Test Bank - Chapter 6 Cost Volume Profit Analysis

Chapter 6

Cost-Volume-Profit Relationships

True/False

1.TMedium

A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole.

2.FMedium

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

3.FMedium

In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will tend to be lower in the company with a higher proportion of fixed expenses in its cost structure.

4.TMedium

For a given level of sales, a low contribution margin ratio will produce less net income than a high contribution margin ratio.

5.TEasy

Once the break-even point has been reached, increases in contribution margin will be reflected dollar for dollar in increased net income.

6.TMedium

The formula for the break-even point is the same as the formula to attain a given target profit for the special case where the target profit is zero.

7.TEasy

At the break-even point: Sales - Variable expenses = Fixed expenses.

8.FMedium

If fixed expenses increase by $10,000 per year, then the level of sales needed to break even will also increase by $10,000.

9.TEasy

The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin ratio.

10.FMedium

A company with sales of $70,000 and variable expenses of $40,000 should spend $10,000 on increased advertising if the increased advertising will increase sales by $20,000.

11.TMedium

If the fixed expenses increase in a company, and all other factors remain unchanged, then one would expect the margin of safety to decrease.

Managerial Accounting, 9/e 176

12.TEasy

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.

13.FMedium

If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be lower in the company with a higher proportion of fixed expenses in its cost structure.

14.TMedium

If two companies have the same total sales and total expenses and make the same product, the volatility of net income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure.

15.TEasy

A company with a degree of operating leverage of 4 would expect net income to increase by 200% if sales increased from $100,000 to $150,000.

Multiple Choice

16.DEasyCMA adapted

The difference between total sales in dollars and total variable expenses is called:a. net operating income.b. net profit.c. the gross margin.d. the contribution margin.

17.BHardCMA adapted

Brasher Company manufacturers and sells a single product that has a positive contribution margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change, then what would be the effect on the contribution margin per unit and the contribution margin ratio?

Contribution Contribution margin per unit margin ratioa. Decrease Decreaseb. Decrease No changec. No change Decreased. No change No change

Managerial Accounting, 9/e177

18.BEasy

Once the break-even point is reached:a. the total contribution margin changes from negative to positive.b. net income will increase by the unit contribution margin for each additional item sold.c. variable expenses will remain constant in total.d. the contribution margin ratio begins to decrease.

19.BMediumCPA adapted

The contribution margin ratio always increases when the:a. variable expenses as a percentage of sales increase.b. variable expenses as a percentage of sales decrease.c. break-even point increases.d. break-even point decreases.

20.CMediumCPA adapted

If the fixed expenses of a product increase while variable expenses and the selling price remain constant, what will happen to the total contribution margin and the break-even point?

Contribution margin Break-even pointa. Increase Decreaseb. Decrease Increasec. Unchanged Increased. Unchanged Unchanged

21.CEasyCPA adapted

The total contribution margin decreases if sales volume remains the same and:a. fixed expenses increase.b. fixed expenses decrease.c. variable expense per unit increases.d. variable expense per unit decreases.

22.DEasy

The break-even in units sold will decrease if there is an increase in:a. unit sales volume.b. total fixed expenses.c. unit variable expenses.d. selling price.

23.BEasyCPA adapted

Break-even analysis assumes that:a. total costs are unchanged.b. unit variable expenses are unchanged.c. variable expenses are nonlinear.d. unit fixed expenses are unchanged.


24.DHardCPA adapted

A company increased the selling price for its product from $1.00 to $1.10 a unit when total fixed expenses increased from $400,000 to $480,000 and variable expense per unit remained unchanged. How would these changes affect the break-even point?a. The break-even point in units would increase.b. The break-even point in units would decrease.c. The break-even point in units would remain unchanged.d. The effect cannot be determined from the information given.

25.AEasyCMA adapted

The ratio of fixed expenses to the unit contribution margin is the:a. break-even point in unit sales.b. profit margin.c. contribution margin ratio.d. margin of safety.

26.AEasyCMA adapted

The break-even point in unit sales increases when variable expenses:a. increase and the selling price remains unchanged.b. decrease and the selling price remains unchanged.c. decrease and the selling price increases.d. remain unchanged and the selling price increases.

27.DEasy

The margin of safety percentage is computed as:a. Break-even sales/Total sales.b. Total sales - Break-even sales.c. (Total sales - Break-even sales)/Break-even sales.d. (Total sales - Break-even sales)/ Total sales.

28.CEasy

The margin of safety is equal to:a. Sales - Net income.b. Sales - (Variable expenses/Contribution margin).c. Sales - (Fixed expenses/Contribution margin ratio).d. Sales - (Variable expenses + Fixed expenses).

29.CEasy

The amount by which a company's sales can decline before losses are incurred is called the:a. contribution margin ratio.b. degree of operating leverage.c. margin of safety.d. contribution margin ratio.

30.DEasy

The degree of operating leverage can be calculated as:a. contribution margin divided by sales.b. gross margin divided by net income.c. net income divided by sales.d. contribution margin divided by net income.


31.BEasyCMA adapted

If company A has a higher degree of operating leverage than company B, then:a. the company A has higher variable expenses.b. the company A's profits are more sensitive to percentage changes in sales.c. the company A is more profitable.d. the company A is less risky.

32.DMediumCMA adapted

Marston enterprises sells three chemicals: petrol, septine, and tridol. Petrol's unit contribution margin is higher than septine's which is higher than tridol's. Which one of the following events is most likely to increase the company's overall break-even point?a. The installation of new computer-controlled equipment and subsequent lay-off of assembly-line workers.b. A decrease in tridol's selling price.c. An increase in the overall market demand for septine.d. A change in the relative market demand for the products, with the increase favoring petrol relative to septine and tridol.

33.DHard

A company has provided the following data: Sales........... 3,000 units Sales price..... $70 per unit Variable cost... $50 per unit Fixed cost...... $25,000

If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net income will:a. increase by $61,000.b. increase by $20,000.c. increase by $3,500.d. increase by $11,000.

34.AHard

A company has provided the following data: Sales........... 3,000 units Sales price..... $70 per unit Variable cost... $50 per unit Fixed cost...... $25,000

If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, net income will:a. decrease by $31,875.b. decrease by $15,000.c. increase by $20,625.d. decrease by $3,125.


