Question 1

Proops Company has a weighted-average unit contribution margin of $30 for its two products: Drew and Carey.Expected sales for Proops are 40,000 Drews and 60,000 Careys.Fixed expenses are $1,800,000.At the expected sales level, Proops' net income will be

Accepted Answer

First, we need to calculate the total contribution margin (CM) of both products:

CM = (40,000 Drews * $30 CM per unit) + (60,000 Careys * $30 CM per unit) = $3,000,000

Next, we can calculate the total expenses:

Fixed expenses = $1,800,000

Finally, we can calculate the net income:

Net income = Total CM - Fixed expenses
Net income = $3,000,000 - $1,800,000
Net income = $1,200,000

Therefore, the answer is C, which indicates that Proops' net income at the expected sales level will be $1,200,000.

Question 2

The following monthly data are available for Wackadoos, Inc.which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units.How much is the margin of safety for the company for June?

Accepted Answer

The answer of The following monthly data are available for...

Question 3

Company A and Company B sell their products for exactly the same sales price.Both have the same annual total costs.Company A's variable and fixed costs at break-even total $60,000 and $30,000 respectively.Company B's variable and fixed costs at break-even total $30,000 and $60,000 respectively.Both companies have the same net income.If both companies experience an increase in sales, which company will have the higher net income?

Accepted Answer

Company B will have the higher net income because its variable costs are lower, meaning it will have a higher contribution margin per unit. As sales increase, Company B will have a higher profit due to its higher contribution margin.

Question 4

Sulingo, Inc.calculated how many units it needed in order to earn net income totalling $67,750 for the month.What calculation did Sulingo perform?

Accepted Answer

Sulingo performed a calculation to determine the number of units needed to earn a specific net income, which is known as the break-even point. The formula used for this calculation is (fixed costs + target net income) ÷ contribution margin per unit. Therefore, the correct option is C, which includes the fixed costs and the target net income (given as $67,750) divided by the contribution margin per unit.

Question 5

Goose Bay Sync's management established its target net income for the year.What did the company do?

Accepted Answer

The management of Goose Bay Sync established its target net income for the year by determining its desired annual income for its product lines.

Question 6

Old Canadian Company has sales of $500,000, variable costs of $425,000, and fixed costs of $25,000.New World Company has sales of $500,000, variable costs of $200,000, and fixed costs of $250,000.New World's margin of safety ratio is

Accepted Answer

The answer of Old Canadian Company has sales of $500,000,...

Question 7

Phi Kappa is planning to hold a seminar for students at the University Centre.It has two options: $$\text { OPTION 1: Fixed rental cast of } \$ 1,000 \text { and } \$ 12 \text { per person for baoks }$$ or
$\text { OPTION 2: Fixed rental cost of } \$ 3,000 \text { and } \$ 8 \text { per person for books }$
 Tickets will be $5 per student.Other items will be donated by recruiters wishing to network with students.Which option will cause the biggest loss if very few students attend?

Accepted Answer

Option 1 has a higher fixed cost, so it will result in a bigger loss if few students attend.

Question 8

The margin of safety ratio

Accepted Answer

The margin of safety ratio indicates how much sales could decline before the company operates at a loss. It is calculated as the difference between actual sales and break-even sales, divided by actual sales. It is a measure of financial risk and helps managers determine how much cushion they have before experiencing losses.

Question 9

How many sales are required to earn a target after-tax net income of $80,000 if total fixed costs are $100,000, the contribution margin ratio is 40%, and the tax rate is 25%?

Accepted Answer

Step 1: Determine the contribution margin per unit
Contribution margin ratio = 40%
Selling price per unit - Variable cost per unit = Contribution margin per unit
Let's assume the selling price per unit is $10 and the variable cost per unit is $6
$10 - $6 = $4 contribution margin per unit

Step 2: Determine the breakeven point in units
Breakeven point (in units) = Total fixed costs ÷ Contribution margin per unit
$100,000 ÷ $4 = 25,000 units

Step 3: Determine the target net income before taxes
Target net income before taxes = Target after-tax net income ÷ (1 - Tax rate)
$80,000 ÷ (1 - 0.25) = $106,667

Step 4: Determine the sales required to achieve the target net income
Sales required = (Fixed costs + Target net income before taxes) ÷ Contribution margin ratio
($100,000 + $106,667) ÷ 0.4 = $516,667

Therefore, the answer is C ($516,667).

Question 10

Organizer Company has fixed costs of $200,000 and variable costs are 60% of sales.How much will Organizer Company report as sales when its net income equals $20,000?

