Question 1

Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following: Variable manufacturing costs $9 Variable selling and administrative costs 6 Total $15 ``` Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit? A. $3,000 increase. B. $4,200 increase. C. $3,000 decrease. D. $4,200 decrease. ```

Accepted Answer

C. $3,000 decrease. This problem compares the increase in revenue due to the possible increased spending on advertising. The $15,000 for advertising is just another fixed cost. The contribution margin ratio is used to determine 40% of the new revenue of $780,000 = $312,000 resulting in only $12,000 more in contribution margin as compared to a new fixed advertising cost $15,000. The difference between the $15,000 and the $12,000 is a $3,000 decrease in income.

Question 2

In 2004, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor's 2005 liability insurance increased by $1,200,000 over 2004. ``` Assuming the volume and other costs are unchanged, what should the 2005 price be if Thor is to make the same $200,000 profit before income taxes? A. $120.00. B. $135.00. C. $150.00. D. $240.00. ```

Accepted Answer

B. $135.00. The problem first requires that the variable cost per unit (V) be computed so that the price can then be made a variable. V does not change in the question. 80,000($120 - V) - $1,000,000 = $200,000 V = $105 Now to solve for the new selling price S 80,000(S - $105) - $2,200,000 = $200,000 S = $135

Question 3

The sales and cost information for Gamore Company are as follows: ``` Sales (250,000 units) $5,000,000 Direct materials and direct labor 1,500,000 Factory overhead: Variable 200,000 Fixed 350,000 Selling and general expenses: Variable 50,000 Fixed 300,000 ``` Gamore's breakeven point in the number of units is A. 49,240. B. 50,000. C. 62,500. D. 92,860.

Accepted Answer

B. 50,000. Given sales of $5,000,000 and total variable costs of 1,750,000, the contribution margin (CM) is the difference of $3,250,000. Then the CM is divided by the units: $3,250,000 / 250,000 units = $13 CM per unit. From here, the BE point in units is equal to the total fixed costs divided by the CM per unit: $650,000 / $13 = 50,000 units.

Question 4

How do you calculate break-even point in unit when profit is not mentioned?

Accepted Answer

Break-point in unit =Total Fixed Cost in Dollars/CM per unit in Dollars

Question 5

Del Co. has fixed costs of $100,000 and breakeven sales of $800,000. What is its projected profit at $1,200,000 sales? A. $50,000. B. $150,000. C. $200,000. D. $400,000.

Accepted Answer

A. $50,000. The objective is to determine the contribution margin ratio and apply it to the sales figure. This results in the total contribution margin because the contribution margin ratio is (sales - variable costs)/sales. Then subtract fixed cost to find the projected profit. Breakeven sales = fixed cost/contribution margin ratio $800,000 = $100,000/cmr .125 = cmr Projected profit = .125($1,200,000) - $100,000 = $50,000

Question 6

``` A ceramics manufacturer sold cups last year for $7.50 each. The variable cost of manufacturing was $2.25 per unit. The company needed to sell 20,000 cups to break even. Its net income was $5,040. This year, the company expects the price per cup to be $9.00; the variable manufacturing cost to increase by 33.3%; and the fixed costs to increase by 10%. How many cups (rounded) does the company need to sell this year to break even? A. 17,111. B. 17,500. C. 19,250. D. 25,667. ```

Accepted Answer

C. 19,250. To calculate the breakeven point, we must first find the fixed cost of the prior year. Fixed costs (FC) / contribution margin (CM) = breakeven point in units. Thus, using prior year data, FC / ($7.50 - $2.25) = 20,000 units. Solving for FC = $105,000. Current year FC = 1.1(prior year FC) = $115,500; thus, breakeven units for the current year = $115,500 / ($9 - $3) = $19,250.

Question 7

Wren Co. manufactures and sells two products with selling prices and variable costs as follows: A B Selling price $18.00 $22.00 Variable costs 12.00 14.00 ``` Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If the operating income last year was $28,800, what was the number of units Wren sold? A. 5,486. B. 6,000. C. 9,600. D. 10,500. ```

Accepted Answer

``` SEE BECKER CPA-05781 Adding an operating income of $28,800 to fixed costs of $38,400 = contribution margin (CM) of $67,200. Total CM for A = $6, while CM for B = $8. Since the ratio of units in the sales mix is 4 parts A to 1 part B, the proper equation would be A+B =FC+PROFIT 6(B4)+B(8)=$67,200 24B+8B=$67,200 32B=$67,200 B=2100 A=2100 4=8400 ``` TOTAL UNIT=2100+8400=10500 UNIT thus, Q = 10,500.

