ACCT20200 Chapter Notes - Chapter 5: Earnings Before Interest And Taxes, Contribution Margin, Fixed Cost

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CVP Analysis and Price Changes

(LO 3-1)

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently, the company sells 60,000 units for $30 per unit. The variable production costs are $15, and fixed costs amount to $700,000. Production engineers have advised management that they expect unit labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year. Of the $15 variable costs, 50 percent are from labor and 25 percent are from materials. Variable overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than 10 percent. It is also expected that fixed costs will rise by 5 percent as a result of increased taxes and other miscellaneous fixed charges.

The company wishes to maintain the same level of profit in real dollar terms. It is expected that to accomplish this objective, profits must increase by 6 percent during the year.

Required

Compute the volume in units and the dollar sales level necessary to maintain the present profit level, assuming that the maximum price increase is implemented.

Compute the volume of sales and the dollar sales level necessary to provide the 6 percent increase in profits, assuming that the maximum price increase is implemented.

If the volume of sales were to remain at 60,000 units, what price increase would be required to attain the 6 percent increase in profits?

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?

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:

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What was Rusty Co.’s weighted average unit contributionmargin?

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

4.

Flying Cloud Co. has the following operating data for itsmanufacturing operations:

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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

5.

Given the following cost and activity observations for BountyCompany’s utilities, use the high-low method to calculate Bounty’variable utilities costs per machine hour. Round your answer to thenearest cent.

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6.

Costs that remain constant in total dollar amount as the levelof activity changes are called

7.

Lee Industry sales are $525,000, variable costs are 53% ofsales, and operating income is $19,000. What is the contributionmargin ratio?

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)?

9.

Contribution margin is

1) All of the following are examples of product costs except:

depreciation on the company's administrative offices.

salary of the plant manager.

insurance on the factory equipment.

rental costs of the factory facility.

2) Period costs:

are treated as expenses in the period they are incurred

are directly traceable to products

include direct labor

are also referred to as manufacturing overhead costs

.

3) Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following per unit data apply for sales to regular customers:

Direct materials $30

Direct manufacturing labor 5

Variable manufacturing overhead 10

Fixed manufacturing overhead 40

Total manufacturing costs $85

The plant has capacity for 2,000 axles and is considering expanding production to 1,500 axles. What is the total cost of producing 1,500 axles?

a. $85,000

b. $170,000

c. $107,500

d. $102,500

4) In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would:

overstate period expenses on the income statement.

overstate the cost of goods sold on the income statement.

understate the cost of goods manufactured.

have no effect on the cost of goods manufactured.

5) In CVP analysis, focusing on target net income rather than operating income:

a. will increase the breakeven point

b. will decrease the breakeven point

c. will not change the breakeven point

d. does not allow calculation of breakeven point

6) A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases.

a. True

b. False

7) As activity increases within the relevant range, fixed costs remain constant on a per unit basis.

a. True

b. False

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

A CVP graph shows the maximum possible profit.

A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

A CVP graph assumes that total expense varies in direct proportion to unit sales.

A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

9) How would the following costs be classified (product or period) under variable costing at a retail clothing store?

10) The principal difference between variable costing and absorption costing centers on:

whether variable manufacturing costs should be included as product costs.

whether fixed manufacturing costs should be included as product costs.

whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs.

none of these.

11) Joe has a hot dog cart that he parks on the NY sidewalk and sells hotdogs during the day. The variable cost of a hot dog is $.90. The selling price of the hot dog is $2.00. The fixed cost is $3,000 per month which covers the loan for the cart and the salary Joe needs to make to live. How many hotdogs must Joe sell in one month in order to break even?

3,300 hot dogs

3,000 hot dogs

2,727.27 hot dogs

2,728 hot dogs

12) Shun Corporation manufactures and sells a hand held calculator. The following information relates to Shun's operations for last year:

What is Shun's unit product cost under absorption costing for last year?

$4.10

$4.55

$5.85

$6.30.

Use the following information to answer questions 13 to 15:

Barnett Company uses the weighted-average method in its process costing system. The company adds materials at the beginning of the process in Department M. Conversion costs were 75% complete with respect to the 4,000 units in work in process at May 1 and 50% complete with respect to the 6,000 units in work in process at May 31. During May, 14,000 units were started, 12,000 units were completed and transferred to the next department.

13) Calculate the number of equivalent units for materials.

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

14) Calculate the number of equivalent units for conversion?

10,000 units

12,000 units

14,000 units

15,000 units

18,000 units

15) An analysis of the costs relating to work in process at May 1 and to production activity for May follows:

The total cost per equivalent unit for May was:

$5.02

$5.10

$5.12

$5.25