chapter 5 notes and problem examples

Question 1

What assumptions does CVP analysis rely on?

Answer 1

Costs are linear within the relevant range, and costs can be classified as variable or fixed. Also, sales mix is constant, and units produced are sold (inventory is constant).

Question 2

A company produces a product with a contribution margin per unit of $36. If the company incurs $62,000 in total fixed costs and expects to sell 2,500 units their income would be $X

Answer 2

To find the income, first Multiple the margin per unit of $36 by the expected sales of 2,500 units. Take that number of 90,000$ and subtract it by the total fixed costs of 62,000$ resulting in an income of 28,000$.

Question 3

A measure to assess the effect of changes in the level of sales on income is the:

Answer 3

degree of operating leverage

Question 4

Maker’s Company produces a product that has a variable cost of $4 per unit. The company’s fixed costs are $40,000. The product sells for $12 per unit. The company is considering purchasing a new manufacturing machine which would improve efficiency. The new machine would decrease the variable cost to $3, but increase fixed costs by $5,000. How how do we find the revised break-even point in dollars $?

Answer 4

Take the per unit sale cost and subtract the new revised variable cost, then find the revised contribution margin ratio by dividing 9 by 12, giving the ratio 0.75. Finally, divide the revised fixed costs by that revised contribution margin ratio, giving us the new revised break-even point of $60,000 in dollars.

Question 5

RST Company produces a product that has a variable cost of $6 per unit. The company’s fixed costs are $30,000. The product sells for $10 per unit. RST desires to earn a target income of $20,000. How do we find the sales level in dollars to achieve the desired target income?

Answer 5

(Fixed Costs + Target Income / Contribution margin ratio) = $125,000

Question 6

What is sales mix?

Answer 6

Sales mix is the proportion of the sales volume for each product.

Question 7

RST Company produces a product that has a selling price of $10 per unit and variable cost of 6$ per unit. The company’s fixed costs are $30,000. If the company sells 15,000 units, How do we find the degree of operating leverage?

Answer 7

degree of operating leverage = (contribution margin / income) : Answer is 2.

Question 8

RST Company produces a product that has a variable cost of $6 per unit. The company’s fixed costs are $30,000. The product sells for $10 per unit. The company is considering purchasing a new manufacturing machine which would improve efficiency. The new machine would decrease the variable cost to $4, but increase fixed costs by $15,000. How do we find the revised break-even point in dollars $?

Answer 8

$75,000

Question 9

In variable costing, what are the costs included in product costs?

Answer 9

only the costs that change in total with changes in production levels

Question 10

What is sales mix?

Answer 10

Sales mix is the proportion of sales volume for various products.