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Exam 2: Costvolumeprofit Relationships

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Question 71

True/False

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The margin of safety is the amount by which sales can decrease before losses are incurred by the company.

A) True
B) False

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Question 72

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Which of the following statements is correct with regard to a CVP graph?

A) A CVP graph shows the maximum possible profit.
B) A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
C) A CVP graph assumes that total expense varies in direct proportion to unit sales.
D) A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

E) A) and D)
F) B) and C)

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Question 73

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Thornbrough Corporation produces and sells a single product with the following characteristics: The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change?

Golebiewski Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. The margin of safety percentage is closest to:

Lister Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. If sales increase to 3,040 units, the increase in net operating income would be closest to: (Round your intermediate calculations to 2 decimal places.)

Muzzillo Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range. Required: a. If the selling price increases by $4 per unit and the sales volume decreases by 300 units, what would be the estimated net operating income? b. If the variable cost per unit increases by $6, spending on advertising increases by $3,000, and unit sales increase by 1,800 units, what would be the estimated net operating income?

Sarratt Corporation's contribution margin ratio is 62% and its fixed monthly expenses are $91,000. Assume that the company's sales for May are expected to be $193,000. Required: Estimate the company's net operating income for May, assuming that the fixed monthly expenses do not change. Show your work!

Mcmurtry Corporation sells a product for $170 per unit. The product's current sales are 10,000 units and its break-even sales are 8,100 units. The margin of safety as a percentage of sales is closest to:

Shelhorse Corporation produces and sells a single product. Data concerning that product appear below: Fixed expenses are $275,000 per month. The company is currently selling 4,000 units per month. Required: The marketing manager believes that a $13,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!

Stockmaster Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. The margin of safety in dollars is closest to:

Chovanec Corporation produces and sells a single product. Data concerning that product appear below: Fixed expenses are $521,000 per month. The company is currently selling 7,000 units per month. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?

Certosimo Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range. Required: a. If sales increase to 7,040 units, what would be the estimated increase in net operating income? b. If sales decline to 6,900 units, what would be the estimated net operating income?

Laraia Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range. Required: a. What is the contribution margin per unit? b. What is the contribution margin ratio? c. What is the variable expense ratio? d. If sales increase to 3,050 units, what would be the estimated increase in net operating income? e. If sales decline to 2,900 units, what would be the estimated net operating income? f. If the selling price increases by $4 per unit and the sales volume decreases by 200 units, what would be the estimated net operating income? g. If the variable cost per unit increases by $5, spending on advertising increases by $3,000, and unit sales increase by 450 units, what would be the estimated net operating income? h. What is the break-even point in unit sales? i. What is the break-even point in dollar sales? j. Estimate how many units must be sold to achieve a target profit of $54,000. k. What is the margin of safety in dollars? l. What is the margin of safety percentage? m. What is the degree of operating leverage? n. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 15% increase in sales?

Carver Corporation produces a product which sells for $40. Variable manufacturing costs are $18 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 15% of the selling price is paid on each unit sold. The contribution margin per unit is:

Ensley Corporation has provided the following data concerning its only product: The margin of safety as a percentage of sales is closest to:

An increase in the number of units sold will decrease a company's break-even point.

Kelchner Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. The contribution margin ratio is closest to:

A company with high operating leverage will experience a larger reduction in net operating income in a period of declining sales than a company with low operating leverage.

If sales volume increases and all other factors remain constant, then the:

A cement manufacturer has supplied the following data: The company's contribution margin ratio is closest to: