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Exam 6: How Is Cost-Volume-Profit Analysis Used for Decision Making

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Question 21

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Exhibit 6-6 Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce. -Refer to Exhibit 6-6.Which of the following is the correct contribution margin per unit?

A) $15.00
B) $5.00
C) $40.00
D) $25.00
E) None of the answer choices is correct.

F) A) and D)
G) All of the above

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Question 22

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The break-even point in sales dollars is the total sales dollars minus the total contribution margin.

A) True
B) False

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Question 23

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Absorption costing treats fixed manufacturing overhead costs as product costs.

Exhibit 6-5 Estrada Incorporated produces two different products with the following monthly data. $\begin{array}{llcc}&\text { Charcoal } & \text { Gas } & \text { Total } \\&\text { Barbecues } & \text { Barbecues } &\\\text { Selling price per unit } & \$ 150 & \$ 600 & \\\text { Variable cost per unit } & \$ 60 & \$ 360 & \\\text { Expected unit sales } & 1,400 & 600 & 2,000 \\\text { Sales mix } & 70 \% & 30 \% & 100 \% \\\text { Fixed costs } & & & \$ 180,000\end{array}$ -Refer to Exhibit 6-5.What would be the operating profit if the Charcoal Barbecue sales price increases 20 percent?

Exhibit 6-7 Bodega Chocolate,Inc.is a new company that produces a single product.The company has no beginning inventory.During the year the company produced 10,000 units out of which 9,000 were sold.Below are Bodega's costs: $\begin{array}{ll}\underline{\text { Variable costs per unit:} } \\\text { Production } & \$ 4.00 \\\text { Selling and administrative } & \$ 2.50\end{array}$ $\begin{array}{ll}\underline{\text { Total fixed costs for the year:}}\\\text {Production}&\$20,700.00\\\text {Selling and administrative}&\$85,000\end{array}$ -Refer to Exhibit 6-7.What is the unit product cost using variable costing?

Exhibit 6-3 Howard Company sells mountain bikes for $1,400 per unit representing 40 percent of total sales,and cruising bikes for $1,000 per unit representing 60 percent of total sales.Variable cost per unit is $600 for mountain bikes and $500 for cruising bikes. -Refer to Exhibit 6-3.What is the contribution margin per unit for each product?

Operating leverage refers to the level of fixed costs within an organization.

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing overhead costs under absorption versus variable costing?

Paco's Bikes sells 120 bicycles each month for $400 per unit.Variable cost per unit is $160 and fixed costs total $4,800 per month.What is the contribution margin ratio?

Designer Jackets,Inc.produces blazers and has the following data available on these products. $\begin{array}{llr} \text {Sales price per unit } &\$250\\ \text { Variable cost per unit} &100\\ \text { Fixed costs per month} &15,000\\ \text { Tax rate} &25 \text { percent }\end{array}$ (1)How many units must be sold to earn a monthly profit of $180,000 after taxes? (2)How many sales dollars are required to earn a monthly profit of $180,000 after taxes?

Which of the following companies would most likely have a high operating leverage?

Which of the following statements is true regarding operating leverage?

All of the following are steps used to find the target profit for companies that incur income taxes except:

Exhibit 6-1 Larimer Company has monthly fixed costs totaling $90,000 and variable costs of $5 per unit.Each unit of product is sold for $20. -Refer to Exhibit 6-1.What is the break-even point in sales dollars?

Exhibit 6-2 Victor Company makes a single product.The company has monthly fixed costs totaling $200,000 and variable costs of $20 per unit.Each unit of product is sold for $35.Brevard expects to sell 25,000 units each month. -Refer to Exhibit 6-2.What would be the operating profit if total fixed costs decreases 20 percent?

Which of the following is the correct profit equation?

Assume that Snowmobile Company produces two products: Racer and Cruiser.Below are the data for each: $\begin{array} { l r r } & { \text { Racer } } & { \text { Cruiser } } \\ \text { Selling price } & \$ 6,000 & \$ 4,000 \\\text { Variable cost } & 3,600 & 2,650\end{array}$ In the past,Snowmobiles had difficulty finding skilled workers.However,the company recently hired additional labor,thereby eliminating this resource constraint.The company now is faced with limited available machine-hours.It has a total of 4,000 machine-hours available each month.The Racer requires 50 machine-hours per unit and the Cruiser requires 15 machine-hours per unit. (1)What is the contribution margin provided by each product? (2)Calculate the contribution margin per unit of constrained resource for each model. (3)Which model would the company prefer to sell to maximize overall company profit?

Exhibit 6-6 Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce. -Refer to Exhibit 6-6.Which of the following is the correct contribution margin per machine hour?

The local nonprofit youth symphony is planning a concert fundraiser.The organization estimates that 550 tickets can be sold for $16 per person.The fixed costs are $720.The local chamber of commerce office will process ticket orders for a fee of $4 per ticket,to relieve the youth symphony of this responsibility. (1)How many tickets does your organization have to sell to break even? (2)How many tickets does your organization have to sell to earn a profit of $4,320? (3)How much must your organization have in sales dollars to break even (rounded to the nearest cent)? (4)How much must your organization have in sales dollars to earn a profit of $4,320 (rounded to the nearest cent)? (5)What is the organization's margin of safety in units and in sales dollars?

Firms with low operating leverage tend to make more from increasing sales than similar firms with high operating leverage.