Question 1

After-Tax Target Income: Profit Analysis 
X-Cee-Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 21,000 pairs of cross-country skis of the mountaineering model or the touring model. The Sales Department assures management that it can sell between 9,000 and 14,000 pairs of either product this year. Because the models are very similar, X-Cee-Ski will produce only one of the two models.
The following information was compiled by the Accounting Department:
  
Fixed costs will total $320,000 if the mountaineering model is produced but will be only
$220,000 if the touring model is produced. X-Cee-Ski is subject to a 40 percent income tax rate.
Required: 
1. If X-Cee-Ski Company desires an after-tax net income of $48,000, how many pairs of touring model skis will the company have to sell?
2. Suppose that X-Cee-Ski Company decided to produce only one model of skis. What is the total sales revenue at which X-Cee-Ski Company would make the same profit or loss regardless of the ski model it decided to produce? 
3. If the Sales Department could guarantee the annual sale of 12,000 pairs of either model, which model would the company produce, and why? (CMA adapted)

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X-Cee-Ski Company...

Question 2

Multiple Products, Break-Even Analysis, Operating Leverage, Segmented Income Statements 
Ironjay, Inc., produces two types of weight-training equipment: the Jay-flex (a weight machine that allows the user to perform a number of different exercises) and a set of free weights. Ironjay sells the Jay-flex to sporting goods stores for $200. The free weights sell for $75 per set. The projected income statement for the coming year follows:
  
The owner of Ironjay estimates that 40 percent of the sales revenues will be produced by sales of the Jay-flex, with the remaining 60 percent by free weights. The Jay-flex is also responsible for 40 percent of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the Jay-flex line.
Required: 
1. Compute the sales revenue that must be earned for Ironjay to break even.
2. Compute the number of Jay-flex machines and free weight sets that must be sold for Ironjay to break even. 
3. Compute the degree of operating leverage for Ironjay. Now, assume that the actual revenues will be 40 percent higher than the projected revenues. By what percentage will profits increase with this change in sales volume? 
4. Ironjay is considering adding a new product-the Jay-rider. The Jay-rider is a cross between a rowing machine and a stationary bicycle. For the first year, Ironjay estimates that the Jay- rider will cannibalize 600 units of sales from the Jay-flex. Sales of free weight sets will remain unchanged. The Jay-rider will sell for $180 and have variable costs of $140. The increase in fixed costs to support manufacture of this product is $5,700. Compute the number of Jay-flex machines, free weight sets, and Jay-riders that must be sold for Ironjay to break even. For the coming year, is the addition of the Jay-rider a good idea? Why or why not? Why might Ironjay choose to add the Jay-rider anyway?

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Question 3

After-Tax Profit Targets 
Olivian Company wants to earn $420,000 in net (after-tax) income next year. Its product is priced at $275 per unit. Product costs include:
  
Variable selling expense is $14 per unit; fixed selling and administrative expense totals $290,000.
Olivian has a tax rate of 40 percent.
Required: 
1. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.
2. Calculate the number of units that will yield operating income calculated in Requirement 1 above. (Round to the nearest unit.)
3. Prepare an income statement for Olivian Company for the coming year based on the number of units computed in Requirement 2.
4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $420,000 target net income be higher or lower than the units calculated in Requirement 3? Calculate the number of units needed at the new tax rate. (Round dollar amounts to the nearest dollar and unit amounts to the nearest unit.)

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Olivian Company wants to...

Question 4

How do income taxes affect the break-even point and CVP analysis?

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Question 5

CVP with Activity-Based Costing 
Busy-Bee Baking Company produces a variety of breads. The average price of a loaf of bread is $1. Costs are as follows:
  
Other data:
  
Required: 
1. Compute the break-even point in units using conventional analysis.
2. Compute the break-even point in units using activity-based analysis. 
3. Suppose that Busy-Bee could reduce the setup cost by $100 per setup and could reduce the number of maintenance hours needed to 1,000. How many units must be sold to break even in this case? (Round answer up to whole units.)

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Busy-Bee Baking Company...

Question 6

Break-Even in Units and Sales Dollars, Margin of Safety 
Drake Company produces a single product. Last year's income statement is as follows:
  
Required: 
1. Compute the break-even point in units and sales revenue.
2. What was the margin of safety for Drake Company last year? 
3. Suppose that Drake Company is considering an investment in new technology that will increase fixed costs by $250,000 per year, but will lower variable costs to 45 percent of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming Drake makes this investment. What is the new break-even point in units, assuming the investment is made?

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Question 7

Explain why contribution margin per unit becomes profit per unit above the break-even point.

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Question 8

Break-Even for a Service Firm 
Jonah Graham owns and operates The Green Thumb Company (GTC), which provides live plants and flower arrangements to professional offices. Jonah has fixed costs of $3,240 per month for office/greenhouse rent, advertising, and a delivery van. Variable costs for the plants, fertilizer, pots, and other supplies average $24 per job. GTC charges $60 per month for the average job.
Required: 
1. How many jobs must GTC average each month to break even?
2. What is the operating income for GTC in a month with 88 jobs? With 95 jobs?
3. Jonah faces a tax rate equal to 25 percent. How many jobs must Jonah have per month to earn an after-tax income of $1,200? (Round your answer to whole units.)
4. Suppose that Jonah's fixed costs increase to $3,400 per month and he decides to increase the price to $75 per job. What is the new break-even point in number of jobs per month? (Round your answer to the nearest whole number of jobs.)

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Jonah Graham...

