ACC 406 Chapter Notes - Chapter 4: Contribution Margin, Variable Cost, Earnings Before Interest And Taxes

EXERCISE 5-2 Prepare a Cost-Volume-Profit (CVP) Graph [LO5-2] Karlik Enterprises distributes a single product whose selling price is $24 and whose variable expense is $18 per unit. The company's monthly fixed expense is $24,000. Required: 1. Prepare a cost-volume-profit graph for the company up to a sales level of 8,000 units. 2. Estimate the company's break-even point in unit sales using your cost-volume-profit graph.

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

PROBLEM 5-26 Basic CVP Analysis; Graphing (L05-1, L05-2, L05-4, L05-5] The Fashion Shoe Company operates a chain of women's shoe shops that carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial com- mission on each pair of shoes sold in addition to a small base salary) in order to encourage them to be aggressive in their sales efforts. The following worksheet contains cost and revenue data for Shop 48 and is typical of the company's many outlets: Per Pair of Shoes Selling price ...... $30.00 Variable expenses: Invoice cost ... Sales commission .. Total variable expenses ..... $13.50 4.50 $18.00 Annual Fixed expenses: Advertising ... Rent Salaries Total fixed expenses .... $ 30,000 20,000 100,000 $150,000 Required: 1. Calculate the annual break-even point in unit sales and in dollar sales for Shop 48. 2. Prepare a CVP graph showing cost and revenue data for Shop 48 from zero shoes up to 17,000 pairs of shoes sold each year. Clearly indicate the break-even point on the graph. 3. If 12,000 pairs of shoes are sold in a year, what would be Shop 48's net operating income or loss? 4. The company is considering paying the store manager of Shop 48 an incentive commission of 75 cents per pair of shoes in addition to the salesperson's commission). If this change is made, what will be the new break-even point in unit sales and in dollar sales? Refer to the original data. As an alternative to (4) above, the company is considering paying the store manager 50 cents commission on each pair of shoes sold in excess of the break-even point. If this change is made, what will be the shop's net operating income or loss if 15,000 pairs of shoes are sold? 6. Refer to the original data. The company is considering eliminating sales commissions entirely in its shops and increasing fixed salaries by $31,500 annually. If this change is made, what will be the new break-even point in unit sales and in dollar sales for Shop 48? Would you rec- ommend that the change be made? Explain.