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Exam 5: Cost Behavior and Cost-Volume-Profit Analysis

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Question 101

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Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised break-even point in units would:

A) Increase by 250.
B) Decrease by 250.
C) Increase by 12,000.
D) Decrease by 8,000.
E) Increase by 8,000.

F) C) and E)
G) D) and E)

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Question 102

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The sales mix of Desert Springs Company is 5 units of A, 3 units of B, and 1 unit of C. Per unit sales prices for each product are $30, $40, and $50, respectively. Variable costs per unit are $14, $24, and $34, respectively. Fixed costs are $597,600. What is the break-even point in composite units and in units of A, B, and C?

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Contribution margin of a composite unit...

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Question 103

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The ratio (proportion) of the sales volumes of the various products sold by a company is called the ________.

A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The pretax net income is:

Parker Co. is preparing next period's forecasts. Total fixed costs are expected to be $300,000 and the contribution margin ratio is expected to be 30%. (a) Calculate the company's break-even point in dollar sales. (b) If sales are $1,800,000 above the break-even point, what will Parker's pretax income be?

The high-low method of deriving an estimated cost line uses all the data points available.

Scatter diagrams plot volume (units) on the horizontal axis and cost on the vertical axis.

Madison Corporation sells three products (M, N, and O) in the following sales mix: 3:1:2. Unit price and cost data are: Total fixed costs are $340,000. The break-even point in sales dollars for the current sales mix is (round to the nearest thousand) :

Raven Company has a target of $70,000 pre-tax income. The contribution margin ratio is 30%. What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?

A company manufactures and sells a product for $120 per unit. The company's fixed costs are $68,760, and its variable costs are $90 per unit. The company's break-even point in sales dollars is:

A company manufactures and sells a product for $120 per unit. The company's fixed costs are $68,760, and its variable costs are $90 per unit. The company's break-even point in units is:

Describe what happens to the net income of a company under each of the following assumptions: (a) Units sold are less than break-even units. (b) Units sold are greater than break-even units. (c) Units sold are equal to the break-even units.

Define the break-even point of a company.

A company has total fixed costs of $360,000. Its product sells for $40 per unit and variable costs amount to $25 per unit. What is the break-even point in dollar sales?

A visual line fit to points in a scatter diagram may be used to identify the approximate relation between past cost and unit data.

The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.

Preston Company is analyzing two alternative methods of producing its product. The production manager indicates that variable costs can be reduced 40% by installing a machine that automates production, but fixed costs would increase. Alternative 1 shows costs before installing the machine; Alternative 2 shows costs after the machine is installed. (a) Compute the break-even point in units and dollars for both alternatives. (b) Prepare a forecasted income statement for both alternatives assuming that 30,000 units will be sold. The statements should report sales, total variable costs, contribution margin, fixed costs, income before taxes, income taxes, and net income. Below the income statement, compute the degree of operating leverage. Which alternative would you recommend and why?

A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000. If the variable costs per unit are $5, total fixed costs must be:

The following information describes a product expected to be produced and sold by Garr Company: Selling price……………………………………… $80 per unit Variable costs…………………………………… $32 per unit Total fixed costs………………………………… $630,000 Required: (a) Calculate the contribution margin ratio. (b) Calculate the break-even point in dollar sales. (c) What dollar amount of sales would be necessary to achieve a pretax income of $120,000?

Benjamin Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows: (a) Calculate the company's break-even point in composite units and sales dollars. (b) Calculate the number of units of each individual product to be sold at the break-even point.