# Cost-volume-profit analysis is the study of the effects of by 20xh58y

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```									E6-3

Ger Company reports the following operating results for the month of August: Sales \$300,000 (units 5,000); variable costs
\$210,000; and fixed costs \$70,000. Management is considering three independent courses of action to increase net income.

Compute the net income that would result from each of the independent actions below:

1.      Increase selling price by 10% with no change in total variable costs.

\$

2.      Reduce variable costs to 58% of sales.

\$

3.      Reduce fixed costs by \$20,000.

\$

E6-9 (a,b)

Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance. Shown below are
unit cost and sales data.

Pairs               Pairs               Range
of Shoes            of Gloves             Finder
Unit sales price                               \$100                  \$30                \$250
Unit variable costs                               60                    10               200
Unit contribution margin                        \$40                    \$20               \$50
Sales mix                                       40%                    50%               10%

Fixed costs are \$620,000.

Compute the break-even point in units for the company.

Determine the number of units to be sold at the break-even point for each product line.
Shoes

Gloves

Range finders
E6-11
Spencer Company manufactures and sells three products. Relevant per unit data concerning each product are given
below.
Product
A                B                 C
Selling price                                        \$9              \$12              \$14
Variable costs and expenses                          \$3            \$9.50              \$12
Machine hours to produce                               2                1                 2

Compute the contribution margin per unit of the limited resource (machine hour) for each product. (Round answers to
2 decimal places, e.g. 10.50.)
Product A
\$
Product B
\$
Product C
\$

Assuming 1,500 additional machine hours are available, which product should be manufactured?

Prepare an analysis showing the total contribution margin if the additional hours are (1) divided equally among the
products, and (2) allocated entirely to the product identified in (b) above. (Round contribution margin to 2 decimal places,
e.g. 10.50.)

Divided equally among the products:

Product
A                                  B                              C

Machine hours
Contribution margin per unit
of limited resource                                      \$                                   \$                             \$

Total contribution margin                                    \$                                   \$                             \$

The total contribution margin is \$                       .

Allocated entirely to the product identified in the section above.

Machine hours

Contribution margin per unit of limited resource
\$
Total contribution margin
\$

E6-15

Imagen Arquitectonica of Tijuana, Mexico is contemplating a major change in its cost structure. Currently, all of its
drafting work is performed by skilled draftsmen. Alfredo Ayala, Imagen's owner, is considering replacing the draftsmen
with a computerized drafting system.
However, before making the change Alfredo would like to know the consequences of the change, since the volume of
business varies significantly from year to year. Shown below are CVP income statements for each alternative.
Manual System Computerized System
Sales                                             \$1,500,000             \$1,500,000
Variable costs                                     1,200,000                600,000
Contribution margin                                  300,000                900,000
Fixed costs                                           60,000                660,000
Net income                                          \$240,000              \$240,000

Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 10.50.)
Manual System

Computerized System

P6-3A

Manning Industries manufactures and sells three different models of wet-dry shop vacuum cleaners. Although the shop vacs
vary in terms of quality and features, all are good sellers. Manning is currently operating at full capacity with limited machine
time. Sales and production information relevant to each model follows.
Product
Economy                 Standard               Deluxe
Selling price                                             \$30                     \$50                 \$100
Variable costs and expenses                               \$12                     \$18                   \$42
Machine hours required                                      .5                      .8                   1.6

What is the contribution margin per unit of limited resource for each product? (Round answers to 2 decimal places, e.g. 10.50.)
Economy
\$
Standard
\$
Deluxe
\$
P6 – 4A

The Creekside Inn is a restaurant in Tucson, Arizona. It specializes in southwestern style meals in a moderate price
range. Terry Wilson, the manager of Creekside, has determined that during the last 2 years the sales mix and
contribution margin ratio of its offerings are as follows.
Contribution Margin
Percent of Total Sales        Ratio
Appetizers                              10%                   60%
Main entrees                            60%                   30%
Desserts                                10%                   50%
Beverages                               20%                   80%

Terry is considering a variety of options to try to improve the profitability of the restaurant. Her goal is to generate a target
net income of \$150,000.The company has fixed costs of \$1,200,000 per year.