35.CHard

Last year, Twins Company reported $750,000 in sales (25,000 units) and a net income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, the company's:a. contribution margin ratio is 40%.b. break-even point is 24,000 units.c. variable expense per unit is $9.d. variable expenses are 60% of sales.

36.CHard

Last year, Black Company reported sales of $640,000, a contribution margin of $160,000, and a net loss of $40,000. Based on this information, the break-even point was:a. $640,000.b. $480,000.c. $800,000.d. $960,000.

37.BHard

The break-even point in sales for Rice Company is $360,000 and the company's contribution margin ratio is 30%. If Rice Company desires an income of $84,000, sales would have to totala. $280,000.b. $640,000.c. $480,000.d. $560,000.

38.BHard

The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be:a. $8,000.b. $32,000.c. $24,000.d. $16,000.

39.CHard

Young Company has a margin of safety percentage of 20%. The break-even point is $400,000 and the variable costs are 40% of sales. Given this information, the net income is:a. $48,000.b. $80,000.c. $60,000.d. $0.

40.CMedium

Dodero Company produces a single product which sells for $100 per unit. Fixed expenses total $12,000 per month, and variable expenses are $60 per unit. The company's sales average 500 units per month. Which of the following statements is correct?a. The company's break-even point is $12,000 per month.b. The fixed expenses remain constant at $24 per unit for any activity level within the relevant range.c. The company's contribution margin ratio is 40%.d. Responses a, b, and c are all correct.


41.DEasy

North Company sells a single product. The product has a selling price of $30 per unit and variable expenses of 70% of sales. If the company's fixed expenses total $60,000 per year, then it will have a break-even of:a. $60,000.b. $85,714.c. $42,000.d. $200,000.

42.AHardCPA adapted

Gerber Company is planning to sell 200,000 units for $2.00 a unit and will just break even at this level of sales. The contribution margin ratio is 25%. What are the company's fixed expenses?a. $100,000b. $160,000c. $200,000d. $300,000

43.AMediumCPA adapted

Marling Corporation has budgeted the following data:

Expected sales ...... $600,000 Variable expenses ... 420,000 Fixed expenses ...... 120,000

What is the break-even in sales dollars?a. $400,000b. $420,000c. $540,000d. $660,000


Wallace, Inc., prepared the following budgeted data based on a sales forecast of $6,000,000:

Variable Fixed Direct materials ......... $1,600,000 Direct labor ............. 1,400,000 Factory overhead ......... 600,000 $ 900,000 Selling expenses ......... 240,000 360,000 Administrative expenses .. 60,000 140,000 Total ............... $3,900,000 $1,400,000

What would be the amount of sales dollars at the break-even point?a. $2,250,000b. $3,500,000c. $4,000,000d. $5,300,000


45.DHardCPA adapted

Koby Co. has sales of $200,000 with variable expenses of $150,000, fixed expenses of $60,000, and a net loss of $10,000. How much would Koby have to sell in order to achieve a net income of 10% of sales?a. $375,000.b. $451,000.c. $431,000.d. $400,000.

46.AHard

Green Company's variable expenses are 75% of sales. At a sales level of $400,000, the company's degree of operating leverage is 8. At this sales level, fixed expenses equal:a. $87,500.b. $100,000.c. $50,000.d. $75,000.

47.CMedium

Scott Company's variable expenses are 72% of sales. The company's break-even point in sales is $2,450,000. If sales are $60,000 below the break-even point, the company would report a:a. $43,200 loss.b. $60,000 loss.c. $16,800 loss.d. cannot be determined from the data given.

48.BHard

Last year, Perry Company reported profits of $4,200. It's variable expenses totaled $66,000 or $6 per unit. The unit contribution margin was $3.00. The break-even point in units for Perry Company is:a. 11,000.b. 9,600.c. 22,000.d. 12,400.

49.CHard

At a break-even point of 800 units sold, White Company's variable expenses are $8,000 and its fixed expenses are $4,000. What will the Company's net income be at a volume of 801 units?a. $15b. $10c. $5d. $20


50.BMediumCPA adapted

The following information pertains to Rica Company:

Sales (50,000 units) ................ $1,000,000 Manufacturing costs: Variable .......................... 340,000 Fixed ............................. 70,000 Selling and admin. expenses: Variable .......................... 10,000 Fixed ............................. 60,000

How much is Rica's break-even point in number of units?a. 9,848b. 10,000c. 18,571d. 26,000

51.DHard

Curtis Company anticipates selling 10,000 units next year. The company wants to earn a net income equal to 10% of sales. If variable expenses are $12 per unit and fixed expenses total $78,000 per year, what selling price must be established to achieve the desired level of net income?a. $19.80 per unitb. $18.00 per unitc. $21.78 per unitd. $22.00 per unit

52.DEasy

Carver Company produces a product which sells for $30. Variable manufacturing costs are $15 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. A selling commission of 10% of the selling price is paid on each unit sold. The contribution margin per unit is:a. $ 3.b. $15.c. $ 8.d. $12.

53.BHardCMA adapted

At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses were $2,000. What will the 401st unit sold contribute to profit?a. $0.b. $5.c. $10.d. $15.


54.DMediumCMA adapted

The following information relates to Clyde Corporation which produced and sold 50,000 units last month.

Sales ............................. $850,000 Manufacturing costs: Fixed ........................... 210,000 Variable ........................ 140,000 Selling and administrative expenses: Fixed ........................... 300,000 Variable ........................ 45,000

There were no beginning or ending inventories. Production and sales next month are expected to be 40,000 units. The company's unit contribution margin next month should be:a. $16.63.b. $ 3.10.c. $ 7.98.d. $13.30.

55.BMedium

The following is last month's contribution format income statement:

Sales (12,000 units) ................ $1,200,000 Less variable expenses .............. 700,000 Contribution margin ................. 500,000 Less fixed expenses ................. 300,000 Net income .......................... $ 200,000

What is the company's margin of safety percentage to the nearest whole percent?a. 42%b. 40%c. 17%d. 20%

56.DMedium



What is the company's margin of safety in dollars?a. $100,000b. $600,000c. $1,500,000d. $250,000


57.AMedium

The following data pertain to Wistron Company's two products:

Product X Product Y Sales in dollars ........ $100,000 $80,000 Contribution margin ratio 48% 30%

If fixed expenses for the company as a whole are $60,000 and the product mix is constant, the overall break-even point for the company would be:a. $150,000.b. $153,846.c. $100,000.d. $132,000.

