If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would:
a. increase.
b. remain the same.
c. decrease.
d. increase or decrease, depending upon the percentage increase in wage rates.
Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio and the unit contribution margin are:
a. 53% and $7 per unit.
b. 47% and $11 per unit.
c. 52% and $11 per unit.
d. 47% and $8 per unit.
If sales are $500,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage?
a. 0
b. 1.3
c. 3.1
d. 1.25
Which of the following describes the behavior of the fixed cost per unit?
a. Increases with increasing production
b. Remains constant with changes in production
c. Decreases with increasing production
d. Decreases with decreasing production
If variable costs per unit decreased because of a decrease in utility rates, the break-even point would:
a. increase.
b. increase or decrease, depending upon the percentage increase in utility rates.
c. decrease.
d. remain the same.
Costs that vary in total in direct proportion to changes in an activity level are called:
a. differential costs.
b. fixed costs.
c. variable costs.
d. sunk costs
Which of the following conditions would cause the break-even point to increase?
a. Total fixed costs decrease
b. Unit variable cost decreases
c. Unit variable cost increases
d. Unit selling price increases
In cost-volume-profit analysis, all costs are classified into the following two categories:
a. discretionary costs and sunk costs
b. variable costs and fixed costs
c. mixed costs and variable costs
d. sunk costs and fixed costs
If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Related questions
The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:
Direct Materials: $3.00
Direct Labor: $1.50
Variable Manufacturing Overhead: $0.40
Variable Selling Expenses: $1.10
Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below.
1. Compute net income before tax.
2. Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.
3. Calculate the break-even point in units and dollars ofrevenue.
4. Calculate the margin of safety:
In units
In sales dollars
As a percentage
5. Calculate the degree of operating leverage.
6. Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.
7. Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.
8. A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.
| Requirement 1 | ||||
| Units | Price | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 2 | ||||
| Contribution Margin per Unitin Dollars = Selling Price â Variable Costs | ||||
| Selling Price | Variable Costs | Contribution Margin per Unit | ||
| Contribution Margin Ratio =Contribution Margin/Selling Price | ||||
| Contribution Margin | Selling Price | Contribution Margin Ratio | ||
| Requirement 3 | ||||
| Break-Even Point = Fixed Costs/ Contribution Margin | ||||
| Fixed Costs | Contribution Margin | Break-Even Point in Units (Rounded) | ||
| Break-Even Point in Units XSelling Price per Unit = Break-Even Point Sales | ||||
| Break-Even Point in Units | Selling Price per Unit | Break-Even Point in Sales (Rounded) | ||
| Requirement 4A | ||||
| Margin of Safety in Units =Current Unit Sales â Break-Even Point in Unit Sales | ||||
| Current Unit Sales | Break-Even Point in Sales | Margin of Safety in Units | ||
| Requirement 4B | ||||
| Margin of Safety in Dollars =Current Sales in Dollars â Break-Even Point Sales in Dollars | ||||
| Current Sales in Dollars | Break-Even Point in Dollars | Margin of Safety in Dollars | ||
| Requirement 4C | ||||
| Margin of Safety as aPercentage = Margin of Sales in Units / Current Unit Sales | ||||
| Margin of Safety in Units | Current Unit Sales | Margin of Safety Percentage | ||
| Requirement 5 | ||||
| Degree of Operating Leverage =Contribution Margin / Operating Income | ||||
| Contribution Margin | Operating Income | Operating Leverage | ||
| Requirement 6 | ||||
| Units | $ Per Unit | Totals | ||
| Sales | X | $ | $ | |
| Variable Costs | X | $ | $ | |
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Operating Leverage | Times % Increase | Increase would be XX% | ||
| Prior Income | $ | From Part 1 | ||
| Increase | $ | Prior Income X XX% Above | ||
| Total | $ | |||
| Requirement 7 | ||||
| Targeted Income = (Fixed Costs+ Target Income) / Contribution Margin | ||||
| Fixed Costs + Target Income | Divided by Contribution Margin | # of Units (Rounded) | ||
| Fixed Costs | $ | |||
| Target Income | $ | |||
| Total | $ | $ | X | |
| # of Units Above X $ Per Unit | ||||
| Proof | Revenue | XX,XXX X $XX.XX | $ | |
| Variable Costs | XX,XXX X $X.XX | $ | ||
| Contribution Margin | $ | |||
| Fixed Costs | $ | |||
| Net Income | $ | |||
| Requirement 8 | ||||
| Sales Mix | ||||
| Current | Specialty | Total | ||
| Expected Sales Units | X | X | ||
| Revenue = Sales X Price | $ | $ | $ | |
| Variable Costs X Units | $ | $ | $ | |
| Contribution Margin | $ | $ | $ | |
| Fixed Costs | $ | $ | $ | |
| Operating Income | $ | |||
| Prior Net Income FromRequirement 1 | $ | |||
| Additional Operating Income | (Operating Income Above Less Prior Income) | $ | ||
| Decision With Explanation | ||||
1.
