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Exam 21: Cost-Volume-Profit Analysis

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Question 1

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________ is a "what if" technique that estimates profit or loss results if selling price,costs,volume,or underlying assumptions change.

A) High-low method of analysis
B) Sensitivity analysis
C) Contribution margin
D) Operating leverage

E) B) and D)
F) B) and C)

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Question 2

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Fixed cost per unit is assumed to be constant within a particular relevant range of activity.

A) True
B) False

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Question 3

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Diaz Foods produces a gourmet salsa which sells for $28 per unit.Variable costs are $8 per unit,and fixed costs are $7,000 per month.If Diaz expects to sell 1,700 units,compute the margin of safety in units.

When there are no units in the beginning Finished Goods Inventory and the units produced are more than the units sold,the operating income will be higher under absorption costing than variable costing.

Which of the following costs does not change in total despite changes in volume?

If variable costs go down,and all other factors remain the same,the margin of safety will become larger.

Kaycom,Inc.reports the following information: $\begin{array} { | l | r |r| } \hline \text { Units produced } & 580& \text { units } \\\hline \text { Units sold } & 580& \text { units } \\\hline \text { Sales price } & \$ 140& \text { per unit } \\\hline \text { Direct materials } & \$ 20& \text { per unit } \\\hline \text { Direct labor } & \$ 25 &\text { per unit } \\\hline \text { Variable manufacturing overhead } & \$ 30& \text { per unit } \\\hline \text { Fixed manufacturing overhead } & \$ 20,000& \text { per year } \\\hline \text { Variable selling and administrative costs } & \$ 5& \text { per unit } \\\hline \text { Fixed selling and administrative costs } & \$ 15,000& \text { per year } \\\hline\end{array}$ What is the amount of unit product cost that will be considered for external reporting purposes? (Round any intermediate calculations and your final answer to the nearest cent.)

Roy's Raingear produces a single product and reports the following data: $\begin{array}{|l|r|l|}\hline \text { Price } & \$ 8.84 &\text { per unit } \\\hline \text { Variable cost } & \$ 6 & \text { per unit } \\\hline \text { Fixed cost } & \$ 21,000 &\text { per month } \\\hline \text { Volume } & 13,000 &\text { per month } \\\hline\end{array}$ If the company reduces its price to $7.75,it believes that the volume will go up to 15,000 units. How would this change affect operating income?

Which of the following the correct formula for calculating contribution margin ratio?

If variable costs go up,and all other factors remain the same,the margin of safety will become smaller.

SailFind,Inc.has collected the following data.(There are no beginning inventories.) $\begin{array} { | l | r | } \hline \text { Units produced } & { 580 \text { units } } \\\hline \text { Sales price } & \$ 130 \text { per unit } \\\hline \text { Direct materials } & \$ 19 \text { per unit } \\\hline \text { Direct labor } & \$ 15 \text { per unit } \\\hline \text { Variable manufacturing overhead } & \$ 5 \text { per unit } \\\hline \text { Fixed manufacturing overhead } & \$ 15,200 \text { per year } \\\hline \text { Variable selling and administrative costs } & \$ 6 \text { per unit } \\\hline \text { Fixed selling and administrative costs } & \$ 16,400 \text { per year } \\\hline\end{array}$ What is the operating income using variable costing if 550 units are sold?

Total fixed costs can change from one relevant range to another.

Zhou Company is facing a $7 increase in the variable cost of producing one of its products for the upcoming year.Because of this situation,the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time.The price increase will lower sales volume,but the other changes may help the company maintain its profit margins.Zhou has provided the following information regarding the current year results and the proposal made by the sales manager: $\begin{array} { | l | r | r | } \hline & \text { Current Year } & \text { Proposal } \\\hline \text { Unit sale } & 30,000 & 20,000 \\\hline \text { Sales price per unit } & \$ 52 & \$ 58 \\\hline \text { Variable cost per unit } & \$ 34 & \$ 41 \\\hline \text { Fixed cost } & \$ 78,000 & \$ 96,000 \\\hline\end{array}$ Relative to the current year,the sales manager's proposal will ________.

When more units are sold than produced,operating income is higher under absorption costing.

When units produced exceeds units sold,how does operating income differ between variable costing and absorption costing? Explain your answer.

Franco Company has variable costs of $0.65 per unit of product.In October,the volume of production was 24,000 units and units sold were 23,000.The total production costs incurred were $32,200.What are the fixed costs per month?

Brevard Company sells two products-A and B.Product A is sold for $26 per unit and has a variable cost per unit of $16.Product B is sold for $34 per unit and has a unit variable cost of $21.Total fixed costs for the company are $50,000.Brevard Company typically sells three units of Product A for every unit of Product B.What is the breakeven point in total units?

Drenning Timber Products has estimated the following amounts for its next fiscal year: $\begin{array} { | l | r | } \hline \text { Total fixed expenses } & \$ 834,500 \\\hline \text { Sale price per unit } & 41 \\\hline \text { Variable expenses per unit } & 30 \\\hline\end{array}$ What will happen to the breakeven point (in units) if Drenning can reduce fixed expenses by $22,500?

Total variable costs change in direct proportion to a change in volume.

The margin of safety focuses on how much operating income is left over from sales revenue after covering all variable and fixed costs.