures, physical controls, and independent internal verification. Examples are provided to illustrate how missing specific controls enabled several fraud scenarios.
This document provides the full text of the final exam for ECO 550 from Strayer University. It includes multiple choice and problem questions covering chapters 9 through 17 on topics like cost theory, pricing strategy under perfect competition and monopolistic competition, and break-even analysis. The document provides a link to purchase an instant download of the exam solutions.
This document provides the full text of the final exam for ECO 550 from Strayer University. It includes multiple choice and problem questions covering chapters 9 through 17 on topics like cost theory, pricing strategy under perfect competition and monopolistic competition, and break-even analysis. The document provides a link to purchase an instant download of the exam solutions.
This document provides the full text of the final exam for ECO 550 from Strayer University. It includes multiple choice and problem questions covering chapters 9 through 17 on topics like cost theory, pricing strategy under perfect competition and monopolistic competition, and break-even analysis. The document provides a link to purchase an instant download of the exam solutions.
This document provides the full text of the ECO 550 Week 10 Chapter 9 through 17 Final Exam from Strayer University. It includes 25 multiple choice questions and 1 problem covering topics related to cost theory, perfect competition, monopolistic competition, and asymmetric information. The document provides the full exam for students to purchase in order to complete their ECO 550 course final exam.
This document provides a sample management advisory services exam with questions and answers on various topics such as:
- Cost of capital and the tax shield effect
- Components of the cash conversion cycle
- Timing of cash flows in capital budgeting projects
- Relationship between breakeven and shutdown points
- Measures of productivity, leverage, and demand elasticity
- Cost behavior and cost drivers in activity-based costing
- Capital budgeting techniques like payback period, net present value, and internal rate of return
- Relevant versus irrelevant costs in decision making
- Steps in strategic planning and master budget preparation
Mca & bca i fma u 4.1 cost -volume-profit analysisRai University
Cost-volume-profit (CVP) analysis explains the impact of changes in selling prices, sales volume, variable costs, and fixed costs on net profit. It helps determine the effect of changing one factor on the others. Contribution is defined as sales minus variable costs and represents the amount available to cover fixed costs and profits. The profit-volume (P/V) ratio expresses the relationship between contribution and sales and can be used to calculate break-even point, profit at a given sales level, sales needed for a target profit, and the effect of a price reduction. The break-even point is the sales level where total costs equal total revenues, meaning no profit or loss. Margin of safety is the difference between
Bca i fma u 4.1 cost -volume-profit analysisRai University
Cost-volume-profit (CVP) analysis explains the impact of changes in selling prices, volume of sales, variable costs, and fixed costs on net profit. It helps determine the effect of changing one factor on the others. Contribution is defined as sales minus variable costs, and is used to calculate break-even point, profit at a given sales level, and sales needed to earn a target profit. The profit-volume (P/V) ratio expresses the relationship between contribution and sales, and is an important indicator of profitability. It is used to calculate break-even point, profit at a given sales level, sales needed for a target profit, and the impact of a price reduction. Margin of safety is
Mca i fma u 4.1 cost -volume-profit analysisRai University
Cost-volume-profit (CVP) analysis explains the impact of changes in selling prices, sales volume, variable costs, and fixed costs on net profit. It helps determine the effect of changing one factor on the others. Contribution is defined as sales minus variable costs and represents the amount available to cover fixed costs and profits. The profit-volume (P/V) ratio expresses the relationship between contribution and sales and can be used to calculate break-even point, profit at a given sales level, sales needed for a target profit, and the effect of a price reduction. The break-even point is the sales level where total costs equal total revenues, meaning no profit or loss. Margin of safety is the difference between
Bba ii cost and management accounting u 4.1 cost -volume-profit analysisRai University
This document discusses cost-volume-profit (CVP) analysis, which examines the effects of changes in fixed costs, variable costs, sales price, quantity, and product mix on profits. It explains how CVP analysis can determine the impact of these factors on net profit. Contribution is defined as sales minus variable costs, and the contribution/sales ratio (also called the P/V ratio) expresses the relationship between contribution and sales. The P/V ratio is used to calculate important metrics like break-even point, profit at a given sales level, and sales needed to earn a target profit. The document also defines margin of safety as the difference between actual and break-even sales.
Cost-volume-profit (CVP) analysis is a technique used to analyze the relationship between costs, volume, and profits. It uses linear equations to model how total costs and revenues change with production volume. CVP breaks down costs into fixed and variable components and calculates the break-even point, where total revenues equal total costs. It also determines the contribution margin of each unit and how many units must be sold to cover fixed costs. CVP analysis is useful for short-term decision making but assumes costs and prices remain constant, which limits its effectiveness for long-term planning.
CVP (cost-volume-profit) analysis examines the relationships between costs, volume, and profit. It is a useful short-term planning tool for decision making. Key elements include break-even point, contribution margin, and profit-volume charts. CVP assumes fixed costs are constant at all activity levels and unit variable costs are also constant. It can be applied to single or multiple products if they have a fixed sales mix. The document provides an example CVP analysis for a company with three hair product lines.
Cost and production analysis - Cost concepts – Cost and output relationship - cost control – Short run and Long run - cost functions - production functions – Break-even analysis - Economies scale of production.
1) The document discusses cost-volume-profit (CVP) analysis, which studies how costs and profits are affected by changes in volume. It examines variable costs, fixed costs, and contribution margin.
2) Variable costs vary with activity and remain the same per unit. Fixed costs remain constant total but vary per unit. Mixed costs have both fixed and variable components.
3) The high-low method is used to determine the fixed and variable portions of mixed costs using data from two activity levels.
The document discusses concepts related to marginal costing including:
1) The definition of marginal cost as the change in total cost from producing one additional unit of output.
2) Formulas used in marginal costing like marginal cost, contribution, profit volume ratio, and break-even point.
3) The advantages of using marginal costing and break-even analysis for managerial decision making regarding production levels and product profitability.
This document discusses different types of costs including fixed costs, variable costs, average costs, and marginal costs. It provides examples of each type of cost and explains how they relate to total cost, average cost, and profit analysis. The key points made include:
- Fixed costs do not depend on output while variable costs do depend on output. Total cost is the sum of fixed and variable costs.
- Average cost is total cost divided by output and depends on the ratio of fixed costs to output. Marginal cost is the change in total cost from a one unit change in output and depends only on variable costs.
- The relationship between average cost, marginal cost, and output determines if a company experiences economies of
This document discusses cost-volume-profit (CVP) analysis and cost curves. It begins by defining CVP analysis as a technique for studying the relationship between costs, volume, and profit. It then outlines the assumptions of CVP analysis and describes three techniques: contribution analysis, profit-volume ratio analysis, and break-even analysis. The document also discusses average cost (AC), total cost (TC), and marginal cost (MC) curves in both the short-run and long-run, explaining how they are related and their different shapes.
