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Exam 3: Analysis of Cost, Volume, and Pricing to Increase Profitability

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Question 31

True/False

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On a cost-volume-profit graph, the total revenue line lies below the total cost line to the left of the break-even point.

A) True
B) False

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Question 32

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Billings Company has developed the following budgeted income statement: The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product. The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units. If this strategy is pursued the company's budgeted net income will: $\begin{array} { | l | r | } \hline \text { Sales Revenue } ( 2,300 \text { units } x ~ \$ 14 \text { sales price } ) & \$ 32,200 \\\hline \text { Total Variable Expenses } ( 2,300 \times \$ 6 \text { per unit) } & ( 13,800 ) \\\hline \text { Contribution Margin } & 18,400 \\\hline \text { Fixed Expenses } & ( 10,000 ) \\\hline \text { Net Income } & \$ 8,400 \\\hline & \\\hline\end{array}$

A) decrease by $4,250.
B) increase by $4,850.
C) increase by $13,250.
D) decrease by $4,150.

E) All of the above
F) B) and C)

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Question 33

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Rocky Mountain Bottling Company produces a soft drink that is sold for a dollar. At production and sales of 800,000 units, the company pays $600,000 in production costs, half of which are fixed costs. At that volume, general, selling, and administrative costs amount to $250,000 of which $70,000 are fixed costs. What is the amount of contribution margin per unit?

For a company that sells several products, different sales mixes generally give rise to different break-even sales levels, even if overall sales volume remains unchanged.

Sharon Company has variable costs of $80 per unit, total fixed costs of $200,000, and a break-even point of 5,000 units. If the sales price per unit is increased by $10, how many units must Sharon Company sell to break-even?

If total fixed costs increase while variable costs and sales price are unchanged, what happens to the break-even point?

In order to perform cost-volume-profit analysis, a company must be able to identify its variable and fixed costs.

Broadway Company produces and sells two models of calculators. The following monthly data are provided: Total monthly fixed costs are expected to be $15,000. What is the break-even point in sales dollars at the expected sales mix? (Do not round your intermediate calculations.) $\begin{array}{|l|r|l|}\hline &{\text { Standard }} & {\text { Premium }} \\\hline \text { Unit selling price } & \$ 100 & \$ 150 \\\hline \text { Unit variable manufacturing cost } & \$ 60 & \$ 90 \\\hline \begin{array}{l}\text { Unit variable selling and } \\\text { administrative cost }\end{array} & \$15& \$30 \\\hline \text { Number of units produced and sold } & 3,000 & 1,000 \\\hline\end{array}$

Markham Company has a contribution margin ratio of 25%. The company is considering a proposal that will increase sales by $150,000. What increase in profit can be expected assuming total fixed costs increase by $25,000? (Do not round your intermediate calculations.)

During the current year, Vanguard Company sold 80,000 of its only product at a selling price of $60 per unit. Variable costs were $18 per unit, and Vanguard's margin of safety for the year was 25,000 units.Required: 1) Calculate Vanguard's margin of safety ratio for the current year.2) What was the amount of Vanguard's fixed costs for the current year?

For a company that sells several products, cost-volume-profit techniques cannot be used to calculate the sales volume required to yield a target level of profit.

How would a company use target pricing to identify the desired cost for a product or service?

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Which of the following software applications is most useful for performing cost-volume-profit sensitivity analysis?

Kingston Company sells its product for $200 per unit. The company's accountant provided the following cost information: What is Kingston Company's contribution margin ratio? $\begin{array} { | l | l | } \hline \text { Manufacturing costs } & \$ 25,000 + 40 \% \text { of sales } \\\hline \text { Selling costs } & \$ 10,000 + 20 \% \text { of sales } \\\hline \text { Administrative costs } & \$ 15,000 + 10 \% \text { of sales } \\\hline\end{array}$

Consider the following cost-volume-profit graph: The line designated by the letter (A) represents which of the following?

Burke Company has a break-even of $600,000 in total sales. Assuming the company sells its product for $50 per unit, what is its margin of safety in units if sales total $850,000?

How can the contribution margin ratio be used in cost-volume-profit analysis?

A market research specialist told Peachtree Company that it could expect to sell 500,000 units of its new high-capacity computer disk at a price of $5. Assuming the company desires a profit margin equal to 20% of sales, what target cost per unit is necessary?

When drawing a cost-volume-profit graph, how are the axes labeled?