58.DMedium

The following monthly data are available for the Phelps Company:

Product A Product B Product C TotalSales................ $150,000 $130,000 $90,000 $370,000Variable expenses.... 91,000 104,000 27,000 222,000Contribution margin.. $ 59,000 $ 26,000 $63,000 148,000Fixed expenses....... 55,000Net income........... $ 93,000

The break-even sales for the month for the company are:a. $91,667.b. $203,000.c. $148,000.d. $137,500.

59.AEasy

The following data pertain to last month's operations:

Selling price ..................... $20 per unit Variable production cost ........... $12 per unit Fixed production cost .............. $3,000 Variable selling & admin. expense .. $3 per unit Fixed selling & admin. expenses .... $1,500

The break-even point in dollars is:a. $18,000.b. $6,000.c. $11,250.d. $7,500.


60.AEasy

The following data pertain to last month's operations:

Selling price ..................... $30 per unit Variable production cost ........... $15 per unit Fixed production cost .............. $80,000 Variable selling & admin. expense .. $3 per unit Fixed selling & admin. expenses .... $40,000

The break-even point in dollars is:a. $300,000.b. $240,000.c. $200,000.d. $160,000.

61.CEasy



What is the company's break-even sales in units?a. 0 unitsb. 12,000 unitsc. 6,000 unitsd. 8,000 units

62.AEasy


Sales (20,000 units) ................ $1,800,000 Less variable expenses .............. 1,200,000 Contribution margin ................. 600,000 Less fixed expenses ................. 400,000 Net income .......................... $ 200,000

What is the company's break-even in sales dollars?a. $1,200,000b. $0c. $1,800,000d. $1,600,000

63.CMedium

Roberts Company sells a single product at a selling price of $55 per unit. Variable costs are $30.25 per unit and fixed costs are $113,850.Roberts Company’s break-even point is:a. $207,000.b. 3,764 units.c. $253,000.d. 2,070 units.

64.AMedium

A product sells for $20 per unit, and has a contribution margin ratio of 40%. Fixed expenses total $120,000 annually. How many units must be sold to yield a profit of $30,000?a. 18,750b. 20,000


c. 25,000d. 12,500

65.BMedium

A total of 30,000 units were sold last year. The contribution margin per unit was $2, and fixed expenses totaled $20,000 for the year. This year fixed expenses are expected to increase to $26,000, but the contribution margin per unit will remain unchanged at $2. How many units must be sold this year to earn the same net income as was earned last year?a. 23,000b. 33,000c. 30,000d. 13,000

66.AMedium

A product sells for $20 per unit and has a contribution margin ratio of 40%. Fixed expenses total $240,000 annually. How many units of the product must be sold to yield a profit of $60,000?a. 37,500b. 40,000c. 65,000d. 30,000

67.AMediumCPA adapted

Lindsay Company reported the following results from sales of 5,000 units for the month of June:

Sales ............... $200,000 Variable expenses ... 120,000 Fixed expenses ...... 60,000

Assume that Lindsay increases the selling price of the product by 10% on July 1. How many units would have to be sold in July in order to generate a profit of $20,000?a. 4,000b. 4,300c. 4,500d. 5,000


68.CMediumCMA adapted

Austin Manufacturing had the following operating data for the year just ended.

Selling price per unit ......... $60 per unit Variable expense per unit ...... $22 per unit Fixed expense .................. $504,000

Management plans to improve the quality of its only product by: (1) replacing a component that costs $3.50 with a higher-grade component that costs $5.50; and (2) renting a packing machine for $18,000 a year. If the desired target profit is $288,000, the company must sell:a. 19,300 units.b. 21,316 units.c. 22,500 units.d. 20,842 units.


Kern Company prepared the following tentative budget for next year:

Sales ................... $500,000 Selling price ........... $5 per unit Variable expenses ....... $300,000 Fixed expenses .......... $150,000

The sales manager argues that the unit selling price could be increased by 20%, with an expected volume decrease of only 10%. If Kern incorporates these changes in its budget, what should be the budgeted net income?a. $66,000b. $90,000c. $120,000d. $145,000


Wilson Company prepared the following preliminary budget assuming no advertising expenditures:

Selling price ............ $10 per unit Unit sales ............... 100,000 Variable expenses ........ $600,000 Fixed expenses ........... $300,000

Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted net income?a. $175,000b. $190,000c. $205,000d. $365,000


71.DHard

Loren Company's single product has a selling price of $15 per unit. Last year the company reported total variable expenses of $180,000, fixed expenses of $90,000, and a net income of $30,000. A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%. If her proposal is adopted, net income would:a. increase by $45,000.b. increase by $37,500.c. increase by $7,500.d. increase by $28,500.

72.BMedium

The following monthly data are available for the Eager Company and its only product:

Unit sales price ...................... $75 Unit variable expenses ................ $30 Total fixed expenses................... $180,000 Actual sales for the month of March.... 7,000 units The margin of safety for the company for March was:a. $315,000.b. $225,000.c. $135,000.d. $495,000.

73.DEasy

Ostler Company's net income last year was $10,000 and its contribution margin was $50,000. Using the operating leverage concept, if the company's sales increase next year by 8%, net income can be expected to increase by:a. 20%.b. 16%.c. 160%.d. 40%.

74.BEasy

If sales increase from $80,000 per year to $120,000 per year, and if the operating leverage is 5, then net income should increase by:a. 167%.b. 250%.c. 100%.d. 334%.


75.CEasy


Sales (8,000 units) ................ $800,000 Less variable expenses .............. 500,000 Contribution margin ................. 300,000 Less fixed expenses ................. 200,000 Net income .......................... $100,000

What is the company's degree of operating leverage?a. 0.125b. 8.0c. 3.0d. 0.333

76.DHard

Goodman Company has sales of 3,000 units at $80 per unit. Variable costs are 35% of the sales price. If total fixed costs are $66,000, the degree of operating leverage is:a. 0.79.b. 0.93.c. 2.67.d. 1.73.