A PROJECT REPORT ONBREAK EVEN CHART. by INDRAKUMAR R PADWANI ...INDRAKUMAR PADWANI
This document provides information about break-even analysis including definitions of key terms, calculations, and examples. It defines a break-even point as the volume of output where there is no profit or loss. The break-even point can be found by drawing a chart that graphs total costs and sales revenue against production volume. The point where these lines intersect is the break-even point. It also discusses how changing variables like fixed costs, variable costs, or sales revenue impacts the break-even point. Examples are provided to demonstrate calculating break-even point, margin of safety, and analyzing decisions like accepting special orders.
A PROJECT REPORT ON BREAK EVEN CHART BY Indrakumar Padwani.pptxINDRAKUMAR PADWANI
This document provides information on break-even analysis including definitions of key terms, calculations, and examples. It defines a break-even point as the volume of output where there is no profit or loss. The break-even point can be found by drawing a chart showing the relationship between total costs and total revenues. The document also discusses the importance of concepts like margin of safety and how changing variables like fixed costs, variable costs, or revenues impacts the break-even point. Examples are provided to demonstrate calculating break-even quantity, profit, and margin of safety using given cost and revenue information.
Cost and Management Accounting II Chapter 1.pdfalemayehu73
CVP (cost-volume-profit) analysis is a tool that examines the relationship between a firm's costs, volume of production/sales, and profits. It can be used to determine the break-even point, which is when total revenue equals total costs. There are three methods for conducting a CVP analysis: contribution margin approach, equation approach, and graphical approach. The document provides examples of how to use the equation and contribution margin approaches to calculate a company's break-even point in units and dollars. Key assumptions of the CVP model include constant costs and sales, no changes in production capacity, and equal sales and production levels.
World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4
World economy charts case
World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4World economy charts case study presented by a Big 4
World economy charts case study presented by a Big 4
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1. 343
TRUE/FALSE
1. A company’s break-even point is the level where total revenues equal total costs.
ANS: T DIF: Easy OBJ: 9-1
2. Absorption costing is more useful than variable costing in determining a company’s break-even point.
ANS: F DIF: Easy OBJ: 9-1
3. Variable costing is more useful than absorption costing in determining a company’s break-even point.
ANS: T DIF: Easy OBJ: 9-1
4. Total variable costs vary directly with levels of production.
ANS: T DIF: Easy OBJ: 9-1
5. Variable costs per unit vary directly with levels of production.
ANS: F DIF: Easy OBJ: 9-1
6. Variable costs per unit remain unchanged with levels of production.
ANS: T DIF: Easy OBJ: 9-1
7. Total fixed costs remain unchanged with levels of production.
ANS: T DIF: Easy OBJ: 9-1
8. Total fixed costs vary inversely with levels of production.
ANS: F DIF: Easy OBJ: 9-1
9. Fixed costs per unit vary inversely with levels of production.
ANS: T DIF: Easy OBJ: 9-1
10. Fixed costs per unit remain constant with levels of production.
ANS: F DIF: Easy OBJ: 9-1
11. Break-even point may be expressed in terms of units or dollars.
ANS: T DIF: Easy OBJ: 9-1
12. Dividing total fixed costs by the contribution margin ratio yields break-even point in sales dollars.
ANS: T DIF: Easy OBJ: 9-2
2. 344
13. Dividing total fixed costs by the contribution margin ratio yields break-even point in units.
ANS: F DIF: Easy OBJ: 9-2
14. After the break-even point is reached,each dollar of contribution margin is a dollar of before-tax
profit.
ANS: T DIF: Easy OBJ: 9-3
15. After the break-even point is reached,each dollar of contribution margin is a dollar of after-tax profit.
ANS: F DIF: Easy OBJ: 9-3
16. When using CVP analysis to determine sales level for a desired amount of profit, the profit is treated
as an additional cost to be covered.
ANS: T DIF: Moderate OBJ: 9-3
17. When computing profit on an after-tax basis, it is necessary to divide the pretax profit by the effective
tax rate.
ANS: F DIF: Moderate OBJ: 9-3
18. When computing profit on an after-tax basis, it is necessary to divide the pretax profit by (1 - effective
tax rate).
ANS: T DIF: Moderate OBJ: 9-3
19. On a CVP graph, the total cost line intersects the y-axis at zero.
ANS: F DIF: Moderate OBJ: 9-3
20. On a CVP graph, the total variable cost line intersects the y-axis at zero.
ANS: T DIF: Moderate OBJ: 9-3
21. On a CVP graph, the total revenue line intersects the y-axis at zero.
ANS: T DIF: Moderate OBJ: 9-3
22. On a CVP graph, the total fixed cost line parallels the x-axis.
ANS: T DIF: Moderate OBJ: 9-3
23. Incremental analysis focuses on factors that change from one decision to another.
ANS: T DIF: Easy OBJ: 9-3
24. In a multi-product environment, CVP analysis makes the assumption that a company’s sales mix is
constant.
ANS: T DIF: Moderate OBJ: 9-4
3. 345
25. The margin of safety is an effective measure of risk for a company.
ANS: T DIF: Moderate OBJ: 9-5
26. There is an inverse relationship between degree of operating leverage and the margin of safety.
ANS: T DIF: Moderate OBJ: 9-5
27. The margin of safety is computed by dividing 1 by the degree of operating leverage.
ANS: T DIF: Moderate OBJ: 9-5
28. In CVP analysis, sales and production are assumed to be equal.
ANS: T DIF: Moderate OBJ: 9-6
COMPLETION
1. The level of activity where a company’s total revenues equal total costs is referred to as the
______________________________.
ANS: break-even point
DIF: Easy OBJ: 9-1
2. Contribution margin divided by revenue is referred to as the _______________________.
ANS: contribution margin ratio
DIF: Easy OBJ: 9-2
3. A process that focuses only on factors that change from one course of action to another is referred to as
__________________________________.
ANS: incremental analysis
DIF: Easy OBJ: 9-3
4. The excess of budgeted or actualsales over sales at break-even point is referred to as
_________________________________.
ANS: margin of safety
DIF: Moderate OBJ: 9-5
5. The relationship between a company’s variable costs and fixed costs is referred to as its
______________________________.
ANS: operating leverage
DIF: Moderate OBJ: 9-5
4. 346
6. The __________________________________ is computed by dividing the contribution margin by
profit before tax.
ANS: degree of operating leverage
DIF: Moderate OBJ: 9-5
7. The formula for margin of safety is ________________________________________.
ANS: 1 ÷ Degree of Operating Leverage
DIF: Moderate OBJ: 9-5
MULTIPLE CHOICE
1. CVP analysis requires costs to be categorized as
a. either fixed or variable.
b. fixed, mixed, or variable.
c. product or period.
d. standard or actual.
ANS: A DIF: Easy OBJ: 9-1,9-6
2. With respect to fixed costs, CVP analysis assumes total fixed costs
a. per unit remain constant as volume changes.
b. remain constant from one period to the next.
c. vary directly with volume.
d. remain constant across changes in volume.
ANS: D DIF: Easy OBJ: 9-2,9-6
3. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.
