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Exam 21: Cost-Volume-Profit Analysis

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Question 21

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In Keegan Corporation's most recent fiscal year, the company reported pretax earnings of $215,000. Fixed costs totaled $325,800, the unit selling price of the firm's only product was $60, and the variable costs per unit were 40% of the selling price. Based on this information, the firm's break-even point in units was:

A) 8,750 units.
B) 13,575 units.
C) 9,050 units.
D) 13,750 units.
E) 15,023 units.

F) B) and E)
G) A) and C)

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Question 22

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A ________ cost is one that remains unchanged despite variations in the volume of activity within a relevant range. A ________ cost is one that changes in proportion to changes in volume of activity.

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Question 23

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The method most likely to produce the most precise line of cost behavior and require the least amount of judgment is the scatter diagram.

The following information is available for a company's utility cost for operating its machines over the last four months. $\begin{array} { | l | r | r | } \hline \text { Month } & \text { Machine hours } & \text { Utility cost } \\\hline \text { January } & 900 & \$ 5,450 \\\hline \text { February } & 1,800 & \$ 6,900 \\\hline \text { March } & 2,400 & \$ 8,100 \\\hline \text { April } & 600 & \$ 3,600 \\\hline\end{array}$ - Using the high-low method, the estimated total fixed cost for utilities is:

What is the high-low method? Briefly describe how it is applied.

A method that estimates cost behavior by using just the highest and lowest volume levels is called the:

Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $270. Annual fixed costs are $800,000. Current sales volume is $4,200,000. -Flannigan Company management targets an annual pre-tax income of $1,125,000. Compute the dollar sales to earn the target pre-tax net income.

If a firm's forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety in dollars is:

Kent Manufacturing produces a product that sells for $50.00 and has variable costs of $24.00 per unit. Fixed costs are $260,000. Kent can buy a new production machine that will increase fixed costs by $11,400 per year, but will decrease variable costs by $3.50 per unit. -Compute the contribution margin per unit if the machine is purchased.

While the total amount of fixed cost remains constant with the level of production, fixed cost per unit changes as volume changes.

McCoy Brothers manufactures and sells two products, A and Z in the ratio of 5:2. Product A sells for $75; Z sells for $95. Variable costs for product A are $35; for Z $40. Fixed costs are $418,500. - Compute the break-even point in composite units.

A manufacturer reports the following costs to produce 10,000 units in its first year of operations: Direct materials, $10 per unit, Direct labor, $6 per unit, Variable overhead, $70,000, and Fixed overhead, $120,000. - The total product cost per unit under variable costing is:

Cost-volume-profit analysis can be used to compute expected income from predicted sales and cost levels.

Benjamin Co. has three products A, B, and C, and its fixed costs are $69,000. The sales mix for its products are 3 units of A, 4 units of B, and 1 unit of C. Information about the three products follows: A B C $\begin{array} { l | l | l | l | l } \text { Projected sales in dollars..... } & \$ 192,000 & \$ 192,000 & \$ 64,000 \\\hline \text { Selling price per unit......... } & \$ 40 & \$ 30 & \$ 40 \\\hline \text { Contribution margin ratio ...... } & 30 \% & 35 \% & 35 \%\end{array}$ (a) Calculate the company's break-even point in composite units and sales dollars. (b) Calculate the number of units of each individual product to be sold at the break-even point.

A product sells for $200 per unit, and its variable costs per unit are $130. The fixed costs are $420,000. If the firm wants to earn $35,000 pretax income, how many units must be sold?

At Midland Company's break-even point of 9,000 units, fixed costs are $180,000 and variable costs are $540,000 in total. The unit sales price is:

Fielder Productions reports the following information: Total Contribution Margin…………………..$32,000 Total Fixed Costs……………………………. $28,000 Required: (a) Calculate Fielder's degree of operating leverage (DOL). (b) Fielder Productions forecasts a 6% increase in sales. What is the expected effect in percent on pretax income?

Isaacson Co. has total fixed costs of $240,000 and a contribution margin ratio of 40%. If rent expense increases by $5,000, how much will total sales revenue have to increase to cover this increase in costs?

Philadelphia Co. is considering the production and sale of a new product with the following sales and cost data: unit sales price, $300; unit variable costs, $180; total fixed costs, $270,000; and projected sales, $900,000. What is the margin of safety: (a) In dollar sales? And (b) As a percent of sales?

Which of the following is the correct interpretation of a degree of operating leverage of 5?