Reference: 6-1The following is Addison Corporation's contribution format income statement for last month:

Sales ....................... $1,000,000 Less variable expenses ...... 700,000 Contribution margin ......... 300,000 Less fixed expenses ......... 180,000 Net income .................. $ 120,000

The company has no beginning or ending inventories. A total of 20,000 units were produced and sold last month.

77.DEasyRefer To: 6-1

What is the company's contribution margin ratio?a. 250%b. 150%c. 70%d. 30%


What is the company's break-even in units?a. 20,000 unitsb. 0 unitsc. 18,000 unitsd. 12,000 units


79.CEasyRefer To: 6-1

If sales increase by 100 units, by how much should net income increase?a. $ 400b. $4,800c. $1,500d. $2,500

80.AEasyRefer To: 6-1

How many units would the company have to sell to attain target profits of $150,000?a. 22,000b. 37,500c. 25,000d. 26,667


What is the company's margin of safety in dollars?a. $400,000b. $600,000c. $120,000d. $880,000

82.BEasyRefer To: 6-1


Reference: 6-2The following is Allison Corporation's contribution format income statement for last month:

Sales ...................... $800,000 Less variable expenses ..... 300,000 Contribution margin ........ 500,000 Less fixed expenses ........ 400,000 Net income ................. $100,000

The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.


What is the company's contribution margin ratio?a. 62.5%b. 160.0%c. 500%d. 20%


What is the company's break-even sales in dollars?a. $0b. $640,000c. $700,000d. $400,000



If sales increase by 200 units, by how much should net income increase?a. $16,000b. $5,000c. $2,000d. $10,000


How many units would the company have to sell to attain target profits of $120,000?a. 10,800b. 12,000c. 10,400d. 11,200


What is the company's margin of safety percentage?a. 25%b. 20%c. 40%d. 10%



Reference: 6-3McGordon Corporation has provided the following data:

Sales................. $800,000 Variable expenses..... 560,000 Fixed expenses........ 168,000


The contribution margin is:a. $240,000.b. $560,000.c. $632,000.d. $72,000.


The break-even point in sales dollars is:a. $240,000.b. $560,000.c. $728,000.d. $408,000.


Reference: 6-4The following data relate to a company that produces and sells a travel guide that is updated monthly:

Fixed costs: Copy editing..........................$ 6,000 Art work ............................. 2,000 Typesetting........................... 72,000

Variable costs: Printing and binding..................$ 3.20 per copy Bookstore discounts................... 4.00 per copy Salespersons’ commissions............. 0.50 per copy Author’s royalties.................... 2.00 per copy

Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July.


The unit contribution margin per book is:a. $10.30.b. $14.30.c. $10.80.d. $8.30.

92.CMediumRefer To: 6-4

The contribution margin ratio for the book is:a. 71.5%.b. 54.0%.c. 51.5%.d. 51.9%.

93.BMediumRefer To: 6-4

The break-even point in units is:a. 8,247 books.b. 7,767 books.c. 7,407 books.d. 6,504 books.

94.CHardRefer To: 6-4

The degree of operating leverage for July is:a. the same as that for June.b. higher than that for June.c. lower than that for June.d. not determinable.

95.AMediumRefer To: 6-4

The degree of operating leverage for July is closest to:a. 4.48.b. 3.48.c. 4.22.d. 8.70.


Reference: 6-5Dorian Company produces and sells a single product. The product sells for $60 per unit and has a contribution margin ratio of 40%. The company's monthly fixed expenses are $28,800.


The variable expense per unit is:a. $31.20.b. $24.00.c. $36.00.d. $28.80.


The break-even point in sales dollars is:a. $48,000.b. $72,000.c. $28,800.d. $0.

98.DHardRefer To: 6-5

If Dorian Company desires a monthly net income equal to 10% of sales, monthly sales will have to be:a. $90,000.b. $45,600.c. $120,000.d. 96,000.


If the selling price is reduced by 5%, variable expenses reduced by $1.00, and fixed expenses increased to a total of $38,400, how many units would need to be sold to earn a net income of $21,000?a. 1,000b. 2,700c. 1,700d. 2,950

Reference: 6-6Arthur Company had the following data for the year just ended:

Sales ............ 4,000 units Sales price ...... $60 per unit Variable cost .... $18 per unit Fixed costs ...... $42,000

100.AHardRefer To: 6-6

If the company wants to increase its total contribution margin by 40% in the next year, all other factors remaining the same, it will need to increase its sales by:a. $96,000.b. $50,400.c. $67,200.d. $72,000.


If the company wants its margin of safety to equal $35,000 next year, all other factors remaining the same, it will need to sell:a. 1,000 units.b. 833 units.c. 1,583 units.d. 1,833 units.

102. If the company’s sales volume increases by 30% next year, all other factors remaining


BHardRefer To: 6-6

the same, its net income will increase by:a. $92,400.b. $50,400.c. $37,800.d. $72,000.


If the company’s fixed costs decrease by 20% next year, all other factors remaining the same, the break-even level will change from that of the current year by (rounded to the nearest whole unit):a. 200 unit increase.b. 440 unit decrease.c. 200 unit decrease.d. no change in the break-even point.

Reference: 6-7Paxton Corp has provided the following data concerning its operations last month:

Sales ................ $400,000 Variable expenses .... 250,000 Fixed expenses ....... 100,000

Paxton Corp is a retailing organization.

104.AMediumRefer To: 6-7

The operating leverage is:a. 3.b. 8.c. 0.33.d. 5.

105.DMediumRefer To: 6-7

The contribution margin ratio is:a. 12.5%.b. 33.0%.c. 25.0%.d. 37.5%.



The break-even sales in dollars is (round to the nearest dollar):a. $148,148.b. $266,667.c. $333,333.d. $350,000.

Reference: 6-8Janet Company produces a game that sells for $17 per game. Variable expenses are $9 per game and fixed expenses total $172,000 annually.


The break-even point is closest to:a. 19,111 units.b. 10,118 units.c. 21,500 units.d. 24,000 units.


The contribution margin ratio is closest to:a. 47.1%.b. 2.1%.c. 1.9%.d. 52.9%.