Consistent with these assumptions, as volume decreases total
a. fixed costs decrease.
b. variable costs remain constant.
c. costs decrease.
d. costs remain constant.
ANS: C DIF: Easy OBJ: 9-2,9-6
4. According to CVP analysis, a company could never incur a loss that exceeded its total
a. variable costs.
b. fixed costs.
c. costs.
d. contribution margin.
ANS: C DIF: Easy OBJ: 9-2,9-6
5. CVP analysis is based on concepts from
a. standard costing.
b. variable costing.
c. job order costing.
d. process costing.
ANS: B DIF: Easy OBJ: 9-2
5. 347
6. Cost-volume-profit analysis is a technique available to management to understand better the
interrelationships of several factors that affect a firm's profit. As with many such techniques, the
accountant oversimplifies the real world by making assumptions. Which of the following is not a
major assumption underlying CVP analysis?
a. All costs incurred by a firm can be separated into their fixed and variable components.
b. The product selling price per unit is constant at all volume levels.
c. Operating efficiency and employee productivity are constant at all volume levels.
d. For multi-product situations, the sales mix can vary at all volume levels.
ANS: D DIF: Easy OBJ: 9-2
7. In CVP analysis, linear functions are assumed for
a. contribution margin per unit.
b. fixed cost per unit.
c. total costs per unit.
d. all of the above.
ANS: A DIF: Easy OBJ: 9-2,9-6
8. Which of the following factors is involved in studying cost-volume-profit relationships?
a. product mix
b. variable costs
c. fixed costs
d. all of the above
ANS: D DIF: Easy OBJ: 9-2
9. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only
a. fixed and mixed costs.
b. relevant fixed costs.
c. relevant variable costs.
d. a relevant range of volume.
ANS: D DIF: Easy OBJ: 9-2
10. After the level of volume exceeds the break-even point
a. the contribution margin ratio increases.
b. the total contribution margin exceeds the total fixed costs.
c. total fixed costs per unit will remain constant.
d. the total contribution margin will turn from negative to positive.
ANS: B DIF: Easy OBJ: 9-2
11. Which of the following will decrease the break-even point?
Decrease in
fixed cost
Increase in direct
labor cost
Increase in
selling price
a. yes yes yes
b. yes no yes
c. yes no no
d. no yes no
ANS: B DIF: Easy OBJ: 9-2
6. 348
12. At the break-even point, fixed costs are always
a. less than the contribution margin.
b. equal to the contribution margin.
c. more than the contribution margin.
d. more than the variable cost.
ANS: B DIF: Easy OBJ: 9-2
13. The method of cost accounting that lends itself to break-even analysis is
a. variable.
b. standard.
c. absolute.
d. absorption.
ANS: A DIF: Easy OBJ: 9-2
14. Given the following notation, what is the break-even sales level in units?
SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit
a. SP/(FC/VC)
b. FC/(VC/SP)
c. VC/(SP - FC)
d. FC/(SP - VC)
ANS: D DIF: Easy OBJ: 9-2
15. Consider the equation X = Sales - [(CM/Sales) (Sales)]. What is X?
a. net income
b. fixed costs
c. contribution margin
d. variable costs
ANS: D DIF: Moderate OBJ: 9-2
16. If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry.
b. must have no fixed costs.
c. sales price must equal $0.
d. sales price must equal its variable costs.
ANS: D DIF: Moderate OBJ: 9-2
17. Break-even analysis assumes over the relevant range that
a. total variable costs are linear.
b. fixed costs per unit are constant.
c. total variable costs are nonlinear.
d. total revenue is nonlinear.
ANS: A DIF: Easy OBJ: 9-2,9-6
7. 349
18. To compute the break-even point in units, which of the following formulas is used?
a. FC/CM per unit
b. FC/CM ratio
c. CM/CM ratio
d. (FC+VC)/CM ratio
ANS: A DIF: Easy OBJ: 9-2
19. A firm's break-even point in dollars can be found in one calculation using which of the following
formulas?
a. FC/CM per unit
b. VC/CM
c. FC/CM ratio
d. VC/CM ratio
ANS: C DIF: Easy OBJ: 9-2
20. The contribution margin ratio always increases when the
a. variable costs as a percentage of net sales increase.
b. variable costs as a percentage of net sales decrease.
c. break-even point increases.
d. break-even point decreases.
ANS: B DIF: Easy OBJ: 9-2,9-6
21. In a multiple-product firm, the product that has the highest contribution margin per unit will
a. generate more profit for each $1 of sales than the other products.
b. have the highest contribution margin ratio.
c. generate the most profit for each unit sold.
d. have the lowest variable costs per unit.
ANS: C DIF: Easy OBJ: 9-4,9-6
22. _____________ focuses only on factors that change from one course of action to another.
a. Incremental analysis
b. Margin of safety
c. Operating leverage
d. A break-even chart
ANS: A DIF: Easy OBJ: 9-3
23. The margin of safety would be negative if a company('s)
a. was presently operating at a volume that is below the break-even point.
b. present fixed costs were less than its contribution margin.
c. variable costs exceeded its fixed costs.
d. degree of operating leverage is greater than 100.
ANS: A DIF: Easy OBJ: 9-5
8. 350
24. The margin of safety is a key concept of CVP analysis. The margin of safety is the
a. contribution margin rate.
b. difference between budgeted contribution margin and actualcontribution margin.
c. difference between budgeted contribution margin and break-even contribution margin.
d. difference between budgeted sales and break-even sales.
ANS: D DIF: Easy OBJ: 9-5
25. Management is considering replacing an existing sales commission compensation plan with a fixed
salary plan. If the change is adopted, the company's
a. break-even point must increase.
b. margin of safety must decrease.
c. operating leverage must increase.
d. profit must increase.
ANS: C DIF: Moderate OBJ: 9-5
26. As projected net income increases the
a. degree of operating leverage declines.
b. margin of safety stays constant.
c. break-even point goes down.
d. contribution margin ratio goes up.
ANS: A DIF: Moderate OBJ: 9-5
27. A managerial preference for a very low degree of operating leverage might indicate that
a. an increase in sales volume is expected.
b. a decrease in sales volume is expected.
c. the firm is very unprofitable.
d. the firm has very high fixed costs.
ANS: B DIF: Moderate OBJ: 9-5
Thompson Company
Below is an income statement for Thompson Company:
Sales $400,000
Variable costs (125,000)
Contribution margin $275,000
Fixed costs (200,000)
Profit before taxes $ 75,000
28. Refer to Thompson Company. What is Thompson’s degree of operating leverage?
a. 3.67
b. 5.33
c. 1.45
d. 2.67
ANS: A
$(275,000/75,000) = 3.67
DIF: Moderate OBJ: 9-5
9. 351
29. Refer to Thompson Company. Based on the cost and revenue structure on the income statement,what
was Thompson’s break-even point in dollars?
a. $200,000
b. $325,000
c. $300,000
d. $290,909
ANS: D
CM Percentage = $(275/400) = .6875
.6875x - $800,000 = 0
x = $290,909
DIF: Moderate OBJ: 9-3
30. Refer to Thompson Company. What was Thompson’s margin of safety?
a. $200,000
b. $75,000
c. $100,000
d. $109,091
ANS: D
Margin of Safety = $(400,000 - 290,909)
= $109,091
DIF: Easy OBJ: 9-5
31. Refer to Thompson Company. Assuming that the fixed costs are expected to remain at $200,000 for
the coming year and the sales price per unit and variable costs per unit are also expected to remain
constant, how much profit before taxes will be produced if the company anticipates sales for the
coming year rising to 130 percent of the current year’s level?
a. $97,500
b. $195,000
c. $157,500
d. A prediction cannot be made from the information given.
