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Exam 21: Cost-Volume-Profit Analysis

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Question 21

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

A) High-low method.
B) Least-squares method.
C) Scatter method.
D) Break-even method.
E) Step-wise method.

F) A) and D)
G) C) and D)

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Question 22

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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.

A) True
B) False

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Question 23

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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.

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

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.

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?

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 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:

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

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.

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:

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.

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?

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.

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:

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

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?

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