Reference: 6-9Fletcher Company has three products with the following characteristics:

Product A Product B Product C Monthly sales in dollars $60,000 $80,000 $100,000 Contribution margin ratio 20% 40% 16%

109.CMediumRefer To: 6-9

The overall contribution margin ratio for the company as a whole is (to the nearest tenth of a percent):a. 25.3%.b. 75.0%.c. 25.0%.d. 28.5%.


If total units sold remain unchanged, but the sales mix shifts more heavily toward Product C, one would expect the overall contribution margin ratio to:a. increase.b. decrease.c. remain unchanged.d. none of these.


Reference: 6-10Oslo Co.'s industrial photo-finishing division incurred the following expenses last year:

Variable Fixed Direct materials ......... $200,000 Direct labor ............. 150,000 Factory overhead ......... 70,000 $42,000 Selling and administrative 30,000 48,000 Total ................. $450,000 $90,000

During the year, the division sold 300,000 photo-prints for $2.00 each.

111. AMediumCPA adaptedRefer To: 6-10

How many photo-prints did the division have to sell to break even?a. 180,000b. 120,000c. 90,000d. 60,000

112. CEasyCPA adaptedRefer To: 6-10

What was the division's total contribution margin?a. $250,000b. $180,000c. $150,000d. $60,000

113. CMediumCPA adaptedRefer To: 6-10

If the division produces and sells 350,000 photo-prints, its total expenses would be:a. $525,000.b. $540,000.c. $615,000.d. $630,000.

Reference: 6-11Hurst Co. manufacturers and sells a single product. Price and cost data regarding this product are as follows:

Selling price .................... $40 per unit Variable manufacturing costs ..... $20 per unit Variable selling & admin. expenses $6 per unit Fixed manufacturing overhead ..... $208,000 per year Fixed selling & admin. expenses .. $324,000 per year


114. CMediumRefer To: 6-11

The break-even point in units per year is:a. 15,200 units.b. 26,600 units.c. 38,000 units.d. 40,000 units.

115.BHardRefer To: 6-11

How many units need to be sold to earn an annual net income equal to 10% of sales?a. 44,000 unitsb. 53,200 unitsc. 54,500 unitsd. 47,500 units

116. DHardRefer To: 6-11

In the current year, the company sold 43,000 units. Due to competition, management will be forced to lower the selling price by 10% next year. How many units must be sold next year to earn the same income as was earned in the current year?a. 50,000 unitsb. 53,200 unitsc. 58,800 unitsd. 60,200 units

Reference: 6-12Junsin Corporation's budget for next year appears below. The budget assumes the company will sell 30,000 units.

Sales ............ $600,000 Less expenses: Variable ....... $390,000 Fixed .......... 140,000 530,000 Net income ....... $ 70,000

117. DEasyRefer To: 6-12

The break-even point in annual sales dollars is:a. $530,000.b. $350,000.c. $460,000.d. $400,000.

118. AEasyRefer To: 6-12

The company's margin of safety as a percentage of sales (rounded to the nearest whole percent) is:a. 33%.b. 50%.c. 12%.d. 67%.


Reference: 6-13Hooper Corporation produces and sells two models of vacuum cleaners, Standard and Deluxe. The company records show the following monthly data relating to these two products:

Standard Deluxe Selling price per unit............... $150 $165 Variable production costs............ 120 126 Variable selling expense per unit.... 16 13 Expected monthly sales in units...... 600 1,200 Total monthly fixed cost............. $15,000

119. CMediumRefer To: 6-13

The break-even in sales dollars for the expected sales mix is closest to:a. $160,772.b. $95,178.c. $109,091.d. $175,644.

120. BMediumRefer To: 6-13

If the expected monthly sales in units were divided equally between the two models (900 Standard and 900 Deluxe), the break-even level of sales would be:a. the same as with the expected sales mix.b. higher than with the expected sales mix.c. lower than with the expected sales mix.d. cannot be determined with the available data.

Reference: 6-14Wright Corporation's contribution format income statement for last month appears below.

Sales ................... $45,000 Less variable expenses .. 27,000 Contribution margin ..... 18,000 Less fixed expenses ..... 12,000 Net income .............. $ 6,000

There were no beginning or ending inventories. The company produced and sold 3,000 units during the month.

121. DHardRefer To: 6-14

If sales decrease by 500 units by next month, by how much would fixed expenses have to be reduced to maintain the current net income?a. $7,500b. $6,000c. $2,000d. $3,000

122. BMediumRefer To: 6-14

The company has an opportunity to secure a special order of 800 units if it is willing to drop the selling price on these units to $13. Costs of securing the special order would be $1,000. The special order would not affect the company's regular sales. If the special order is accepted, the company's overall net income will:a. increase $3,200.b. increase $2,200.c. increase $3,800.d. remain the same.


Essay

123.Easy

The following is Arkadia Corporation's contribution format income statement for last month:


The company has no beginning or ending inventories and produced and sold 20,000 units during the month.

Required:

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?

c. If sales increase by 100 units, by how much should net income increase?

d. How many units would the company have to sell to attain target profits of $125,000?

e. What is the company's margin of safety in dollars?

f. What is the company's degree of operating leverage?

Answer:a. Contribution margin ratio CM ratio = Contribution margin ÷ Sales = $400,000 ÷ $1,200,000 = 0.333

b. Break-even unitsSelling price ($1,200,000 ÷ 20,000 units)..... $60 per unitVariable expenses ($800,000 ÷ 20,000 units)... $40 per unit

Sales = Variable expenses + Fixed expenses + Profit $60Q = $40Q + $300,000 + $0 $20Q = $300,000 Q = $300,000 ÷ $20 = 15,000 units

c. Increase in net income from additional sales of 100 units Selling price ............... $60 per unit Variable expenses ........... $40 per unit Unit contribution margin .... $20 per unit Additional sales ............ x 100 units Increase in net income ...... $2,000

d. Sales to attain target profit


Sales = Variable expenses + Fixed expenses + Profit $60Q = $40Q + $300,000 + $125,000 $20Q = $425,000 Q = $425,000 ÷ $20 = 21,250 units

e. Margin of safety in dollars Break-even sales = $60 per unit x 15,000 units = $900,000 Margin of safety in dollars = Sales - Break-even sales = $1,200,000 - $900,000 = $300,000

f. Degree of operating leverage Degree of operating leverage = Contribution margin ÷ Net income = $400,000 ÷ $100,000 = 4.0

124.Easy

The following is Alsatia Corporation's contribution format income statement for last month:


The company has no beginning or ending inventories and produced and sold 10,000 units during the month.