ANS: C
Contribution Margin * 1.20 = New Contribution Margin
$275,000 * 1.20 = $357,500
Contribution Margin - Fixed Costs = Profit
$(357,500 - 200,000) = $157,500
DIF: Moderate OBJ: 9-3
10. 352
Value Pro
Value Pro produces and sells a single product. Information on its costs follow:
Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs:
SG&A $12,000 per year
Production $15,000 per year
32. Refer to Value Pro. Assume Value Pro produced and sold 5,000 units. At this level of activity, it
produced a profit of $18,000. What was Value Pro's sales price per unit?
a. $15.00
b. $11.40
c. $9.60
d. $10.00
ANS: A
Profit + Fixed Costs = Contribution Margin
$18,000 + $27,000 = $45,000
$45,000 / 5,000 units = $9 contribution margin per unit
Contribution Margin + Variable Costs = Sales Price/Unit
$(9 + (4 + 2)) = $15/Unit
DIF: Moderate OBJ: 9-3
33. Refer to Value Pro. In the upcoming year,Value Pro estimates that it will produce and sell 4,000 units.
The variable costs per unit and the total fixed costs are expected to be the same as in the current year.
However,it anticipates a sales price of $16 per unit. What is Value Pro's projected margin of safety for
the coming year?
a. $7,000
b. $20,800
c. $18,400
d. $13,000
ANS: B
Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
($10*4,000) - $27,000 = $(40,000 - 27,000) = $13,000
Breakeven
0.625x - $27,000 = $0
x = $43,200
$(64,000 - 43,200) = $20,800
DIF: Moderate OBJ: 9-5
11. 353
34. Harris Manufacturing incurs annual fixed costs of $250,000 in producing and selling a single product.
Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by management. The
company projects its income tax rate at 40 percent. What is the maximum amount that Harris can
expend for variable costs per unit and still meet its profit objective if the sales price per unit is
estimated at $6?
a. $3.37
b. $3.59
c. $3.00
d. $3.70
ANS: C
Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs: 250,000
Contribution Margin: $375,000
Projected Sales $750,000
less: Contribution Margin 375,000
Variable Costs $375,000
$375,000 / 125,000 units $3/unit
DIF: Moderate OBJ: 9-3
Folk Company
The following information relates to financial projections of Folk Company:
Projected sales 60,000 units
Projected variable costs $2.00 per unit
Projected fixed costs $50,000 per year
Projected unit sales price $7.00
35. Refer to Folk Company. How many units would Folk Company need to sell to earn a profit before
taxes of $10,000?
a. 25,714
b. 10,000
c. 8,571
d. 12,000
ANS: D
Contribution Margin per Unit: $5
$5x - $50,000 - $10,000
$5x = $60,000
x = 12,000 units
DIF: Moderate OBJ: 9-3
12. 354
36. Refer to Folk Company. If Folk Company achieves its projections, what will be its degree of operating
leverage?
a. 6.00
b. 1.20
c. 1.68
d. 2.40
ANS: B
Net profit = (60,000 units * $5/unit) - $50,000
= $300,000 - $50,000
= $250,000
DOL = $(300,000/120,000) = 1.20
DIF: Moderate OBJ: 9-5
37. Unique Company manufactures a single product. In the prior year, the company had sales of $90,000,
variable costs of $50,000, and fixed costs of $30,000. Unique expects its cost structure and sales price
per unit to remain the same in the current year,however total sales are expected to increase by 20
percent. If the current year projections are realized, net income should exceed the prior year’s net
income by:
a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.
ANS: B
Contribution margin: $40,000
Net profit: $(40,000 - 30,000) = $10,000
20% CM increase: $40,000 * 1.20 = $48,000
Net profit: $(48,000 - 30,000) = $18,000
Increase in profit $8,000
$8,000/$10,000 = 80%
DIF: Moderate OBJ: 9-3
Eclectic Corporation
Eclectic Corporation manufactures and sells two products: A and B. The operating results of the
company are as follows:
Product A Product B
Sales in units 2,000 3,000
Sales price per unit $10 $5
Variable costs per unit 7 3
In addition, the company incurred total fixed costs in the amount of $9,000.
13. 355
38. Refer to Eclectic Corporation.. How many total units would the company have needed to sell to break
even?
a. 3,750
b. 750
c. 3,600
d. 1,800
ANS: A
Let B = 1.5A
3A + 2(1.5A) - $9,000 = $0
6A - $9,000 = $0
A = 1,500
B = 2,250
Total units = 3,750
DIF: Moderate OBJ: 9-4
39. Refer to Eclectic Corporation. If the company would have sold a total of 6,000 units, consistent with
CVP assumptions how many of those units would you expect to be Product B?
a. 3,000
b. 4,000
c. 3,600
d. 3,500
ANS: C
A + 1.5A = 6,000 units
2.5A = 6,000 units
A = 2,400 units
B = 3,600 units
DIF: Moderate OBJ: 9-4
40. Refer to Eclectic Corporation. How many units would the company have needed to sell to produce a
profit of $12,000?
a. 8,750
b. 20,000
c. 10,000
d. 8,400
ANS: A
3A + 2(1.5A) - $9,000 = $12,000
6A = $21,000
A = 3,500 units
B = 5,250 units
Total = 8,750 units
DIF: Moderate OBJ: 9-4
14. 356
Brittany Company
Below is an income statement for Brittany Company:
Sales $300,000
Variable costs (150,000)
Contribution margin $150,000
Fixed costs (100,000)
Profit before taxes $ 50,000
41. Refer to Brittany Company. What was the company's margin of safety?
a. $50,000
b. $100,000
c. $150,000
d. $25,000
ANS: B
Margin of safety = Sales - BEP Sales
CM = .50
BEP Sales = .50x - $100,000 = 0
= .50x = $100,000
x = $200,000
$(300,000 - 200,000) = $100,000
DIF: Moderate OBJ: 9-5
42. Refer to Brittany Company. If the unit sales price for Brittany’s sole product was $10, how many units
would it have needed to sell to produce a profit of $40,000?
