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Exam 18: Cost Behavior and Cost-Volume-Profit Analysis

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Question 91

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A company manufactures and sells a product for $120 per unit. The company's fixed costs are $68,760, and its variable costs are $90 per unit. The company's break-even point in dollars is:

A) $91,680
B) $68,760
C) $2,2921
D) $275,040
E) $206,280

F) C) and E)
G) D) and E)

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Question 92

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Least-squares regression is a statistical method for deriving an estimated line of cost behavior.

A) True
B) False

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Question 93

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Three important assumptions in cost-volume-profit analysis is that (1) _______________ per unit is constant, (2) _____________ per unit is constant, and (3) ______________ are constant in total.

A cost that remains the same in total even when volume of activity varies is a:

The ratio of the sales volume for the various products sold by a company is called the:

Joseph 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: $\begin{array}{lrrr}&A&B&C\\\text { Projected sales in dollars } &\$ 192,000& \$ 192,000&\$ 64,000\\\text { Selling price per unit } & \$ 40 & \$ 30 & \$ 40 \\\text { Contribution margin ratio } & 30 \% & 35 \% & 35 \%\end{array}$ (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.

There are at least three different methods to estimate costs. These methods are the _______________, _______________, and _______________ methods.

Schmidt Inc., manufactures inexpensive cameras that sell for $50.00. Fixed costs are $720,000 and variable costs are $30.00 per unit. Schmidt can buy a newer production machine that will increase fixed costs by $14,400 per year, but will increase variable costs by 10% per unit. What are the original and the new breakeven points in this situation?

Benny and Frieda are art students who often received compliments on the t-shirts they designed and made themselves. In need of funds for fall semester, they decide to sell these t-shirts at a small stand at the South Haven Beach during the summer. Rent on the beach stand is $1,600 per month. Variable costs per t-shirt are $4.75. A. Complete the following table which estimates total costs and cost per t-shirt at the indicated levels of activity for this t-shirt stand. Round the costs per t-shirt to two decimal places. $\begin{array} { | l | c | c | c | } \hline & & { \text { Number of } \mathrm { t } \text {-shirts sold in one month } } \\\hline & 1,000 & 1,500 & 2,000 \\\hline \text { Total fixed cost } & & & \\\hline \text { Total variable cost } & & & \\\hline \text { Total cost } & & & \\\hline \text { Cost per t-shirt sold } & & & \\\hline\end{array}$ B. Benny and Frieda need to each earn $5,000 before the fall term starts. They plan to sell the t-shirts for $15. 1. Will they be able to meet their goal? Support your comments with computations. 2. What other factors might affect this business venture?

There are only two methods to derive an estimated line of cost behavior: the high-low method and the scatter diagram.

Herriot Co. has total fixed costs of $180,000 and a contribution margin ratio of 40%. Assume that an additional advertising expenditure of $4,000 would increase sales by $8,000. Should the company spend this additional amount on advertising? (Support your answer with calculations.)

Thomas Company has total fixed costs of $360,000 and variable costs of $14 per unit. If the unit sales price is reduced from $24 to $20 and advertising is increased by $10,000, sales will increase from 40,000 to 65,000 units. -What are the contribution margin and net income under the revised conditions?

Abrams 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 sales have to increase to cover this increase in costs?

Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.

Ivan Company has a goal of earning $70,000 after-tax income. Ivan would need to pay $20,000 of income taxes at the target level of income. The contribution margin ratio is 30%. What amount of dollar sales must be achieved to reach the goal if fixed costs are $36,000?

Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales. What will pretax income equal if sales are $325,000?

Willco Inc. manufactures electronic parts. They are analyzing their monthly maintenance costs to determine the best way to budget these costs in the future. They have collected the following data for the last 6 months: -Using the high-low method and the Willco data, calculate the variable maintenance cost per machine hour (round to three decimal places) .