Accepted Answer

To find the sales amount when the net income equals $20,000, we can use the formula for profit: Profit = Sales - Variable Costs - Fixed Costs. Given that the variable costs are 60% of sales, we can express variable costs as 0.60 * Sales. The fixed costs are given as $200,000. Setting up the equation with the given net income ($20,000) gives us: $20,000 = Sales - 0.60 * Sales - $200,000. Simplifying, we get $20,000 = 0.40 * Sales - $200,000. Adding $200,000 to both sides and then dividing by 0.40 gives us Sales = $550,000.

Question 11

Which concept answers the following question: 'If budgeted revenues are above break even and decline, how far can they fall before the break-even point is reached?'

Accepted Answer

The margin of safety measures how far revenues can fall before reaching the break-even point, indicating the buffer or cushion a company has before it starts incurring losses.

Question 12

Swashbuckler, Inc.produces buckets.The selling price is $20 per unit and the variable costs are $8 per bucket.Fixed costs per month are $4,800.If Swashbuckler sells 10 more units beyond break even, how much does profit increase as a result?

Accepted Answer

The profit per unit is the selling price minus the variable costs, which is $20 - $8 = $12 per bucket. Selling 10 more units beyond the break-even point would increase profit by 10 units * $12/unit = $120.

Question 13

Wardley Corporation sells its product for $40.The variable costs are $18 per unit.Fixed costs are $16,000.The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs.Which of the following is true about the break-even point in units?

Accepted Answer

The answer of Wardley Corporation sells its product for $40.The...

Question 14

A key reason for management to build in a margin of safety in its projections is

Accepted Answer

The answer of A key reason for management to build...

Question 15

NoWeeds, Inc.has variable costs equal to 25% of sales.Its selling price is $95 per unit.If NoWeeds sells one unit more than the number of break-even units, how much will profit increase?

Accepted Answer

Selling one unit more than the break-even point means all revenue from that unit is profit, except for the variable costs. The variable cost per unit is 25% of $95, which is $23.75. Therefore, the profit increase from selling one additional unit is $95 - $23.75 = $71.25.

Question 16

Sample, Inc.determined its unit variable cost increased by 15%.Which one of the following will NOT increase as a direct result?

Accepted Answer

Contribution margin is calculated by subtracting unit variable cost from unit sales price. Since the increase in unit variable cost will also result in an increase in unit sales price, the contribution margin will not be directly impacted. However, choices A, B, and D will all increase as a result of the increase in unit variable cost.

Question 17

Sutton Company produces flash drives for computers, which it sells for $20 each.Each flash drive costs $6 of variable costs to make.During April, 700 drives were sold.Fixed costs for April were $4 per unit for a total of $2,800 for the month.How much does Sutton's operating income increase for each $1,000 increase in revenue per month?

Accepted Answer

The contribution margin per unit is $14 ($20 - $6). For each $1,000 increase in revenue, the increase in units sold is $1,000 / $20 = 50 units. The increase in operating income is 50 units * $14 = $700.

Question 18

Stacker requires sales of $500,000 to cover its fixed costs of $100,000 and to earn net income of $80,000.What percent are variable costs of sales?

Accepted Answer

Variable costs are calculated as a percentage of sales by subtracting the desired net income and fixed costs from sales, then dividing by sales. Here, ($500,000 - $100,000 - $80,000) / $500,000 = 64%.

Question 19

T'pol Corporation is considering a plan that will increase total units sold.The plan will cause a shift from high- to low-margin sales.The plan will

Accepted Answer

The impact on net income from shifting from high- to low-margin sales while increasing total units sold depends on various factors such as the volume of increase in sales, the difference in margins, and the fixed and variable costs associated with the sales. Without specific information on these factors, it's impossible to definitively say whether net income will increase, decrease, or remain unchanged.

Question 20

A company requires $600,000 in sales to meet its target net income after tax.Its contribution margin is 40%, and fixed costs are $80,000.How much is the target net income, given that its after-tax rate is 70%?

Accepted Answer

First, we need to calculate the total variable cost as a percentage of sales:

Contribution Margin = Sales - Variable Costs 
40% = Sales - Variable Costs 
Variable Costs = 60% of Sales

Next, we can use the contribution margin ratio to find the break-even point:

Break-even Point = Fixed Costs / Contribution Margin Ratio 
Break-even Point = $80,000 / 40% 
Break-even Point = $200,000

To reach a target net income of $600,000, we need to add $400,000 in profit ($600,000 - $200,000 = $400,000).

To calculate the required sales to achieve this profit, we can use the following formula:

Sales = (Fixed Costs + Target Net Income) / Contribution Margin Ratio 
Sales = ($80,000 + $400,000) / 40% 
Sales = $1,200,000

Finally, we need to adjust for the after-tax rate of 70%:

Net Income After Tax = Target Net Income / (1 - Tax Rate) 
Net Income After Tax = $400,000 / (1 - 0.70) 
Net Income After Tax = $1,333,333

Therefore, the answer is D) $112,000.

Quiz 6: Cost-Volume-Profit