Question 1

Chester Company plans to introduce a new product.A market research specialist claims that 20,000 units can be sold at a $100 selling price.Assuming the company desires a profit margin of 22% of sales,what is the target cost per unit?

Accepted Answer

Selling price per unit = Target cost per unit + Markup
Target cost per unit = Selling price per unit - Markup
Target cost per unit = $100 per unit - ($100 per unit x 0.22)= $100 per unit - $22 per unit = $78 per unit

Question 2

A product has a contribution margin of $2.50 per unit and a selling price of $25 per unit.Fixed costs are $20,000.Assuming new technology increases the unit contribution margin by 50 percent but increases total fixed costs by $13,750,what is the new breakeven point in units?

Accepted Answer

Break-even point in units with new technology = Fixed costs ÷ Contribution margin per unit
Break-even point in units with new technology = ($20,000 + $13,750)÷ ($2.50 per unit x 1.5)= 9,000 units

Question 3

Which of the following is not one of the assumptions underlying cost-volume-profit analysis?

Accepted Answer

The assumption that the selling price changes with changes in sales volume contradicts the basic assumption of CVP analysis that prices remain constant.

Question 4

Consider the following cost-volume-profit graph:  Based on the information in the graph,the breakeven point in sales dollars is approximately equal to:

Accepted Answer

The intersection of the total sales line (A)and the total cost line (B)represents the break-even point,which is $60,000 in this situation.

Question 5

A market research specialist told Peachtree Company that it could expect to sell 500,000 units of its new high-capacity computer disk at a price of $5.Assuming the company desires a profit margin equal to 20% of sales,what target cost per unit is necessary?

Accepted Answer

Selling price per unit = Target cost per unit + Markup
$5 = Target cost per unit + ($5 per unit x 0.20)
Target cost per unit = $5 - ($5 x 0.20)= $4 per unit

Question 6

Markham Company has a contribution margin ratio of 25%.The company is considering a proposal that will increase sales by $150,000.What increase in profit can be expected assuming total fixed costs increase by $25,000? (Do not round your intermediate calculations. )

Accepted Answer

Sales - Variable costs - Fixed costs = Profit
Contribution margin - Fixed costs = Profit
($150,000 x 0.25)- $25,000 = $12,500

Question 7

Billings Company has developed the following budgeted income statement: $\begin{array}{|l|r|}
\hline \text { Sales Revenue }(2,300 \text { units } \times \$ 14 \text { sales price }) & \$ 32,200 \
\hline \text { Total Variable Expenses }(2,300 \times \$ 6 \text { per unit }) & \underline{(13,800)} \
\hline \text { Contribution Margin } & 18,400 \
\hline \text { Fixed Expenses } & \underline{(10,000)} \
\hline \text { Net Income } & \underline{\$ 8400}\
\hline\
\hline
\end{array}$ The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product.The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units.If this strategy is pursued the company's budgeted net income will:

Accepted Answer

The new contribution margin is calculated as: (3,500 units x ($14 - $4.50)) = $33,250. The new fixed costs are $20,000. The new net income is $33,250 - $20,000 = $13,250. The increase in net income is $13,250 - $8,400 = $4,850.

Question 8

Acme Company has variable costs equal to 30% of sales.The company is considering a proposal that will increase sales by $10,000 and total fixed costs by $7,000.By what amount will net income increase?

Accepted Answer

Profit = Sales - Variable costs - Fixed costs
Profit = $10,000 - ($10,000 x 0.30)- $7,000 = $0

Question 9

Which of the following is not an assumption made when performing cost-volume-profit analysis?

Accepted Answer

The assumption that the number of units produced is greater than the number of units sold is not typically made in cost-volume-profit analysis. Usually, it is assumed that the number of units sold and the number of units produced are equal. The other assumptions listed (worker efficiency being constant, production within the relevant range, and a linear cost-volume relationship) are commonly made in cost-volume-profit analysis.

Question 10

Consider the following cost-volume-profit graph:  The line designated by the letter (B)represents which of the following?

