Question 1

Harvey Enterprises expects sales of $1,000,000 and total variable costs of $250,000 for 2005. Total budgeted fixed costs are $200,000. What is the dollar amount of sales necessary to achieve after-tax profits of $700,000 if the tax rate is 30%?

Accepted Answer

The answer of Harvey Enterprises expects sales of $1,000,000 and...

Question 2

After a company exceeds the breakeven point:

Accepted Answer

Once a company exceeds the breakeven point, the total contribution margin increases because each additional unit sold now generates a positive contribution margin that adds to the total contribution. The other options are incorrect as profit per unit and contribution margin ratio remain the same, and fixed costs do not become zero.

Question 3

Which of the following is not an assumption of CVP analysis?

Accepted Answer

CVP (Cost-Volume-Profit) analysis assumes that the sales mix remains constant as activity levels change, not that it varies. Choices A, B, and D are typical assumptions of CVP analysis, where selling prices and variable costs are considered constant per unit, and efficiency or productivity levels are assumed not to change with different activity levels.

Question 4

Tilker Manufacturing sells its product for $40 per unit. Last year, variable costs per unit were $15, and fixed costs were $400,000. How many units must be sold this year to earn a pre-tax profit of $45,000 if variable costs increase by 10%?

Accepted Answer

The answer of Tilker Manufacturing sells its product for $40...

Question 5

Old MacDonald had a farm with expected fixed costs for next year of $91,000. The projected selling price per bushel is $12, with variable costs of $5 per bushel. How many bushels past the breakeven point does MacDonald have to sell to realize a pre-tax profit of $37,100?

Accepted Answer

To calculate the number of bushels past the breakeven point needed to realize a pre-tax profit of $37,100, first, find the breakeven point in bushels. The breakeven point is where total revenue equals total costs (fixed costs + variable costs). The profit formula is Profit = (Selling Price per Bushel - Variable Cost per Bushel) * Number of Bushels - Fixed Costs. To find the breakeven point, set Profit to $0 and solve for the Number of Bushels. Breakeven Point = Fixed Costs / (Selling Price per Bushel - Variable Cost per Bushel) = $91,000 / ($12 - $5) = $91,000 / $7 = 13,000 bushels. To find how many bushels past the breakeven point are needed to realize a pre-tax profit of $37,100, use the profit formula with the desired profit: $37,100 = ($12 - $5) * Number of Bushels - $91,000. Solving for the Number of Bushels gives the total bushels needed to achieve this profit, including the breakeven point. To find just the bushels past the breakeven point, subtract the breakeven point bushels from the total bushels needed. $37,100 = $7 * Number of Bushels - $91,000; $37,100 + $91,000 = $7 * Number of Bushels; $128,100 = $7 * Number of Bushels; Number of Bushels = $128,100 / $7 = 18,300 bushels total. Bushels past the breakeven point = Total bushels - Breakeven bushels = 18,300 - 13,000 = 5,300 bushels.

Question 6

Old MacDonald had a farm with expected fixed costs for next year of $91,000. The projected selling price per bushel is $12, with variable costs of $5 per bushel. How much revenue past the breakeven point does MacDonald have to earn to realize a pre-tax profit of $36,000 if variable costs drop to $3 per bushel?

Accepted Answer

The answer of Old MacDonald had a farm with expected...

Question 7

Bultena Enterprises projects the following for next year: Sales $300,000
Fixed costs $100,000
After-tax profit $12,000
Tax rate 40%
What is the firm's margin of safety in revenue?

Accepted Answer

The answer of Bultena Enterprises projects the following for next...

Question 8

Once a firm reaches the breakeven point, the next unit sold will increase profit by an amount equal to the:

Accepted Answer

The contribution margin per unit is the amount remaining from the selling price after deducting the variable cost per unit. This amount contributes towards covering the fixed costs of the business. Once the breakeven point is reached, any additional unit sold will generate a contribution margin equal to the selling price minus the variable cost per unit. This means that the firm will earn extra profit equal to the contribution margin per unit for each additional unit sold. Therefore, the best choice is C - contribution margin per unit.

Question 9

Harmel, Inc. incurs the following costs each period: Variable manufacturing costs per unit $10
Variable selling costs per unit $2
Total fixed manufacturing costs $18,530
Total fixed selling costs $41,370
If the company sells 6,000 units, what price must be charged to earn a pre-tax profit of $25,000?

Accepted Answer

Explanation:Contribution Margin per unit = $10 - $2 = $8Contribution Margin Ratio = $8 / $10 = 80%Breakeven Sales = $18,530 + $41,370 / 80% = $75,000Sales Price per unit = $75,000 / 6,000 + $25,000 / 6,000 = $26.15

Question 10

The breakeven point occurs when:

Accepted Answer

The breakeven point is when total costs (fixed and variable) equal total revenue, meaning there is no profit or loss.

