Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
4-34
177. Resin Products has estimated that fixed costs per month are $79,200 and variable cost per
dollar of sales is $0.52.
a. What is the break-even point per month in sales?
b. What level of sales is needed for a monthly profit of $24,000?
c. For the month of July, the company anticipates sales of $240,000. What is the
expected level of profit?
Answer
178. Disc Buddy, Inc. produces flash drives. The selling price is $8 per drive. The variable cost of
production is $2.40 per unit and the fixed cost per month is $3,600.
a. Calculate the contribution margin associated with each flash drive.
b. In August, the company sold 200 more flash drives than planned. What is the expected
effect on profit of selling the additional drives?
c. Calculate the contribution margin ratio associated with one flash drive.
d. In October, the company had sales that were $2,400 higher than planned. What is the
expected effect on profit related to the additional sales?
Answer
179. Savane Enterprises sells a single product at a price of $57 per unit. Variable costs per unit are
$35 and total fixed costs are $719,400. Savane is considering the purchase of new equipment
that would increase fixed costs to $1,023,700, but decrease the variable cost per unit to $28.
a. If Savane expects to sell 40,000 units next year, should the company purchase this
new equipment?
b. At what volume in units will your recommendation in part a above change?
Answer
Chapter 4 Cost-Volume-Profit Analysis
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180. Conviser Tools, Inc. produces tape dispensers. The selling price is $12 per dispenser. The
variable cost of production is $4.80 per dispenser and the fixed cost per month is $20,448. For
November, the company expects to sell 3,100 tape dispensers.
a. Calculate expected profit.
b. Calculate the margin of safety in dollars.
Answer
181. Sports To Go is organized into three departments. The following sales and cost data are
available for the prior year:
Water Foot Field Total
Sales $160,000 $96,000 $150,000 $406,000
Less variable costs 64,000 42,000 84,000 190,000
Contribution margin 96,000 54,000 66,000 216,000
Less fixed costs 40,000 16,000 32,000 88,000
Profit $ 56,000 $ 38,000 $ 34,000 $128,000
a. What is Sports To Go’s weighted average contribution margin ratio? Round your
percentage value to two decimal places.
b. What level of sales is needed for Sports to Go to earn a profit of $156,720 assuming
the same ratio of units sold and same selling price per unit?
c. Sports To Go places an advertisement in the local paper each week. All else equal,
which department would you emphasize in the advertisement?
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
4-36
182. Iggy’s Ice Pops produces two flavors of ice pops. Information regarding the products is
summarized for the month of April below:
Kiwi Melon Total
Number of units 2,000 3,000 5,000
Sales revenue $3,000 $3,600 $6,600
Variable costs 1,500 900 2,400
Fixed costs 900 2,400 3,300
Profit $ 600 $ 300 $ 900
a. If Iggy’s sells 50 more kiwi pops, by how much will profit increase?
b. How much is Iggy’s weighted average contribution margin ratio?
c. What level of sales does Iggy’s need in order to earn a profit of $1,200 assuming the
current sales mix? (Round to the nearest dollar.)
Answer
183. Toppers produces two models of hats, fedoras and berets, both made out of cool skin felt
fabric. Information regarding the products is summarized for the month of May in the following
table:
Fedoras Berets
Number of hats produced 1,000 4,000
Sales revenue $28,000 $72,000
Variable costs 12,000 36,000
Fixed costs 3,200 7,000
Profit $12,800 $29,000
Yards of fabric per unit 0.80 yds. 0.40 yds.
Profit per unit $12.80 $7.25
Due to increased demand of hat felt in the market, Toppers can obtain only 3,800 yards of felt
per month. Toppers can sell as many hats as it can produce, however, it must produce at least
800 of each to stay competitive. How many of each model of hat should Toppers make to
maximize profit in June?
Chapter 4 Cost-Volume-Profit Analysis
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184. Kerwin Chocolates prepared the following concerning its two favors of chocolate covered
popcorn sold in 2-pound bags:
Very Good Even Better Totals
Units 4,000 12,000 16,000
Revenue $100,000 $180,000 $280,000
Variable costs 56,000 105,000 161,000
Fixed costs 20,000 40,000 60,000
Profit $ 24,000 $ 35,000 $ 59,000
Selling price per unit $25.00 $15.00
Contribution margin per unit $11.00 $6.25
Profit margin per unit $6.00 $2.92
a. What is Kerwin’s weighted average contribution margin per unit?
b. Calculate Kerwin’s break-even point in units assuming the current sales mix.
c. What will be the number of Very Good and Even Better bags at the break-even level of
sales?
d. What is Kerwin’s weighted average contribution margin ratio?
e. What level of sales (in dollars) will be needed to earn a profit of $64,950 assuming the
current sales mix?
f. What will be the sales (in dollars) of Very Good and Even Better bags for Kerwin’s total
sales calculated in Part e?
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
4-38
185. Listel Rx and Risen, Inc. are two companies in the pharmaceutical industry. Listel Rx does
little research and development. Instead, the company pays for the right to produce and
market drugs that have been developed by other companies. The amount paid is a percent of
sales. Information for the current year follows:
Listel Rx Risen, Inc.