Accepted Answer

The answer of Consider the following cost-volume-profit graph:  The...

Question 11

Consider the following cost-volume-profit graph:  The line designated by the letter (A)represents which of the following?

Accepted Answer

The line designated by letter (A) on a cost-volume-profit graph represents the total revenue. This line shows the amount of revenue earned as the level of activity, such as production or sales, changes. The slope of the line represents the unit selling price, and the point where the line intersects the y-axis represents the fixed cost component of revenue.

Question 12

Burke Company has a break-even of $600,000 in total sales.Assuming the company sells its product for $50 per unit,what is its margin of safety in units if sales total $850,000?

Accepted Answer

Margin of safety = (Budgeted sales - Break-even sales)
Margin of safety = ($850,000 - $600,000)= $250,000
Margin of safety in units = Margin of safety in dollars ÷Selling price per unit
Margin of safety in units = $250,000 ÷ $50 per unit = 5,000 units

Question 13

Columbus Industries makes a product that sells for $25 a unit.The product has a $5 per unit variable cost and total fixed costs of $9,000.At budgeted sales of 2,000 units,the margin of safety ratio is:

Accepted Answer

Break-even point in units = Fixed costs ÷ Contribution margin per unit
Break-even point in units = $9,000 ÷ ($25 - $5)= 450 units
Margin of safety = (Budgeted sales - Break-even sales)÷ Budgeted sales
Margin of safety = (2,000 units - 450 units)÷ 2,000 units = 77.5%

Question 14

Consider the following cost-volume-profit graph:  The area designated by the letter (C)represents which of the following?

Accepted Answer

The answer of Consider the following cost-volume-profit graph:  The...

Question 15

A pricing strategy that sets the price at a premium under the assumption that people will pay more for the product because of the product's brand name,media attention,or some other reason that has piqued the interest of the public is known as:

Accepted Answer

This is a clear description of prestige pricing, where a premium price is set based on the perceived value or prestige of the brand or product. Options A-C do not fit this description as closely.

Question 16

If a company experiences an increase in rent expense,the total cost line on the cost-volume-profit graph will:

Accepted Answer

If fixed costs,such as rent,increase,the total cost line will shit upward.Recall that the break-even point equals fixed costs divided by the contribution margin per unit.If fixed costs increase,the break-even point increases.

Question 17

Consider the following cost-volume-profit graph:  What is the approximate amount of fixed costs in this organization?

Accepted Answer

The point at which the total cost line (B)intersects the vertical axis is the amount of fixed cost,which equals $30,000 in this situation.

Question 18

The margin of safety ratio can be defined as the:

Accepted Answer

The margin of safety ratio is calculated by taking the difference between the budgeted (or actual) sales and the break-even sales, and then dividing that number by the budgeted (or actual) sales. This measures how much sales can drop before the company reaches its break-even point.

Question 19

How does the cost-volume-profit model accommodate non-linear costs and revenues?

Accepted Answer

CVP is limited by a number of underlying assumptions.These assumptions include,but are not limited to,the following.Costs are linear.The variable cost per unit is constant and moves in direct proportion with changes in sales volume.Total fixed costs do not change with changes in sales volume.Efficiency and productivity are constant.Inventory levels in manufacturing companies are constant.

Question 20

During the current year,Fairview Corporation sold 100,000 units of its product for $20 each.The variable cost per unit was $14,and Fairview's margin of safety was 40,000 units.What was the amount of Fairview's total fixed costs?

Accepted Answer

First,determine break-even sales:
Margin of safety in units = Budgeted sales - Break-even sales
Margin of safety in units = 100,000 units - Break-even sales = 40,000
Break-even sales = 100,000 units - 40,000 units = 60,000 units
Then,determine fixed costs:
Break-even point in units = Fixed costs ÷ Contribution margin per unit
60,000 units = Fixed costs ÷ ($20 per unit - $14 per unit)
Fixed costs = 60,000 units x $6 per unit = $360,000

Quiz 3: Analysis of Cost,Volume,and Pricing to Increase Profitability