a. 27,500
b. 29,000
c. 28,000
d. can't be determined from the information given
ANS: C
Contribution Margin at $40,000 profit: $(40,000 + 100,000) = $140,000
Contribution Margin Ratio: 0.50
$140,000 / .50 = $280,000
$280,000 / $10 = 28,000 units
DIF: Moderate OBJ: 9-3
15. 357
43. A firm estimates that it will sell 100,000 units of its sole product in the coming period. It projects the
sales price at $40 per unit, the CM ratio at 60 percent,and profit at $500,000. What is the firm
budgeting for fixed costs in the coming period?
a. $1,600,000
b. $2,400,000
c. $1,100,000
d. $1,900,000
ANS: D
Profit + Fixed Cost = (100,000 units * $60/unit CM)
Fixed Cost = (100,000 units * $24/unit CM) - Profit
= $2,400,000 - $500,000
= $1,900,000
DIF: Moderate OBJ: 9-3
44. Sombrero Company manufactures a western-style hat that sells for $10 per unit. This is its sole product
and it has projected the break-even point at 50,000 units in the coming period. If fixed costs are
projected at $100,000, what is the projected contribution margin ratio?
a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent
ANS: B
Fixed Costs=Contribution Margin at Breakeven Point
= $100,000
Breakeven Sales: $500,000
CM Ratio: $(100,000/500,000) = 20%
DIF: Moderate OBJ: 9-3
Brandon Company
Brandon Company manufactures a single product. Each unit sells for $15. The firm's projected costs
are listed below:
Variable costs per unit:
Production $5
SG&A $1
Fixed costs:
Production $40,000
SG&A $60,000
Estimated volume 20,000 units
16. 358
45. Refer to Brandon Company. What is Brandon's projected margin of safety for the current year?
a. $133,333
b. $150,000
c. $80,000
d. $100,000
ANS: A
Contribution Margin = $9/unit
Contribution Margin Ratio = 60%
Breakeven Point = $100,000/.60 = $166,667
Sales Volume = 20,000 units * $15/unit = $300,000
Margin of Safety = $(300,000 - 166,667) = $133,333
DIF: Moderate OBJ: 9-5
46. Refer to Brandon Company. What is Brandon's projected degree of operating leverage for the current
year?
a. 2.25
b. 1.80
c. 3.75
d. 1.67
ANS: A
Contribution Margin = $180,000
Net Income = 80,000
Degree of Operating Leverage = $180,000/80,000 = 2.55
DIF: Moderate OBJ: 9-5
Alpha, Beta, and Epsilon Companies
Below are income statements that apply to three companies: Alpha, Beta,and Epsilon:
Alpha Co. Beta Co. Epsilon Co.
Sales $100 $100 $100
Variable costs (10) (20) (30)
Contribution margin $ 90 $ 80 $ 70
Fixed costs (30) (20) (10)
Profit before taxes $ 60 $ 60 $ 60
47. Refer to Alpha, Beta,and Epsilon Companies. Within the relevant range, if sales go up by $1 for each
firm, which firm will experience the greatest increase in profit?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. can't be determined from the information given
ANS: A
Alpha Company will have the greatest increase in profit, because it has the
greatest contribution margin per unit.
DIF: Easy OBJ: 9-3
17. 359
48. Refer to Alpha, Beta,and Epsilon Companies. Within the relevant range, if sales go up by one unit for
each firm, which firm will experience the greatest increase in net income?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. can't be determined from the information given
ANS: D
Price per unit is not given.
DIF: Easy OBJ: 9-3
49. Refer to Alpha, Beta,and Epsilon Companies. At sales of $100, which firm has the highest margin of
safety?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. They all have the same margin of safety.
ANS: C
Epsilon Company has the lowest amount of fixed costs to be
covered.
DIF: Moderate OBJ: 9-3
50. Mike is interested in entering the catfish farming business. He estimates if he enters this business, his
fixed costs would be $50,000 per year and his variable costs would equal 30 percent of sales. If each
catfish sells for $2, how many catfish would Mike need to sell to generate a profit that is equal to 10
percent of sales?
a. 40,000
b. 41,667
c. 35,000
d. No level of sales can generate a 10 percent net return on sales.
ANS: B
Let x = sales in dollars
x - .30x - $50,000 = .10x
.60x = $50,000
x = $83,333 Units = $83,333/$2 per unit = 41,667 units
DIF: Difficult OBJ: 9-3
18. 360
51. The following information pertains to Saturn Company’s cost-volume-profit relationships:
Break-even point in units sold 1,000
Variable costs per unit $500
Total fixed costs $150,000
How much will be contributed to profit before taxes by the 1,001st unit sold?
a. $650
b. $500
c. $150
d. $0
ANS: C
Fixed Cost = Contribution Margin
= $150,000
Contribution Margin/Unit = Contribution Margin/Units
$150,000/1,000 units = $150/unit
DIF: Moderate OBJ: 9-3
52. Information concerning Averie Corporation's Product A follows:
Sales $300,000
Variable costs 240,000
Fixed costs 40,000
Assuming that Averie increased sales of Product A by 20 percent,what should the profit from Product
A be?
a. $20,000
b. $24,000
c. $32,000
d. $80,000
ANS: C
Contribution margin at $300,000 in sales = $60,000
Increase contribution margin by 20% = $60,000 * 1.20 = $72,000
Contribution margin - fixed costs = Profit
$(72,000 - 40,000) = $32,000
DIF: Moderate OBJ: 9-3
19. 361
53. Ledbetter Company reported the following results from sales of 5,000 units of Product A for June:
Sales $200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income $ 20,000
Assume that Ledbetter increases the selling price of Product A by 10 percent in July. How many units
of Product A would have to be sold in July to generate an operating income of $20,000?
a. 4,000
b. 4,300
c. 4,545
d. 5,000
ANS: A
If sales price per unit is increased by 10 percent,less units will have to be sold to generate
gross revenues of $200,000.
Sales price per unit = $200,000/5,000 units = $40/unit
$40/unit * 1.10 = $44/unit
$(200,000 / 44/unit) = 4,545 units
DIF: Moderate OBJ: 9-3
54. On a break-even chart,the break-even point is located at the point where the total
a. revenue line crosses the total fixed cost line.
b. revenue line crosses the total contribution margin line.
c. fixed cost line intersects the total variable cost line.
d. revenue line crosses the total cost line.
ANS: D DIF: Easy OBJ: 9-3
55. In a CVP graph, the slope of the total revenue line indicates the
a. rate at which profit changes as volume changes.
b. rate at which the contribution margin changes as volume changes.
c. ratio of increase of total fixed costs.
d. total costs per unit.
ANS: B DIF: Moderate OBJ: 9-3
56. In a CVP graph, the area between the total cost line and the total revenue line represents total
a. contribution margin.
b. variable costs.
c. fixed costs.
d. profit.
ANS: D DIF: Easy OBJ: 9-3
57. In a CVP graph, the area between the total cost line and the total fixed cost line yields the
a. fixed costs per unit.
b. total variable costs.
c. profit.
d. contribution margin.
ANS: B DIF: Easy OBJ: 9-3
20. 362
58. If a company's fixed costs were to increase,the effect on a profit-volume graph would be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be more pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).
