Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500.
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2.
Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500.
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| (1) | Prepare a contribution margin income statement for Blanchard Company at the break-even point. |
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| (2) |
Assume the company’s fixed costs increase by $135,000. What amount of sales (in dollars) is needed to break even?
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3.
Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500. Management targets an annual pretax income of $1,012,500.
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4.
Bloom Company management predicts that it will incur fixed costs of $160,000 and earn pretax income of $164,000 in the next period. Its expected contribution margin ratio is 25%.
| 1. | Compute the amount of total dollar sales. |
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| 2. | Compute the amount of total variable costs. |
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Questions 5-6
[The following information applies to the questions displayed below.]
Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $270,000, up to a maximum capacity of 700,000 yards of rope. Forecasted variable costs are $140 per 100 yards of XT rope.
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| 1. |
Estimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards)(Do not round intermediate calculations.)
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6.
| 3. |
Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.
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Questions 7-8
[The following information applies to the questions displayed below.]
This year Burchard Company sold 40,000 units of its only product for $25 per unit. Manufacturing and selling the product required $200,000 of fixed manufacturing costs and $325,000 of fixed selling and administrative costs. Its per unit variable costs follow.
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| Material | $ | 8.00 | ||
| Direct labor (paid on the basis of completed units) | 5.00 | |||
| Variable overhead costs | 1.00 | |||
| Variable selling and administrative costs | 0.50 | |||
Next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. Management is considering an increase in the unit selling price to reduce the number of units sold because the factory’s output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2, the company will increase the selling price by 20%. This plan will decrease unit sales volume by 10%. Under both plans 1 and 2, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.
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| Required: | |
| 1. |
Compute the break-even point in dollar sales for both (a) plan 1 and (b) plan 2. (Round "per unit answers" to 2 decimal places.)
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8.
| 2. |
Prepare a forecasted contribution margin income statement with two columns showing the expected results of plan 1 and plan 2. The statements should report sales, total variable costs, contribution margin, total fixed costs, income before taxes, income taxes (30% rate), and net income.
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9.
Handy Home sells windows and doors in the ratio of 8:2 (windows:doors). The selling price of each window is $200 and of each door is $500. The variable cost of a window is $125 and of a door is $350. Fixed costs are $900,000.
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Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $300. Annual fixed costs are $870,000. 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.
$5,990,990
Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $300. Annual fixed costs are $870,000. Current sales volume is $4,200,000. Compute the break-even point in units.
5,800
Madison Corporation sells three products (M, N, and O) in the following mix: 3:1:2. Unit price and cost data are:
| M | N | O | |
| Unit sales price | $7 | $4 | $6 |
| Unit variable costs | 3 | 2 | 3 |
$629,000
During its most recent fiscal year, Raphael Enterprises sold 200,000 electric screwdrivers at a price of $15 each. Fixed costs amounted to $400,000 and pretax income was $600,000. What amount should have been reported as variable costs in the company's contribution margin income statement for the year in question?
$2,000,000
Mason Company manufactures and sells shoelaces for $2.00 per pair. Its variable cost per unit is $1.70. Mason's total fixed costs are $10,500. How many pairs must Mason Company sell to break even?
35,000
Locus Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Locus Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?
12,320
Total contribution margin in dollars divided by pretax income is the:
Degree of operating leverage.
A cost-volume-profit (CVP) chart is a graph that plots number of units produced on the horizontal axis and dollars of costs and sales on the vertical axis.
True
A method that estimates cost behavior by using just the highest and lowest volume levels is called the:
High-low method
As the level of volume of activity increases, the variable cost per unit remains constant.
True
Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $300. Annual fixed costs are $870,000. Current sales volume is $4,200,000. Compute the contribution margin per unit.
$150
Which of the following costs are most likely to be classified as variable?
Direct materials
A cost-volume-profit chart is also known as a(n):
Break-even chart
Least-squares regression is a statistical method for identifying cost behavior.
True
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 number of units of Product A McCoy must sell to break even.
6,750
To determine the slope of the variable cost from a scatter diagram, divide the change in units by the change in cost.
False
A step-wise variable cost can be separated into a fixed component and a variable component.
False
Fuschia Company's contribution margin per unit is $12. Total fixed costs are $84,000. What is Fuschia's break-even point in units?
7,000.
A company's normal operating range, which excludes extremely high or low operating levels that are not likely to occur, is called the:
Relevant range.
A company manufactures and sells a product for $120 per unit. The company's fixed costs are $68,760, and its variable costs are $90 per unit. The company's break-even point in dollars is:
$275,040
Cost-volume-profit analysis can be used to compute expected income from predicted sales and cost levels.
True
A company has fixed costs of $320,000 and a contribution margin per unit of $15. If the firm wants to earn a target $40,000 pretax income, how many units must be sold (rounded to the nearest whole unit)?
24,000
An important assumption in multiproduct CVP analysis is a constant sales mix.
True
Management anticipates fixed costs of $72,500 and variable costs equal to 40% of sales. What will pretax income equal if sales are $325,000?
$122,500.
The least-squares regression method is:
A statistical method to identify cost behavior.
Scatter diagrams plot volume (units) on the vertical axis and cost on the horizontal axis.
False
Barclay Enterprises manufactures and sells three distinct styles of bicycles: the Youth model sells for $300 and has a unit contribution margin of $105; the Adult model sells for $850 and has a unit contribution margin of $450; and the Recreational model sells for $1,000 and has a unit contribution margin of $500. The company's sales mix includes: 5 Youth models; 9 Adult models; and 6 Recreational models. If the firm's annual fixed costs total $6,500,000, calculate the firm's break-even point in sales dollars.
$13,000,000
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.
1,350.
The proportion of sales volumes for various products in a multiproduct company is known as the composite mix.