Required:

a. What is the company's contribution margin ratio?

b. What is the company's break-even in units?

c. If sales increase by 100 units, by how much should net income increase?

d. How many units would the company have to sell to attain target profits of $225,000?

e. What is the company's margin of safety in dollars?

f. What is the company's degree of operating leverage?

Answer:a. Contribution margin ratio CM ratio = Contribution margin ÷ Sales = $500,000 ÷ $1,400,000 = 0.357

b. Break-even units Selling price ($1,400,000 ÷ 10,000 units) ... $140 per unit Variable expenses ($900,000 ÷ 10,000 units) . $ 90 per unit

Sales = Variable expenses + Fixed expenses + Profit $140Q = $90Q + $300,000 + $0 $50Q = $300,000 Q = $300,000 ÷ $50 = 6,000 units


c. Increase in net income from additional sales of 100 unitsSelling price ............... $140 per unitVariable expenses ........... $ 90 per unitUnit contribution margin .... $ 50 per unitAdditional sales ............ x 100 unitsIncrease in net income ...... $5,000

d. Sales to attain target profit $140Q = $90Q + $300,000 + $225,000 $50Q = $525,000 Q = $525,000 ÷ $50 = 10,500 units

e. Margin of safety in dollarsBreak-even sales = $140 per unit x 6,000 units = $840,000Margin of safety in dollars = Sales - Break-even sales

= $1,400,000 - $840,000 = $560,000

f. Degree of operating leverageDegree of operating leverage = Contribution margin ÷ Net income = $500,000 ÷ $200,000 = 2.5

125.Medium

Spencer Company's most recent monthly contribution format income statement is given below:

Sales ................... $60,000 Less variable expenses .. 45,000 Contribution margin ..... 15,000 Less fixed expenses ..... 18,000 Net loss ................ ($ 3,000)

The company sells its only product for $10 per unit. There were no beginning or ending inventories.

Required:

a. What are total sales in dollars at the break-even point?

b. What are total variable expenses at the break-even point?

c. What is the company's contribution margin ratio?

d. If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the company's expected net income? (Prepare a new income statement.)

Answer:a. The contribution margin ratio is $15,000 ÷ $60,000 = 25%. Therefore, the break-even in sales dollars is $18,000

÷ 25% = $72,000.

b. The variable cost ratio is $45,000 ÷ $60,000 = 75%. Therefore, the variable expenses at the break-even point are $72,000 x 75% = $54,000.

c. 25% See part (a) above.

d. Sales ($60,000 x 1.1) ................ $66,000


Less variable expenses ($45,000 x 1.1) 49,500 Contribution margin .................. 16,500 Less fixed expenses ($18,000 -$2,000) 16,000 Net income ........................... $ 500

126.Hard

The following monthly data are available for the Challenger Company and its only product, Product SW:

Total Per Unit Sales (400 units)..... $110,000 $275 Variable expenses..... 44,000 110 Contribution margin... $ 66,000 $165 Fixed expenses........ 52,800 Net income............ $ 13,200

Required:

a. Without resorting to calculations, what is the total contribution margin at the break-even point?

b. Management is contemplating the use of plastic gearing rather than metal gearing in Product SW. This change would reduce variable costs by $15. The company’s marketing manager predicts that this would reduce the overall quality

of the product and thus would result in a decline in sales to a level of 350 units per month. Should this change be made?

c. Assume that Challenger Company is currently selling 400 units of Product SW per month. Management wants to increase sales and feels this can be done by cutting the selling price by $25 per unit and increasing the advertising budget

by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made?

d. Assume that Challenger Company is currently selling 400 units of Product SW. Management wants to automate a portion of the production process for Product SW. The new equipment would reduce direct labor costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000. Management believes that the new equipment will increase the reliability of Product SW thus resulting in an increase in monthly sales of 12%. Should

these changes be made?

Answer:

a. The total contribution margin is $52,800 since it is equal to the fixed expenses at the break-even point.

b. The $15 decrease in variable costs will cause the contribution margin per unit to increase from $165 to $180.

Expected total contribution margin: 350 units x $180 = ...... $63,000Present total contribution margin: 400 units x $165 = ...... $66,000Decrease in total contribution margin $ 3,000

The less costly components should not be used to manufacture Product SW.


Net income will decrease by $3,000.

c. The decrease in selling price per unit will cause the unit contribution margin to decrease from $165 to $140.

Expected total contribution margin: 400 x 150% x $140 = ................ $84,000Present total contribution margin: 400 x $165 = ....................... 66,000Incremental contribution margin ................ $18,000Change in fixed costs: Less incremental advertising expense 20,000Reduction in net income ........................ $(2,000)

The change should not be made.

d. The use of the automated process would affect both fixed and variable costs. Fixed costs will increase by $10,000 from $52,800 to $62,800. Variable costs will decrease by $20 from $110 to $90, and the unit contribution margin will increase

from $165 to $185.

Expected total contribution margin: 400 units x 112% x $185 = ...... $82,880Present total contribution margin: 400 units x $165 = ............. 66,000Increase in total contribution margin ...... $16,880Change in fixed costs: Less monthly equipment rental .. 10,000Increase in net income ..................... $ 6,880

The changes should be made.

127.Medium

Tanner Company's most recent contribution format income statement is presented below:

Sales .................... $75,000 Less variable expenses ... 45,000 Contribution margin ...... 30,000 Less fixed expenses ...... 36,000 Net loss ................. $(6,000)

The company sells its only product for $15 per unit. There were no beginning or ending inventories.

Required:

a. Compute the company's break-even point in units sold.

b. Compute the total variable expenses at the break-even point.

c. How many units would have to be sold to earn a target profit of $9,000?

d. The sales manager is convinced that a $6,000 increase in the advertising budget would increase total sales by $25,000. Would you advise the increased advertising outlay?