ANS: B DIF: Moderate OBJ: 9-3
59. If a company's variable costs per unit were to increase but its unit selling price stays constant, the
effect on a profit-volume graph would be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).
ANS: D DIF: Easy OBJ: 9-3
60. The most useful information derived from a cost-volume-profit chart is the
a. amount of sales revenue needed to cover enterprise variable costs.
b. amount of sales revenue needed to cover enterprise fixed costs.
c. relationship among revenues,variable costs, and fixed costs at various levels of activity.
d. volume or output level at which the enterprise breaks even.
ANS: C DIF: Easy OBJ: 9-3
SHORT ANSWER
1. How do changes in volume affect the break-even point?
ANS:
Within the relevant range, the break-even point does not change. This is due to the linearity
assumptions that apply to total revenues,fixed costs, and variable costs.
DIF: Moderate OBJ: 9-2,9-6
2. What major assumption do multi-product firms need to make in using CVP analysis that single-
product firms need not make?
ANS:
The assumption that must be imposed is a constant sales mix. A multi-product firm assumes that
(within the relevant range) the sales mix is constant. This permits CVP analysis to be performed using
a unit of the constant sales mix.
DIF: Moderate OBJ: 9-4
3. What important information is conveyed by the margin of safety calculation in CVP analysis?
ANS:
The break-even point in CVP analysis is critical because it divides profitable levels of operation from
unprofitable levels of operation. The margin of safety gives managers an idea of the extent to which
sales can fall before operations will become unprofitable.
DIF: Moderate OBJ: 9-5
21. 363
4. What are the major assumptions of CVP analysis?
ANS:
1. All revenue and variable cost behavior patterns are constant per unit
and linear within the relevant range.
2. Total contribution margin (total revenue divided by total variable cost) is linear
within the relevant range and increases proportionally with output.
3. Total fixed cost is constant within the relevant range. This assumption,
in part, indicates that no capacity additions will be made during
the period under consideration.
4. Mixed costs can be accurately separated into their fixed and variable elements.
5. Sales and production are equal; thus, there is no material fluctuation in inventory
levels. This assumption is necessary because fixed cost can be allocated
to inventory at a different rate each year. Thus, variable costing
information must be available. Because CVP and variable costing both focus
on cost behavior, they are distinctly compatible with one another.
6. In a multi-product firm, the sales mix remains constant. This assumption is necessary
so that a weighted average contribution margin can be computed.
7. Labor productivity, production technology, and market conditions will not
change. If any of these changes were to occur, costs would change correspondingly,
and selling prices might change
DIF: Moderate OBJ: 9-6
PROBLEM
1. The Coontz Company sells two products, A and B, with contribution margin ratios of 40 and 30
percent and selling prices of $5 and $2.50 a unit. Fixed costs amount to $72,000 a month. Monthly
sales average 30,000 units of product A and 40,000 units of product B.
Required:
a. Assuming that three units of product A are sold for every four units of product B,
calculate the dollar sales volume necessary to break even.
b. As part of its cost accounting routine, Coontz Company assigns $36,000 in fixed
costs to each product each month. Calculate the break-even dollar sales volume for
each product.
c. Coontz Company is considering spending an additional $9,700 a month on
advertising, giving more emphasis to product A and less emphasis to product B. If its
analysis is correct,sales of product A will increase to 40,000 units a month, but sales
of product B will fall to 32,000 units a month. Recalculate the break-even sales
volume, in dollars, at this new product mix. Should the proposal to spend the
additional $9,700 a month be accepted?
ANS:
a. CM = (3 $2) + (4 $.75) = $9
SP = (3 $5) = (4 $2.50) = $25
BE = $72,000 = $400,000
$9/$25
b. A = $36,000 = $90,000 B = $36,000 = $120,000
.4 .3
22. 364
c. CM = (5 $2) + (4 $.75) = $13
SP = (5 $5) + (4 $2.50) = $35
BE = $72,000 + $9,700 = $219,962
$13/35
OLD NEW
CM A = 30,000 $2 = $60,000 CM A = 40,000 $2 = $ 80,000
B = 40,000 $.75 = 30,000 B = 32,000 $.75 24,000
$90,000 $104,000
- FC (72,000) - FC (81,700)
OI $18,000 OI $ 22,300
At current sales levels increase advertising.
DIF: Moderate OBJ: 9-4
2. The Graves Company makes three products. The cost data for these three products is as follows:
Product A Product B Product C
Selling price $10 $20 $40
Variable costs 7 12 16
Total annual fixed costs are $840,000. The firm's experience has been that about 20 percent of dollar
sales come from product A, 60 percent from B, and 20 percent from C.
Required:
a. Compute break-even in sales dollars.
b. Determine the number of units to be sold at the break-even point.
ANS:
A B C
a. SP $10 $20 $40
- VC (7) (12) (16)
= CM $ 3 $ 8 $24
CMR 30% 40% 60%
CMR = (.2 30%) + (.6 40%) + (.2 60%) = 42%
BE = $840,000/.42 = $2,000,000
b. A ($2,000,000 .20)/$10 = 40,000 units
B ($2,000,000 .60)/$20 = 60,000 units
C ($2,000,000 .20)/$40 = 10,000 units
DIF: Moderate OBJ: 9-4
23. 365
3. Anderson Company produces and sells two products: A and B in the ratio of 3A to 5B. Selling prices
for A and B are, respectively, $1,200 and $240; respective variable costs are $480 and $160. The
company's fixed costs are $1,800,000 per year.
Compute the volume of sales in units of each product needed to:
Required:
a. break even.
b. earn $800,000 of income before income taxes.
c. earn $800,000 of income after income taxes,assuming a 30 percent tax rate.
d. earn 12 percent on sales revenue in before-tax income.
e. earn 12 percent on sales revenue in after-tax income, assuming a 30 percent tax rate.
ANS:
A SP $1,200 B SP $240
- VC (480) - VC (160)
CM $ 720 CM $ 80
Weighted CM = (3 $720) + (5 $80) = $2,560
a. $1,800,000 = 703.125 A = 704 3 = 2,112 units
$2,560 B = 704 5 = 3,520
b. $1,800,000 + $800,000 = 1015.625 A = 1,016 3 = 3,048 units
$2,560 B = 1,016 5 = 5,080
c. $800,000/1 - .3 = $1,142,857
$1,800,000 + $1,142,857 = 1,149.55 A = 1,150 3 = 3,450 units
$2,560 B = 1,150 5 = 5,750
d. SP = (3 $1,200) + (5 $240) = $4,800
X = $1,800,000 + $.12X = $4,354,839
$2,560/$4,800
A = ($4,354,839 .75)/$1200 = 2,722 units
B = ($4,354,839 .25/$240 = 4,537
e. X = $1,800,000 + $.12X
1 - .3 = $4,973,684
$2,560/$4,800
A = ($4,973,684 .75)/$1,200 = 3,109 units
B = ($4,973,684 .25/$240 = 5,181
DIF: Moderate OBJ: 9-4
24. 366
Bradley Corporation
Information relating to the current operations of Bradley Corporation follows:
Sales $120,000
Variable costs (36,000)
Contribution margin $ 84,000
Fixed costs (70,000)
Profit before taxes $ 14,000
4. Refer to Bradley Corporation. Bradley's break-even point was 1,000 units. Compute Bradley's sales
price per unit.