Calculate the total restaurant sales and the sales of each product line that would be necessary to achieve the desired
target net income.
Appetizers
\$
Main entrees
\$
Desserts
\$

Beverages
\$

Total restaurant sales
\$

Terry believes the restaurant could greatly improve its profitability by reducing the complexity and selling price of its
entrees to increase the number of clients that it serves. It would then more heavily market its appetizers and
beverages. She is proposing to drop the contribution margin ratio on the main entrees to 10% by dropping the average
selling price. She envisions an expansion of the restaurant that would increase fixed costs by 50%. At the same time,
she is proposing to change the sales mix to the following.
Contribution Margin
Percent of Total Sales           Ratio
Appetizers                            20%                    60%
Main entrees                          30%                    10%
Desserts                              10%                    50%
Beverages                             40%                    80%

Compute the total restaurant sales, and the sales of each product line that would be necessary to achieve the desired
target net income.

Appetizers
\$
Main entrees
\$
Desserts
\$

Beverages
\$
Total restaurant sales
\$

Suppose that Terry drops the selling price on entrees and increases fixed costs as proposed in the second part of the
question, but customers are not swayed by the marketing efforts and the sales mix remains what it was in the first part of
the question. Compute the total restaurant sales and the sales of each product line that would be necessary to achieve
the desired target net income. (Round weighted-average contribution margin to 2 decimal places, e.g. 10.50 and final
answers to 0 decimal places, e.g. 125.)
Appetizers
\$
Main entrees
\$
Desserts
\$
Beverages
\$

Total restaurant sales
\$
Cost-volume-profit analysis is the study of the effects of

changes in costs and volume on a company's profitability ratios.

cost, volume, and profit on the cash budget.

changes in costs and volume on a company's profit.

cost, volume, and profit on various ratios.

The CVP income statement classifies costs

by function and computes a contribution margin.

as variable or fixed and computes contribution margin.

as variable or fixed and computes gross margin.

by function and computes a gross margin.

Contribution margin is the amount of revenue remaining after deducting

cost of goods sold.

fixed costs.

contra-revenue.

variable costs.

Buerhrle's CVP income statement included sales of 2,000 units, a selling price of \$100, variable expenses of \$60
per unit, and fixed expenses of \$44,000. Contribution margin is

\$36,000.

\$80,000.

\$200,000.

\$120,000.
Buerhrle's CVP income statement included sales of 2,000 units, a selling price of \$100, variable expenses of \$60
per unit, and fixed expenses of \$44,000. Net income is

\$76,000.

\$36,000.

\$200,000.

\$80,000

For Dye Company, at a sales level of 5,000 units, sales is \$75,000, variable expenses total \$40,000, and fixed
expenses are \$21,000. What is the contribution margin per unit?

\$8.00

\$2.80

\$15.00

\$7.00

Vazquez Company's cost of goods sold is \$350,000 variable and \$200,000 fixed. The company's selling and
administrative expenses are \$250,000 variable and \$300,000 fixed. If the company's sales is \$1,400,000, what
is its contribution margin?

\$800,000

\$850,000

\$300,000

\$900,000

For Contreras Company, sales is \$1,000,000, fixed expenses are \$300,000, and the contribution margin per unit
is \$72. What is the break-even point?

13,889 units

4,167 units

\$1,388,889 sales dollars

\$416,667 sales dollars
The margin of safety ratio is

margin of safety in dollars divided by break-even sales.

expected sales divided by break-even sales.

expected sales less break-even sales.

margin of safety in dollars divided by expected sales.

In 2008, Thornton sold 3,000 units at \$500 each. Variable expenses were \$250 per unit, and fixed expenses
were \$150,000. The same selling price is expected for 2009. Thornton is tentatively planning to invest in
equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is
Thornton's break-even point in units for 2009?

750

900

720

600

Fields Corporation has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods
and 35% for Sports Gear. Fields incurs \$2,220,000 in fixed costs. The contribution margin ratio for Sporting
Goods is 30%, while for Sports Gear it is 50%.

What will sales be for the Sporting Goods Division at the break-even point?

\$2,100,000

\$3,355,814

\$1,800,000

\$3,900,000

A shift from high-margin sales to low-margin sales

may decrease net income, even though there is an increase in total units sold.

will always decrease net income.

will always increase net income.

will always increase units sold.
Cost structure

refers to the relative proportion of fixed versus variable costs that a company incurs.

generally has little impact on profitability.

refers to the relative proportion of operating versus nonoperating costs that a company incurs.

cannot be significantly changed by companies

Reducing reliance on human workers and instead investing heavily in computers and online technology will

reduce variable costs and increase fixed costs.

have no effect on the relative proportion of fixed and variable costs.

make the company less susceptible to economic swings.

reduce fixed costs and increase variable costs

A company with a higher contribution margin ratio is

either more or less sensitive to changes in sales revenue, depending on other factors.

likely to have a lower breakeven point.

more sensitive to changes in sales revenue.

less sensitive to changes in sales revenue

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