Question 8

``` At the breakeven point, the contribution margin equals total A. Variable costs. B. Sales revenues. C. Selling and administrative costs. D. Fixed costs. ```

Accepted Answer

D. Fixed costs. Profit is equal to Sales - Variable Costs - Fixed Costs. At the breakeven point, profit is zero. Since the contribution margin equals sales minus variable costs: Contribution Margin - Fixed Costs = 0, and therefore Contribution Margin = Fixed Costs.

Question 9

The most likely strategy to reduce the breakeven point would be to A. Increase both the fixed costs and the contribution margin. B. Decrease both the fixed costs and the contribution margin. C. Decrease the fixed costs and increase the contribution margin. D. Increase the fixed costs and decrease the contribution margin.

Accepted Answer

C. Decrease the fixed costs and increase the contribution margin. The breakeven point is the ratio of fixed costs to the contribution margin ratio (or contribution margin per unit for the unit breakeven point). If the fixed costs are decreased (numerator), and the contribution margin is increased (increasing the denominator of either breakeven formula), then the ratio and, therefore, the breakeven point decrease. Decreasing the fixed costs causes the numerator of the ratio to decrease, and increasing the contribution margin causes the denominator to increase. Both changes have the effect of decreasing the ratio. This also makes real-world sense. If fixed costs have decreased, it is easier for the firm to break even because there are less fixed costs to cover. Likewise, if the contribution margin increases, each unit provides a greater contribution to covering fixed costs, thus requiring the sale of fewer units to break even.

Question 10

``` A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year? A. 21,000 B. 21,600 C. 21,960 D. 22,600 ```

Accepted Answer

D. 22,600 Year one fixed cost [(20000 $5.25=$105,000)+income before tax(net income of $5040/1-tax of 40%)}=$ $113,400. CM per unit ($5.25) is given by subtracting variable cost ($2.25) from price ($7.50). Year one units sold of 21,600 is calculated by dividing total CM ($113,400) by CM per unit ($5.25). Year two units sold (22,600 units) is equal to year one units plus 1,000 units.

Question 11

A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company's next steps? A. If production is increased to 12,000 units, profits will increase by $50,000. B. If production is increased to 12,000 units, profits will increase by $100,000. C. If production remains at 10,000 units, profits will decrease by $50,000. D. If production remains at 10,000 units, profits will decrease by $100,000.

Accepted Answer

D. If production remains at 10,000 units, profits will decrease by $100,000. At the current level of 10,000 units, a contribution margin per unit of $35 = $85 - $50, and fixed costs of $300,000, the contribution margin is $350,000 and the operating income is $50,000. If variable costs increase by 20%, the contribution margin per unit decreases to $25 = $35 - $60, or $250,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000. Tricky operating profit will decrease by -$50,000(cm $250,000-$300,00) but contribution margin(cm) refer to as profit in this question will decrease by -$100,000($250,000-$350,00)

Question 12

``` Cott Company has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott's fixed cost? A. $16,000. B. $24,000. C. $80,000. D. $96,000. ```

Accepted Answer

B. $24,000. The margin of safety is the difference between current sales and breakeven sales. Thus, breakeven sales are $120,000 ($200,000 - $80,000). In other words, the firm has breathing room of $80,000 of sales. Sales could fall by this amount before the firm would dip below breakeven. breakeven sales = Fixed cost/contribution margin percentage $120,000 = Fixed cost/.20 $24,000 = Fixed cost or CMR= NET INCOME/margin of Safety in $ MS of $80000 cmr 20%=$16000 sales $200,000=(net income $16,000+FC)/CMR 20% THEN SOLVE FOR FC

Question 13

``` Breakeven analysis assumes that over the relevant range A. Unit revenues are nonlinear. B. Unit variable costs are constant. C. Total costs are constant. D. Total fixed costs are nonlinear. ```

Accepted Answer

B. Unit variable costs are constant. In a graph with the Y-axis being cost and the X-axis being activity level, total variable cost begins at the origin and is an upward sloping line. The slope of this curve is variable cost per unit of activity and is a constant. If variable cost were not assumed to be a constant in the relevant range, breakeven analysis would not be possible.

Question 14

On January 1, 2005, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake's budgeted breakeven point and budgeted margin of safety?

Accepted Answer

Budgeted breakeven point Budgeted margin of safety Increase Decrease Contribution margin percentage (cmr) = (sales - variable costs)/sales breakeven sales = fixed cost/cmr Budgeted margin of safety = Budgeted sales - breakeven sales. If direct labor wage rates increase, then the total variable cost increases. Contribution margin and cmr are decreased, causing breakeven sales to increase. (The firm is now contributing less per sales unit toward the fixed cost.) With the increase in breakeven sales, the margin of safety declines. (The firm has less breathing room now because actual sales are closer to the breakeven point, which has increased.

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