Payton Industries has fixed costs of $490,000, the unit sellingprice is $35, and the unit variable costs are $20. What is thebreak-even sales (units) if fixed costs are reduced by $40,000?
| a. | 32,667 units | |
| b. | 14,000 units | |
| c. | 24,500 units | |
| d. | 30,000 units |
2.
Rusty Co. sells two products, X and Y. Last year, Rusty sold5,000 units of X and 35,000 units of Y. Related data are:
Unit Selling Price | Unit Variable | Unit Contribution | |
Product | Price | Cost | Margin |
X | $110.00 | $70.00 | $40.00 |
Y | 70.00 | 50.00 | 20.00 |
â
â
What was Rusty Co.âs weighted average unit contributionmargin?
| a. | $20.00 | |
| b. | $22.50 | |
| c. | $60.00 | |
| d. | $40.00 |
3.
Charlotte Co. has budgeted salary increases to factorysupervisors totaling 9%. If selling prices and all other costrelationships are held constant, next year's break-even point
| a. | cannot be determined from the data given | |
| b. | will increase by 9% | |
| c. | will decrease by 9% | |
| d. | will increase at a rate greater than 9% |
4.
Flying Cloud Co. has the following operating data for itsmanufacturing operations:
| Unit selling price | $250 |
| Unit variable cost | 100 |
| Total fixed costs | $840,000 |
â
The company has decided to increase the wages of hourly workerswhich will increase the unit variable cost by 10%. Increases in thesalaries of factory supervisors and property taxes for the factorywill increase fixed costs by 4%. If sales prices are held constant,the next break-even point for Flying Cloud Co. will be
| a. | increased by 800 units | |
| b. | increased by 640 units | |
| c. | increased by 400 units | |
| d. | decreased by 640 units |
5.
Given the following cost and activity observations for BountyCompanyâs utilities, use the high-low method to calculate Bountyâvariable utilities costs per machine hour. Round your answer to thenearest cent.
â
â | Cost | Machine Hours |
March | $3,100 | 15,000 |
April | 2,700 | 10,000 |
May | 2,900 | 12,000 |
June | 3,600 | 18,000 |
| a. | $10.00 | |
| b. | $0.11 | |
| c. | $0.63 | |
| d. | $0.67 |
6.
Costs that remain constant in total dollar amount as the levelof activity changes are called
| a. | variable costs | |
| b. | mixed costs | |
| c. | product costs | |
| d. | fixed costs |
7.
Lee Industry sales are $525,000, variable costs are 53% ofsales, and operating income is $19,000. What is the contributionmargin ratio?
| a. | 47% | |
| b. | 26.5% | |
| c. | 53% | |
| d. | 9.5% |
8.
If Kaden Company's fixed costs are $46,800, the unit sellingprice is $42, and the unit variable costs are $24. What is thebreak-even sales (units)?
| a. | 1,950 | |
| b. | 1,114 | |
| c. | 2,400 | |
| d. | 2,600 |
9.
Contribution margin is
| a. | the same as sales revenue | |
| b. | the excess of sales revenue over variable cost | |
| c. | another term for volume in the "cost-volume-profit" analysis | |
| d. | profit |
Variable Costs, Contribution Margin, Contribution Margin Ratio
Super-Tees Company plans to sell 12,000 T-shirts at $16 each in the coming year. Product costs include:
| Direct materials per T-shirt | $5.75 |
| Direct labor per T-shirt | $1.25 |
| Variable overhead per T-shirt | $0.60 |
| Total fixed factory overhead | $43,000 |
Variable selling expense is the redemption of a coupon, which averages $0.80 per T-shirt; fixed selling and administrative expenses total $19,000.
Required:
1. Calculate the following values:
Round dollar amounts to the nearest cent and round ratio values to three decimal places.
| a. Variable product cost per unit | $ |
| b. Total variable cost per unit | $ |
| c. Contribution margin per unit | $ |
| d. Contribution margin ratio | |
| e. Total fixed expense for the year | $ |
Feedback
2. Prepare a contribution-margin-based income statement for Super-Tees Company for the coming year. If required, round your per unit answers to the nearest cent.
| Super-Tees Company | ||
| Contribution-Margin-Based Operating Income Statement | ||
| For the Coming Year | ||
| Total | Per Unit | |
| < >SalesTotal contribution marginTotal fixed expenseTotal variable expense | $ | $ |
| < >SalesTotal contribution marginTotal fixed expenseTotal variable expense | ||
| < >SalesTotal contribution marginTotal fixed expenseTotal variable expense | $ | $ |
| < >SalesTotal contribution marginTotal fixed expenseTotal variable expense | ||
| < >Operating incomeOperating lossSalesTotal contribution margin | $ | |
Feedback
3. What if the per unit selling expense increased from $0.80 to $1.75? Calculate new values for the following:
Round dollar amounts to the nearest cent and round ratio values to four decimal places:
| a. Variable product cost per unit | $ |
| b. Total variable cost per unit | $ |
| c. Contribution margin per unit | $ |
| d. Contribution margin ratio | |
| e. Total fixed expense for the year | $ |
