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Exam 4: Cost-Volume-Profit Analysis: a Managerial Planning Tool

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Question 1

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Music Now plans to sell 6,000 MP3 players at $60 each in the coming year. Variable cost per unit is $12 and total fixed cost is $24,000. Required: A.) Calculate the variable cost ratio. B.) Calculate the contribution margin ratio. C.) Calculate the break-even point in sales dollars. D.) If Music Now has a target profit of $90,000, how many MP3 players will they have to sell?

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A.) $12/$60 = 20% B.) ($60-$12)/$60 = 80% C.) $24,000/80% = $30,000 D.) ($24,000 + $90,000)/($60 - $12) = 2,375 MP3 players

Question 2

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Figure 4-4. Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses. -Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What is the new contribution margin ratio (rounded to two decimal places) ?

A) 38%
B) 62%
C) 40%
D) 60%
E) 50%

F) A) and E)
G) A) and D)

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Question 3

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Operating leverage is the relative mix of

Figure 4-1. Foster Company makes power tools. The budgeted sales are $420,000, budgeted variable costs are $147,000, and budgeted fixed costs are $227,500. -Refer to Figure 4-1. What is the budgeted operating income?

Degree of operating leverage is calculated as

Firm X and Firm Y are competitors within the same industry. Firm X produces its product using large amounts of direct labor. Firm Y has replaced direct labor with investment in machinery. Projected sales for both firms are 15% less than in the prior year. Which statement regarding projected profits is true?

The following information was extracted from the accounting records of MVP Corporation: Required:

Figure 4-3. Paney Company makes calendars. Information on cost per unit is as follows: Fixed marketing expense totaled $13,000 and fixed administrative expense totaled $35,000. The price per calendar is $10. -Refer to Figure 4-3. What is the variable expense ratio?

To find the number of units to sell to earn a targeted income, it is acceptable to simply adjust the break-even units equation by adding target income to the variable cost.

___________________________________ is the income statement format that is based on the separation of costs into fixed and variable components.

A company provided the following information: Required:

If the contribution margin per unit decreases, the break-even point in units

_____________________ is the use of fixed costs to extract higher percentage changes in profits as sales activity changes.

The _________________________ depicts the relationships among cost, volume, and profits by plotting the total revenue line and the total cost line on a graph.

Operating leverage is

If sales remain the same and the margin of safety increases, which of the following is true?

Figure 4-6. Shorter Company had originally expected to earn operating income of $130,000 in the coming year. Shorter's degree of operating leverage is 2.4. Recently, Shorter revised its plans and now expects to increase sales by 20% next year. -Refer to Figure 4-6. What is Shorter's revised expected operating income for the coming year?

Place Corporation had the following income statement for the current year: Required:

Variable expense per unit consists only of direct materials, direct labor, and variable overhead.

Contribution margin ratio can be calculated in all of the following ways except