ANS:
The break-even point is found by dividing the fixed costs by the CM ratio.
The CM ratio is:
$84,000/$120,000 = 70%. Breakeven would then be:
$70,000/.70 = $100,000. Since we also know that the break-even point is defined as 1,000 units, it
must follow that the unit sales price is $100,000/1,000 = $100.
DIF: Moderate OBJ: 9-3
5. Refer to Bradley Corporation. Compute Bradley's degree of operating leverage.
ANS:
The degree of operating leverage is computed as the contribution margin divided by profit before
taxes: $84,000/$14,000 = 6.
DIF: Moderate OBJ: 9-5
McKinney Corporation
McKinney Corporation manufactures and sells two products: A and B. The projected information on
these two products for the coming year is presented below:
Product A Product B
Sales in units 4,000 1,000
Sales price per unit $12 $8
Variable costs per unit 8 4
Total fixed costs for the company are projected at $10,000.
6. Refer to McKinney Corporation. Compute McKinney Corporation's projected break-even point in total
units.
ANS:
The company anticipates a sales mix consisting of 4 units of Product A and 1 unit of Product B. The
total contribution margin for one unit of sales mix would be $20. This consists of $16 of contribution
margin from the 4 units of Product A and $4 of contribution margin from 1 unit of Product B.
25. 367
The overall company break-even point is found by dividing total fixed costs by the contribution
margin on one unit of sales mix: $10,000/$20 = 500 units. The 500 units of sales mix contain 500 5
units of product for a total of 2,500. Of the 2,500 total units, 2,000 are units of Product A and 500 are
units of Product B.
DIF: Moderate OBJ: 9-4
7. Refer to McKinney Corporation. How many units would the company need to sell to produce an
income before income taxes equal to 15 percent of sales?
ANS:
Again, using a unit of sales mix as the unit of analysis, one unit of sales mix sells for $56. Since the
contribution margin is $20 on one unit of sales mix, the CM ratio on one unit of sales mix is $20/$56 =
.3571. This implies that variable costs as a percentage of sales are equal to 1 - .3571 = .6429. Income
before income taxes equal to 15 percent of sales can be found by solving a formula of the following
type:
Sales - VC - FC = Income before income taxes
In this particular case,we solve the following formula:
Sales - (.6429 Sales) - $10,000 = (.15 Sales)
Solving for Sales, we get $48,286. We can find out how many units of sales mix are required to
generate sales of $48,286 by dividing $48,286 by $56 = 863. These 863 units of sales mix each contain
5 units of product, so the correct answer would be 863 5 = 4,315 units of product, 3,452 of Product
A and 863 of Product B.
DIF: Moderate OBJ: 9-4
Perry Corporation
Perry Corporation predicts it will produce and sell 40,000 units of its sole product in the current year.
At that level of volume, it projects a sales price of $30 per unit, a contribution margin ratio of 40
percent, and fixed costs of $5 per unit.
8. Refer to Perry Corporation. What is the company's projected breakeven point in dollars and units?
ANS:
Given the CM ratio of 40 percent, and the Sales price per unit of $30, the CM per unit must be $30
.40 = $12. The total fixed costs would be projected at $5 40,000 = $200,000. Breakeven would be:
$200,000/$12 = 16,667 units. This would also equate to $500,000 of sales.
DIF: Moderate OBJ: 9-3
9. Refer to Perry Corporation. What would the company's projected profit be if it produced and sold
30,000 units?
ANS:
Projected profit would be:
Sales (30,000 $30) $900,000
Variable costs (30,000 $18) (540,000)
Contribution margin $360,000
26. 368
Fixed costs (200,000)
Profit $160,000
DIF: Moderate OBJ: 9-3
Castle Corporation
The following questions are based on the following data pertaining to two types of products
manufactured by Castle Corporation:
Per unit
Sales price Variable costs
Product Y $120 $ 70
Product Z $500 $200
Fixed costs total $300,000 annually. The expected mix in units is 60 percent for Product Y and 40
percent for Product Z.
10. Refer to Castle Corporation. How much is Castle’s break-even point sales in units?
ANS:
BEP units = FC/(unit SP - unit VC) or unit CM(UMC)
For multiple products, use the weighted CM with weights based on units of sales weights.
BEP = FC / [60% ($120 - $70) + 40% ($500 - $200)]
= $300,000/ ($30/u + $120/u) = 2,000 units
DIF: Moderate OBJ: 9-4
11. Refer to Castle Corporation. What is Castle’s break-even point in sales dollars?
ANS:
BEP dollars = FC/CMR
For multiple products, use weighted CMR with weights based on sales dollars as weights or sales mix.
Sales mix is 60 percent and 40 percent in units or in dollars.
Weighted average CMR = WACM/WASale
WACMR = [60% ($120 - $70) + 40% ($500 - $200)] ÷ (60% $120) + (40% $500)
WACMR = [$30 + $120] ÷ [$72 + $200] = .551
BEP sales = 2,000 $272 = $544,000
DIF: Moderate OBJ: 9-4
Q 1. Ritz Company makes three products from a joint input that have the following information:
Units
Produced
Sales Value per
unit at split off
Total Additional
processing costs
Sales value per unit after
additional processing
Product A 50,000 $10 $400,000 $15
Product B 30,000 $8 $300,000 $20
Product C 45,000 $7 $180,000 $10.50
The joint cost incurred to produce the three products to the split off point is $600,000. Which
products should be processed further?
27. 369
SOLUTION:
Units
Produced
Sales
Value per
unit at
split off
Total
Additional
processing
costs
Sales value per
unit after
additional
processing
PROCESS
FURTHER
Product A 50,000 $10 $400,000 $15 ($150,000)
Product B 30,000 $8 $300,000 $20 $60,000
Product C 45,000 $7 $180,000 $10.50 ($22,500)
Q 2-3: IOWA INDUSTRIES
Iowa Industries makes corn oil and corn meal from corn in a joint process. The corn oil can be
further processed into margarine, and the corn meal can be further processed into corn muffin
mix. The joint cost incurred to process the corn to the split off point was $140,000. Information
on the quantities, value, and further processing costs for the joint product appears below:
Quantity Sales value at
split off
Estimated further
processing cost.
Final Sales
Value after
processing
Corn Oil 800,000 lbs. $0.30/lb. $0.15/lb. $0.60/lb.
Corn Meal 1,500,000 lbs. $0.15/lb. $0.45/lb. $0.55/lb.
Q2. Assume that the joint cost is allocated to the products based on the approximate net
realizable value of each product. How much joint cost should be assigned to the corn oil?