Answer:a. Contribution margin ratio = $30,000 ÷ $75,000 = 0.40

$36,000 ÷ 0.40 = $90,000 break-even sales $90,000 ÷ $15 = 6,000 units to break even.

b. Variable expense ratio = $45,000 ÷ $75,000 = 0.60

$90,000 sales x 60% variable expense ratio = $54,000

c. ($36,000 + $9,000) ÷ 0.40 = $112,500 $112,500 ÷ $15 = 7,500 units

d. Increased contribution margin: $25,000 x 0.40 $10,000 Less increased advertising cost ............. 6,000 Incremental net income ...................... $ 4,000

Yes, the advertising budget should be increased.

128.Medium

Belli-Pitt, Inc., produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:

Sales .................. $540,000 Variable expenses ...... 360,000 Contribution margin .... 180,000 Fixed expenses ......... 120,000 Net income ............. $ 60,000

The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories.

Required:

a. Given the present situation, compute 1. The break-even sales in kilograms. 2. The break-even sales in dollars. 3. The sales in kilograms that would be required to produce net income of $90,000. 4. The margin of safety in dollars.

b. An important part of processing is performed by a machine which is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine

rather than the monthly lease. 1. Should the company choose the lease or the royalty plan? 2. Under the royalty plan compute break-even point in kilograms. 3. Under the royalty plan compute break-even point in dollars. 4. Under the royalty plan determine the sales in kilograms that would be required to produce net income of $90,000.

Q = $190,000 ÷ $1.40 = 135,714 units

Answer:a. Per kg. Sales .................. $4.50 100.0% Variable expense ....... 3.00 66.7%


Contribution margin .... $1.50 33.3%

1. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.00Q + $120,000 + $0 $1.50Q = $120,000 Q = $120,000 ÷ $1.50 = 80,000 units

2. 80,000 units x $4.50 = $360,000

3. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.00Q + $120,000 + $90,000 $1.50Q = $210,000 Q = $210,000 ÷ $1.50 = 140,000 units

4. Margin of safety = Sales - Sales at breakeven = $540,000 - $360,000 = $180,000

b. 1. As Is Proposed _ Amount Per Unit Amount Per Unit Sales ............... $540,000 $4.50 $540,000 $4.50 Variable expense .... 360,000 3.00 372,000 3.10 Contribution margin.. 180,000 1.50 168,000 1.40 Fixed expense ....... 120,000 1.00 100,000 0.83 Net income .......... $ 60,000 $0.50 $ 68,000 $0.57

Since net income increases by $8,000 the royalty is a good plan, provided sales remains at the same level.

2. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.10Q + $100,000 + $0 $1.40Q = $100,000 Q = $100,000 ÷ $1.40 = 71,429 units

3. 71,429 x $4.50 = $321,429

4. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.10Q + $100,000 + $90,000 $1.40Q = $190,000

129.Hard CPA adapted

Seco Corp., a wholesale supply company, uses independent sales agents to market the company's products. These agents currently receive a commission of 20% of sales, but are demanding an increase to 25% of sales. Seco had already prepared its budget for next year before learning of the sales agents' demand for an increase in commissions. That budgeted income statement appears below:

SECO CORP. Budgeted Income Statement

Sales ................................. $10,000,000Cost of sales ......................... 6,000,000Gross margin .......................... 4,000,000Selling and administrative expenses: Commissions ......................... $2,000,000 All other expenses (fixed) .......... 100,000 2,100,000


Net income ............................ $ 1,900,000

Seco is considering the possibility of employing its own salespersons. Three individuals would be required, at a salary of $30,000 each, plus commissions of 5% of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000.

Required:

a. Compute Seco's break-even point in sales dollars based upon the company's budgeted income statement, assuming that the company continues to use independent sales agents and that they are paid the old commission rate of 20% of sales.

b. Compute Seco's break-even point in sales dollars, assuming that the company employs its own salespersons.

c. Compute the dollar sales required to attain the target profit of $1,900,000, assuming that the company continues to use independent sales agents and the company agrees to their demand for a 25% sales commission.

d. Compute the sales dollars that would be required to generate the same net income for regardless of whether Seco employs its own salespersons or continues to use the independent sales agents and pays them a 25% commission.

Answer:a. Estimated break-even based on the budgeted income statement.

Sales (a) ...................... $10,000,000 Variable expenses: Cost of sales ................ $6,000,000 Commissions .................. 2,000,000 8,000,000 Contribution margin (b) ........ $ 2,000,000

Contribution margin ratio (b) ÷ (a) 20%

Fixed expenses ................. $100,000 Contribution margin ratio ...... ÷ 0.20 Break-even ..................... $500,000

b. Estimated break-even with company employing its own salespersons

Variable expense ratios: Cost of sales .......................... 60% Commissions ............................ 5% Total ................................ 65% Contribution margin ratio (100% - 65%) ... 35%

Fixed expenses: Sales manager ......................... $ 160,000 3 salespersons @ $30,000 each ......... 90,000 Administrative ........................ 100,000 Total ............................... $ 350,000

Fixed expenses .......................... $ 350,000


Contribution margin ratio ............... ÷ 0.35 Break-even point ........................ $1,000,000

c. Estimated sales volume yielding target profit of $1,900,000

Target profit ........................... $ 1,900,000 Fixed expenses .......................... 100,000 Total ................................. $ 2,000,000

Variable expense ratios: Cost of sales .......................... 60% Commissions ............................ 25% Total ................................ 85% Contribution margin ratio (100% - 85%) ... 15%

Fixed expenses + Target profit ........... $ 2,000,000 Contribution margin ratio ................ ÷ 0.15 Sales volume to attain target profit ..... $13,333,333

d. Estimated sales volume to attain the same profit regardless of whether the company employs its own salespersons or continues to use the sales agents and pays them a commission of 25%

Profit = Sales - Variable expenses - Fixed expenses

Let X= sales volume

With sales agents: Profit = X - 0.85X - $100,000

With salespersons: Profit = X - 0.65X - $350,000

Profit will be the same when: X - 0.85X - $100,000 = X - 0.65X - $350,000 $250,000 = 0.20X

X = $250,000 ÷ 0.20 = $1,250,000

130.Hard

Rawlings Company prepared the following budget information for the coming year:

Product A Product B Product C Total Sales ....... $ 85,714 $1,000,000 $177,777 $1,263,491Variable exp. 25,714 800,000 97,777 923,491Contrib. mar. $ 60,000 $ 200,000 $ 80,000 $ 340,000Fixed exp. .. 255,000Net income .. $ 85,000

The budget assumes the sale of 20,000 units of A, 100,000 units of B, and 80,000 units of C.