Question 11

If the selling price per unit and the variable cost per unit both increase by 5%, what is the effect on the contribution margin per unit and on the contribution margin ratio? Contribution margin per unit Contribution margin ratio

Accepted Answer

If both the selling price per unit and the variable cost per unit increase by the same proportion (in this case, 5%), the contribution margin per unit remains unchanged. Therefore, the contribution margin ratio (contribution margin per unit/selling price per unit) also remains unchanged. The correct option is B, which states that there will be an increase in neither the contribution margin per unit nor the contribution margin ratio.

Question 12

The breakeven sales volume of the Tuck Co. is 800,000 units. If the variable cost per unit increases by $1.50 and the selling price per unit increases by $2 next year, then the new breakeven point will be:

Accepted Answer

The breakeven point will be lower because the variable cost per unit has increased by $1.50, which means that the company will need to sell more units to cover its costs.

Question 13

Before a company reaches the breakeven point:

Accepted Answer

Before a company reaches the breakeven point, the contribution margin per unit is less than the fixed costs per unit. This means that the company is not yet generating enough revenue to cover its fixed costs and is operating at a loss.

Question 14

Log Homes on Spec (LHOS)in British Columbia makes log home kits. Currently, the company does not advertise and has a low selling price for its kits compared to competitors. Next year, the company plans to increase the selling price and begin a wide advertising campaign. Which of the following statements is true?

Accepted Answer

If LHOS sells the same number of units next year with the increased selling price, their contribution margin per unit will increase, resulting in a higher operating leverage. This means that LHOS's profitability will be more sensitive to changes in sales volume. However, we cannot conclude anything about LHOS's breakeven point, profits, or margin of safety based on the information provided.

Question 15

Bauer Company's sales increased, but its pre-tax profits did not change. If the increase was within the relevant range, which of the following statements is true?

Accepted Answer

If Bauer's sales increased but pre-tax profits did not change, it implies that the contribution margin is zero, meaning that the additional sales did not contribute to covering fixed costs or generating profit.

Question 16

Bhuyan Company's budgeted profit for next year is lower than this year's actual profit. The selling price, variable cost per unit, and total fixed costs did not change. Which of the following is false?

Accepted Answer

If the selling price, variable cost per unit, and total fixed costs have not changed, the contribution margin ratio will remain the same. Therefore, choice D is false.

Choice A may be true because if the budgeted profit is lower, the margin of safety (actual sales - breakeven sales) will be lower as well.

Choice B may be true because the breakeven point is based solely on the fixed costs and contribution margin, which have not changed.

Choice C may be true because the degree of operating leverage (contribution margin/operating income) increases as the fixed costs decrease relative to the sales. However, it is not certain without further information about the changes in fixed costs or sales volume.

Question 17

Wierschem, Inc. projects the following for next year: Selling price per unit $30
Variable manufacturing costs per unit $16
Fixed manufacturing costs $74,000
Variable selling costs per unit $2
Fixed administrative costs $24,480
After-tax profit $48,000
Tax rate 40%
How many units will Wierschem have to sell to realize the projected after-tax profit?

Accepted Answer

The answer of Wierschem, Inc. projects the following for next...

Question 18

The Patterson Company is subject to income taxes of 20% on income through $25,000 and 40% on income in excess of $25,000. Projected information for next year follows: Selling price per unit $40
Variable costs per unit $15
Fixed costs $400,000
Sales in units 20,000
What is Patterson's projected after-tax profit?

Accepted Answer

To find the after-tax profit, first calculate the total revenue (20,000 units * $40 = $800,000) and total variable costs (20,000 units * $15 = $300,000). Subtract variable costs and fixed costs from total revenue to get pre-tax profit: $800,000 - $300,000 - $400,000 = $100,000. The first $25,000 is taxed at 20% ($5,000 tax), and the remaining $75,000 is taxed at 40% ($30,000 tax). Total tax is $35,000. Subtract tax from pre-tax profit: $100,000 - $35,000 = $65,000.

Question 19

The breakeven sales volume of the Patin Co. is $800,000. If the variable cost per unit increases next year, then the new breakeven point will be:

Accepted Answer

If the variable cost per unit increases, it will require more units to be sold to cover the fixed costs that remain constant. This means that the breakeven point will increase and be higher than the previous year's breakeven point.

Question 20

The contribution margin ratio of Yoshi enterprises is 60%. If total fixed costs are $200,000, then what is the cost of producing and selling $1,000,000 of Yoshi's product?

Accepted Answer

The cost of producing and selling $1,000,000 of Yoshi's product can be calculated by subtracting the contribution margin from the total sales. With a contribution margin ratio of 60%, the contribution on $1,000,000 sales is $600,000 (60% of $1,000,000). This means the cost of producing and selling the product is $400,000 ($1,000,000 - $600,000). However, since the question asks for the cost, and $600,000 represents the contribution (not the cost), the correct interpretation is that $400,000 is the contribution margin, implying the costs are $600,000.

Quiz 3: Cost-Volume-Profit Analysis