False
A cost that remains unchanged in total despite variations in volume of activity within a relevant range is a:
Fixed cost
The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.
False
Select cost information for Seacrest Enterprises is as follows:
| 1,000 units of output | 5,000 units of output | |||
| Total | Cost/Unit | Total | Cost/Unit | |
| Direct materials | $5,000 | $5.00 | $25,000 | $5.00 |
| Utilities expense | $1,000 | $1.00 | $3,750 | $0.75 |
| Rent expense | $4,000 | $4.00 | $4,000 | $0.80 |
Utilities expense is a mixed cost and rent expense is a fixed cost.
Dividing a mixed cost into its separate fixed and variable cost components makes it more difficult to perform cost-volume-profit analysis.
False
The extent, or relative size, of fixed costs in the total cost structure is known as operating leverage.
True
The contribution margin ratio is the percent of each sales dollar that remains after deducting the total unit variable cost.
True
The contribution margin ratio:
Is the percent of each sales dollar that remains after deducting the total unit variable cost.
Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.
True
Mullis Corp. manufactures DVDs that sell for $5.00. Fixed costs are $28,000 and variable costs are $3.60 per unit. Mullis can buy a newer production machine that will increase fixed costs by $8,000 per year, but will decrease variable costs by $0.40 per unit. What effect would the purchase of the new machine have on Mullis' break-even point in units?
No effect.
An important tool in predicting the volume of activity, the costs to be incurred, the sales to be made, and the profit to be earned is:
Cost-volume-profit analysis.
A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The total contribution margin is:
$125,000.
Henderson Co. has fixed costs of $36,000 and a contribution margin ratio of 24%. If expected sales are $200,000, what is the margin of safety as a percent of sales?
25%.
Forrester Company is considering buying new equipment that would increase monthly fixed costs from $120,000 to $150,000 and would decrease the current variable costs of $70 by $10 per unit. The selling price of $100 is not expected to change. Forrester's current break-even sales are $400,000 and current break-even units are 4,000. If Forrester purchases this new equipment, the revised contribution margin ratio would be:
40%.
A line on a scatter diagram that is intended to reflect the past relation between cost and unit volume is the:
Estimated line of cost behavior.
Alvarez Company's break-even point in units is 1,000. The sales price per unit is $10 and variable cost per unit is $7. If the company sells 2,500 units, what will net income be?
$4,500
A company has fixed costs of $90,000. Its contribution margin ratio is 30% and the product sells for $75 per unit. What is the company's break-even point in dollar sales?
$300,000.
Cost-volume-profit analysis is based on necessary assumptions. Which of the following is not one of these assumptions?
Relevant range includes all possible levels of activity that a company might experience.
A firm expects to sell 25,000 units of its product at $11 per unit and to incur variable costs per unit of $6. Total fixed costs are $70,000. The pretax net income is:
$55,000.
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.
$29.50.
A graphic depiction of the break-even point is known as a cost-volume-profit (CVP) chart.
True
Cost-volume-profit analysis cannot be used when a firm produces and sells more than one product.
False
Contribution margin per unit is the amount by which a product's unit selling price exceeds its total variable cost per unit.
True
Carver Packing Company reports total contribution margin of $72,000 and pretax net income of $24,000 for the current month. In the next month, the company expects sales volume to increase by 8%. The degree of operating leverage and the expected percent change in income, respectively, are:
3.0 and 24%
Use the following information to determine the margin of safety in dollars:
$173,600.
Which of the following is the correct interpretation of a degree of operating leverage of 5?
Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.
Flannigan Company manufactures and sells a single product that sells for $450 per unit; variable costs are $300. Annual fixed costs are $870,000. Current sales volume is $4,200,000. Flannigan Company management targets an annual pre-tax income of $1,125,000. Compute the unit sales to earn the target pre-tax net income.
13,300.
The margin of safety is the excess of:
Expected sales over break-even sales.
The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. Compute the number of units that must be sold in order to achieve a target pretax income of $130,000.
58,621.
During March, a firm expects to its total sales to be $160,000, its total variable costs to be $95,000, and its total fixed costs to be $25,000. The contribution margin for March is:
$65,000.
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ReplyDeleteTo calculate the break-even point in units, one must know unit fixed cost, unit variable cost, and sales price. --------False
ReplyDeleteIn 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:
--------9050 Units
Use the following information to determine the contribution margin ratio:
Unit sales 50,000 Units
Unit selling price $ 14.50
Unit variable cost $ 7.50
Fixed costs $ 204,000
--------48.3%
Select cost information for Klondike Corporation is as follows:
1,000 units of output 2,000 units of output
Total Cost/Unit Total Cost/Unit
Direct materials $ 4,000 $ 4.00 $ 8,000 $ 4.00
Rent expense $ 2,000 $ 2.00 $ 2,000 $ 1.00
----------Direct materials is a variable cost and rent expense is a fixed cost.
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ReplyDeleteFarrow Company reports the following annual results.
ReplyDeleteContribution Margin Income Statement Per Unit Annual Total
Sales (150,000 units) $ 15.00 $ 2,250,000
Variable costs
Direct materials 2.00 300,000
Direct labor 4.00 600,000
Overhead 2.50 375,000
Contribution margin 6.50 975,000
Fixed costs
Fixed overhead 2.00 300,000
Fixed general and administrative 1.50 225,000
Income $ 3.00 $ 450,000
The company receives a special offer for 15,000 units at $12 per unit. The additional sales would not affect its normal sales. Variable costs per unit would be the same for the special offer as they are for the normal units. The special offer would require incremental fixed overhead of $60,000 and incremental fixed general and administrative costs of $4,500.
(a) Compute the income or loss for the special offer.
(b) Should the company accept the special offer?