Quantity ADDL
COSTS
FINAL
VALUE APPX NRV RATIO ALLOCATION
Corn
Oil
800,000 $0.15 $0.60
$360,000.00 0.70588235 $98,823.5294
Corn
Meal
1,500,000 $0.45 $0.55
$150,000.00 0.29411765 $41,176.4706
$510,000.00
28. 370
Q 3. Assume that the joint cost is allocated to the products based on the relative sales value
at split-off of each product. How much joint cost should be assigned to the corn meal?
Quantity AT
SPLIT OFF
VALUE
AT SPLIT
OFF RATIO ALLOCATION
Corn
Oil 800,000 $0.30 $240,000.00
0.516129032 $72,258.0645
Corn
Meal 1,500,000 $0.15 $225,000.00
0.483870968 $67,741.9355
$465,000.00
Q 4: Value Pro produces and sells a single product. Information on its costs follow:
Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs:
SG&A $12,000 per year
Production $15,000 per year
In the upcoming year, Value Pro estimates that it will produce and sell 4,000 units. The
variable costs per unit and the total fixed costs are expected to be the same as in the current
year. However, it anticipates a sales price of $16 per unit. What is Value Pro's projected
margin of safety (in dollars) for the coming year?
Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
Breakeven
10*x - $27,000 = $0 x=2,700 units
Break Even Sales = 2,700*16=$43,200
$(64,000 - 43,200) = $20,800
Q 5. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and selling a
single product. Estimated unit sales are 125,000. An after-tax income of $75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that Meixner can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at $6?
Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs: 250,000
Contribution Margin: $375,000
Projected Sales $750,000
less: Contribution Margin 375,000
Variable Costs $375,000
29. 371
$375,000 / 125,000 units $3/unit
Q 6. Adams Company uses 10,000 units of a part in its production process. The costs to make a
part are: direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed
overhead, $30. Adams has received a quote of $55 from a potential supplier for this part. If
Adams buys the part, 70 percent of the applied fixed overhead would continue. Adams
Company would be better off by $______?
Cost to buy: $55/unit * 10,000 units = $550,000
Cost to manufacture: $(12+25+13+9)= $59/unit
Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000
Q 7. Gamble Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of $50, and Product Y has a contribution
margin of $64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of
machine time. If Gamble Company wants to dedicate 80 percent of its machine time to the
product that will provide the most income, the company will have a total contribution margin
of
Assume 80% of capacity applied to Product X
X: 20,000 hrs/5 hrs per unit 4,000 units * $50 CM/unit $200,000
Y: 5,000 hrs/8 hrs per unit 625 units * $64 CM/unit 40,000
Total $240,000
======
Q 8. Perry Company has 3 divisions: R, S, and T. Division R's income statement shows the
following for the year ended December 31:
Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative expenses 250,000 (350,000)
Net loss $ (150,000)
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent
are avoidable if the division is closed. All of the selling expenses relate to the division and
would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent
are applied from corporate costs (unavoidable). If Division R were eliminated, how would
Perry’s income change?
Sales foregone $(1,000,000)
COGS avoided
Variable $600,000
Fixed 120,000 720,000
30. 372
Selling Expense Avoided 100,000
Administrative Expense Avoided 25,000
Decrease in income $(155,000)
=========
Q 9. Pratt Company is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs
associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3;
applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow
the use of a slightly lower grade of direct material, thereby lowering the price per unit by
$1.50 and selling expenses would be decreased by $1. If Pratt wants this special order to
increase the total net income for the firm to $10,000, what sales price must be quoted for each
of the 5,000 units?
In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.
Direct materials $ 4.50
Direct Labor 10.00
Variable Overhead 3.00
Variable Selling Exp 1.00
Production Costs $18.50
Additional profit per unit
5.00
Sales price/unit $23.50
=====
Q 10. West Company produces a part that has the following costs per unit:
Direct material $ 8
Direct labor 3
Variable overhead 1
Fixed overhead 5
Total $17
Zest Corporation can provide the part to West for $19 per unit. West Company has
determined that 60 percent of its fixed overhead would continue if it purchased the part.
However, if West no longer produces the part, it can rent that portion of the plant facilities for
$60,000 per year. West Company currently produces 10,000 parts per year. Which alternative
is preferable and by what margin?
Purchase price from Zest $(190,000)
Rent Revenue Received 60,000
Variable Costs Avoided 120,000
Fixed Overhead Avoided 20,000
Difference in Favor of Buying $ 10,000
Q 11. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either
product it can make. The following data are pertinent to each respective product:
31. 373
Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05
Allocated Fixed Costs $8.00 $1.00
The company has 40,000 machine hours available for production. What sales mix will
maximize profits?
Brushes have a contribution margin of $8.50 per unit and 8*8.50=$68/hour; combs
have a contribution margin of $2.65 per unit and 20*2.65=$53/hour. Brushes have
bigger CM per hour (constrained resource).
The combination of 320,000 brushes (=8*40,000) and 0 combs provides the highest
profit.
Q 12. Green Industries has two sales territories-East and West. Financial information for the two
territories is presented below:
East West
Sales $980,000 $750,000
Direct costs:
Variable (343,000) (225,000)
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) $(88,000) $ 25,000
Because the company is in a start-up stage, corporate management feels that the East sales
territory is creating too much of a cash-drain on the company and it should be eliminated. If
the East territory is discontinued, one sales manager (whose salary is $40,000 per year) will be
relocated to the West territory. By how much would Green's income change if the East
territory is eliminated?
Sales foregone in East $(980,000)
Variable costs avoided 343,000
Fixed costs avoided 410,000
Decrease in income from
eliminating East territory
$(227,000)
========
Q13: Jones Corp. has a capacity to produce 40,000 units. Its product sells for $50 per unit and the
variable costs incurred in manufacturing and selling the product are as follows on a per unit
basis: Direct materials = $10; Direct labor = $20; Variable manufacturing OH = $5; Sales
commission = $3. Annual fixed manufacturing OH is $500,000 and annual fixed S G & A
costs are $200,000. A customer has proposed a special order to purchase 10,000 units. If
Jones accepts the order, the company would not have to pay its sales people their normal
32. 374
commission of $3 per unit, but the company would incur extra shipping cost of $5 per unit.
Assume that Jones is operating at full capacity and will have to divert sales from regular
customers, if the offer is accepted. What is the minimum price per unit below which Jones
should reject the order?
Ans: 50-3+5=$52
33. 375
Q14-15: The following information relates to Two-4-One Corp.
Service Departments Costs
Service A $70,000
Service B $90,000
Production Departments
Production C $16,000
Production D $21,000
Number of employees is the cost driver for service department A and square-feet is the cost
driver for service department B. The cost drivers are distributed as followed:
Department Square-feet Number of employees
A 1,000 5
B 1,500 15
C 4,000 45
D 3,000 25
Q14: How much of the total Service Department Costs will be allocated to Production
Department C (using the direct method).
34. 376
Q15: How much of the total Service Department Costs will be allocated to Production
Department D (using the step-down method).