Required:

a. What is the company’s breakeven point given the sales mix above?


b. If the budgeted sales mix is maintained, what is the total contribution margin and net income if 300,000 units are sold?

Answer:

a. Product A Product B Product C Total Sales ....... $ 85,714 $1,000,000 $177,777 $1,263,491 100% Variable exp. 25,714 800,000 97,777 923,491 73% Contrib. mar. $ 60,000 $ 200,000 $ 80,000 340,000 27% Fixed exp. .. 255,000 Net income .. $ 85,000

Break-even sales-Budgeted: Fixed Expenses = $255,000 = $944,444 CM Ratio 0.27

b. Per unit contribution margins for Products A, B, and C are as follows:

Product A: $60,000 20,000 units = $3 per unit. Product B: $200,000 100,000 units = $2 per unit. Product C: $80,000 80,000 units = $1 per unit.

Product mix for Products A, B, and C:

Product A: 20,000 (20,000 + 100,000 + 80,000) = 10% Product B: 100,000 (20,000 + 100,000 + 80,000) = 50% Product C: 80,000 (20,000 + 100,000 + 80,000) = 40%

Total contribution margin at 300,000 units: Product A: 10% x 300,000 units x $3/unit = $ 90,000 Product B: 50% x 300,000 units x $2/unit = 300,000 Product C: 40% x 300,000 units x $1/unit = 120,000 Total contribution margin at 300,000 units 510,000 Fixed expenses ........................... 255,000 Net income ............................... $255,000

131.Hard

The following monthly budgeted data is available for the International Company:

Product C Product J Product R Sales................. $500,000 $300,000 $900,000 Variable expenses..... 300,000 210,000 720,000 Contribution margin... $200,000 $ 90,000 $180,000

Budgeted net income for the month is $220,000.

Required:

a. Calculate the break-even sales for the month based.

b. Calculate the margin of safety.

c. Calculate the operating leverage.

Answer:


a. Break-even sales

Product C Product J Product R Total Sales ....... $500,000 $300,000 $900,000 $1,700,000 100% Variable exp. 300,000 210,000 720,000 1,230,000 72% Contrib. mar. $200,000 $ 90,000 $180,000 $ 470,000 28% Fixed exp. .. 250,000 Net income .. $ 220,000

Break-even sales-Budgeted: Fixed Expenses = $250,000 = $892,857 CM Ratio 0.28

b. Margin of safety

Total sales – Break-even sales = $1,700,000 - $892,857 = $807,143

c. Operating leverage

Contribution margin = $470,000 = 2.14 Net income $220,000

132.Hard

The following monthly budgeted data is available for the Baxter Company:

Product C Product J Product R Sales................. $660,000 $380,000 $660,000 Variable expenses..... 396,000 266,000 528,000 Contribution margin... $264,000 $114,000 $132,000

Budgeted net income for the month is $260,000.

Required:

a. Calculate the break-even sales for the month.

b. Calculate the margin of safety.

c. Calculate the operating leverage.

Answer:

a. Break-even sales

Product C Product J Product R Total Sales ....... $660,000 $380,000 $660,000 $1,700,000 100%Variable exp. 396,000 266,000 528,000 1,190,000 70%Contrib. mar. $264,000 $114,000 $132,000 $ 510,000 30%Fixed expenses 250,000Net income .. $ 260,000

Break-even sales—Budgeted: Fixed Expenses = $250,000 = $833,333 CM Ratio 0.30

b. Margin of safety

Total sales – Break-even sales = $1,700,000 - $833,333 = $866,667

c. Operating leverage


Contribution margin = $510,000 = 1.96 Net income $260,000

133.Medium

Barnes Company sells three products—A, B, and C. Budgeted sales by product and in total for the coming month are as follows:

Product A Product B Product C Total %of total sales 48% 20% 32% 100% Sales $240,000 100% $100,000 100% $160,000 100% $500,000 100%Variable exp. 72,000 30% 80,000 80% 88,000 55% 240,000 48%Contrib. Mar. $168,000 70% $ 20,000 20% $ 72,000 45% $260,000 52%Fixed expense 223,600Net income $ 36,400

Break-even sales—Budgeted: Fixed Expenses = $223,600 = $430,000 CM Ratio 0.52

As shown by these data, net income is budgeted at $36,400 for the month, and break-even sales at $430,000.

Assume that actual sales for the month total $500,000 as planned. Actual sales by product are: A, $160,000; B, $200,000; and C, $140,000.

Required:

a. Prepare a contribution income statement for the month based on actual sales data. Assume variable expenses as a percentage of sales and total fixed expenses are the same as budgeted. Present the income statement in the format shown above.

b. Compute break-even sales for the month, based on actual data.

c. Explain why the company did not meet the budgeted operating results or break-even sales even though it met its %500,000 sales budget.

Answer:

a. Product A Product B Product C Total %of total sales 32% 40% 28% 100% Sales $160,000 100% $200,000 100% $140,000 100% $500,000 100%Variable exp. 48,000 30% 160,000 80% 77,000 55% 285,000 57%Contrib. Mar. $112,000 70% $ 40,000 20% $ 63,000 45% $215,000 43%Fixed expense 223,600Net income $ (8,600)

b. Break-even sales: Fixed Expenses = $223,600 = $520,000 CM Ratio 0.43

c. Despite the fact that the Company met its sales budget of $500,000 for the month, the mix of products sold changed from that budgeted. This is the reason the budgeted net income was not met, and the reason the break-even sales were greater than budgeted. The company’s sales mix was planned at 48% A, 20% B, and 32% C. The actual sales mix was 32% A, 40% B, and only 28% C. The budgeted contribution margin was 52%, while the actual contribution margin was 43%. This also explains why the break-even point was higher than planned. With less average contribution margin per dollar of sales, a

greater level of sales is required to provide sufficient contribution margin to cover


fixed costs.


Test Bank - Chapter 6 Cost Volume Profit Analysis

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