Question 9

CVP with Activity-Based Costing and Multiple Products 
Busy-Bee Baking Company produces a variety of breads. The plant manager would like to expand production into sweet rolls as well. The average price of a loaf of bread is $1. Anticipated price for a package of sweet rolls is $1.50. Costs for the new level of production are as follows:
  
Other data:
  
Busy-Bee believes it can sell 600,000 loaves of bread and 200,000 packages of sweet rolls in the coming year.
Required: 
1. Prepare a contribution-margin-based income statement for next year. Be sure to show sales and variable costs by product and in total.
2. Compute the break-even sales for the company as a whole using conventional analysis. 
3. Compute the break-even sales for the company as a whole using activity-based analysis. 
4. Compute the break-even units of each product in units. Does it matter whether you use conventional analysis or activity-based analysis? Why or why not? 
5. Suppose that Busy-Bee could reduce the setup cost by $100 per setup and could reduce the number of maintenance hours needed to 1,000. How many units of each product must be sold to break even in this case? (Round answers up to whole units.)

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Question 10

CVP Analysis, Impact of Activity-Based Costing 
Salem Electronics currently produces two products: a programmable calculator and a tape recorder. A recent marketing study indicated that consumers would react favorably to a radio with the Salem brand name. Owner Kenneth Booth was interested in the possibility. Before any commitment was made, however, Kenneth wanted to know what the incremental fixed costs would be and how many radios must be sold to cover these costs.
In response, Betty Johnson, the marketing manager, gathered data for the current products to help in projecting overhead costs for the new product. The overhead costs based on 30,000 direct labor hours follow. (The high-low method using direct labor hours as the independent variable was used to determine the fixed and variable costs.)
  
The following activity data were also gathered:

Betty was told that a plantwide overhead rate was used to assign overhead costs based on direct labor hours. She was also informed by engineering that if 20,000 radios were produced and sold (her projection based on her marketing study), they would have the same activity data as the recorders (use the same direct labor hours, machine hours, setups, and so on).
Engineering also provided the following additional estimates for the proposed product line:
  
Upon receiving these estimates, Betty did some quick calculations and became quite excited. With a selling price of $26 and just $18,000 of additional fixed costs, only 4,500 units had to be sold to break even. Since Betty was confident that 20,000 units could be sold, she was prepared to strongly recommend the new product line.
Required: 
1. Reproduce Betty's break-even calculation using conventional cost assignments. How much additional profit would be expected under this scenario, assuming that 20,000 radios are sold?
2. Use an activity-based costing approach, and calculate the break-even point and the incremental profit that would be earned on sales of 20,000 units. 
3. Explain why the CVP analysis done in Requirement 2 is more accurate than the analysis done in Requirement 1. What recommendation would you make?

Accepted Answer

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Salem...

Question 11

Multiple-Product Break-Even and Target Profit 
Vandenberg, Inc., produces and sells two products: a ceiling fan and a table fan. Vandenberg plans to sell 30,000 ceiling fans and 70,000 table fans in the coming year. Product price and cost information includes:
  
Common fixed selling and administrative expenses total $85,000. 
Required: 
1. What is the sales mix estimated for next year (calculated to the lowest whole number for each product)?
2. Using the sales mix from Requirement 1, form a package of ceiling fans and table fans. How many ceiling fans and table fans are sold at break-even?
3. Prepare a contribution-margin-based income statement for Vandenberg, Inc., based on the unit sales calculated in Requirement 2.
4. What if Vandenberg, Inc., wanted to earn operating income equal to $14,400? Calculate the number of ceiling fans and table fans that must be sold to earn this level of operating income. (Hint: Remember to form a package of ceiling fans and table fans based on the sales mix and to first calculate the number of packages to earn an operating income of $14,400.)

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Vandenberg, Inc.,...

Question 12

Explain how a change in sales mix can change a company's break-even point.

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Question 13

(2010 CPA Exam) A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20 percent, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company's next steps?

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Question 14

ABC and CVP Analysis: Multiple Products 
Good Scent, Inc., produces two colognes: Rose and Violet. Of the two, Rose Data concerning the two products follow:
  
The company uses a conventional costing system and assigns overhead costs to products using direct labor hours. Annual overhead costs follow. They are classified as fixed or variable with respect to direct labor hours.
  
Required: 
1. Using the conventional approach, compute the number of cases of Rose and the number of cases of Violet that must be sold for the company to break even.
2. Using an activity-based approach, compute the number of cases of each product that must be sold for the company to break even.

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Good...

Question 15

A restaurant owner who had yet to earn a monthly profit said, "The busier we are, the more we lose." What do you think is happening in terms of contribution margin?

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Question 16

Break-Even in Sales Revenue 
Big Red Motors, Inc., employs 15 sales personnel to market its line of luxury automobiles. The average car sells for $75,000, and a 6 percent commission is paid to the salesperson. Big Red Motors is considering a change to the commission arrangement where the company would pay each salesperson a salary of $1,600 per month plus a commission of 2 percent of the sales made by that salesperson. What is the amount of total monthly car sales at which Big Red Motors would be indifferent as to which plan to select? ( CMA adapted )

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Big Red Motors,...

Question 17

(2009 CPA Exam) A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year the company expects the price per cup to be $9.00, variable manufacturing costs to increase 33.3 percent, and fixed costs to increase 10 percent. How many cups (rounded) does the company need to sell this year to break even?

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Quiz 16: Cost-Volume-Profit Analysis

How do income taxes affect the break-even point and CVP analysis?

Explain why contribution margin per unit becomes profit per unit above the break-even point.

Explain how a change in sales mix can change a company's break-even point.

A restaurant owner who had yet to earn a monthly profit said, "The busier we are, the more we lose." What do you think is happening in terms of contribution margin?