Sales $180,000 $116,000
Less variable costs 74,000 62,000
Contribution margin 106,000 54,000
Less fixed costs 40,000 36,000
Profit $ 66,000 $ 18,000
a. Calculate the expected percentage change in profit for a 25 percent decrease in sales
for each company.
b. Which company has the higher operating leverage?
c. Which company is more risky? Justify your response.
Answer
186. Hayden Garden Tools produces two types of rakes with lifetime warranties. The industrial rake
requires 2.4 labor hours and the residential rake requires 1.1 labor hours. The company has
only 800 available labor hours per week. The company can sell all it can produce of either
product.
Industrial Residential
Selling price $360 $210
Variable costs 220 150
Contribution margin $140 $ 60
a. Which rake(s) should the company sell? Justify your answer.
b. What would be the incremental benefit of obtaining 200 additional labor hours?
Answer
Chapter 4 Cost-Volume-Profit Analysis
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187. Burger Time is interested in estimating fixed and variable costs on its triple treat burger. The
following data are available:
Date
Total Cost
January
$4,140
1,030
February
4,220
1,020
March
4,200
1,040
April
3,680
900
May
3,730
890
June
3,970
980
July
4,090
1,000
August
3,850
940
The data generated the following regression analysis:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.97955
R Square
0.95953
Adjusted R Square
0.95278
Standard Error
45.9460
Observations
8
ANOVA
df
SS
MS
F
Significance
F
Regression
1
300333.75
300333.8
142.268
2.1E-05
Residual
6
12666.25
2111.042
Total
7
313000
Coefficients
Standard
Error
t Stat
P-value
Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept
535.937
289.622032
1.850472
0.11372
-172.742
1244.6
-172.74
1244.62
X Variable 1
3.54
0.29658063
11.92762
2.1E-05
2.81179
4.2632
2.81179
4.26321
a. Use the regression output to estimate fixed cost per month and variable costs per
burger sold, and show the total cost equation.
b. Burger Time is considering an advertising campaign that is expected to increase
monthly sales by 200 burgers. Assume that each burger sells for $9. What is the
expected increase in profit associated with the advertising campaign based on the
regression output?
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
4-40
188. Dyna Dog Diet’s regression for bags of organic dog food sold and the related costs appears
below:
Regression Statistics
Multiple R 0.981063
R Square 0.962484
Adjusted R Square 0.949978
Standard Error 672.8269
Observations 5
ANOVA
df SS MS F Sign F
Regression 1 34841912 34841912 76.96535 0.003119
Residual 3 1358088 452696.1
Total 4 36200000
Lower Upper Lower Upper
CoefficientsStd Error t Stat P-value 95% 95% 95% 95%
Intercept 2504.41 9305.639 0.269128 0.805279 -27110.3 32119.11 -27110.3 32119.11
Variable 1 1.98 0.226296 8.77299 0.003119 1.265119 2.70547 1.265119 2.70547
a. How much is the variable cost per unit?
b. How much is total fixed cost?
c. What is the amount of the slope?
d. At what point does the total cost line cross the y-axis if the data points used to
construct the regression are graphed?
e. Write the total cost equation in good form.
f. If 2,500 bags of dog food are sold, how much is total cost?
Answer
Chapter 4 Cost-Volume-Profit Analysis
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CHALLENGE EXERCISES
189. Sharply Knives produces two models of titanium knives, Ginsu and Deluxe. Information
regarding the products is summarized for the month of May in the following table:
Deluxe
Ginsu
Total
Number of knives
2,500
1,500
4,000
Sales revenue
$ 88,000
$66,000
$154,000
Variable costs
30,800
29,700
60,500
Fixed costs
22,900
11,400
34,300
Operating income
$34,300
$24,900
$ 59,200
Contribution margin per unit
$22.88
$24.20
$23.38
Contribution margin ratio
65.00%
55.00%
60.71%
Profit per knife
$13.72
$16.60
Ounces of titanium per knife
7.5
9
Due to a strike, only 24,750 ounces of titanium will be available during each of the next few months.
Each ounce of titanium costs $0.70.
a. Given the limited resource, of which product should Sharply produce more? Support with
calculations and provide sufficient conceptual justification why this product should be chosen.
b. Assume Sharply needs to produce at least 750 of each model per month to stay competitive
and it can sell all it produces. Assume that you chose Deluxe knives as your answer to part a.
Show the calculation of how many deluxe knives that Sharply should produce to maximize
profits.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
4-42
190. MusicRx produces two MP3 players, standard and mini. Information regarding the products is
summarized for the month of April in the following table:
Standard
Mini
Total
Sales revenue
$126,000
$84,000
$210,000
Variable costs
30,800
29,700
60,500
Fixed costs
36,400
28,000
64,400
Operating income
$ 58,800
$26,300
$ 85,100
Contribution margin ratio
75.56%
64.64%
Contribution margin per unit
$22.67
$7.76
MusicRx sells 3 standard MP3 players for every 5 mini players sold. It generates $3 of sales
for standard players for every $2 of mini players. The sales mix is expected to stay stable.
a. How much will total revenue be for MusicRx at break-even? (Round intermediate
calculations to four decimal places.)
b. What would be the sales (in dollars) of mini players for total sales calculated in Part a?
c. Suppose that 60 additional standard MP3 players and 100 additional mini MP3 players
are sold. By how much will profit increase?
Answer
191. The RiverTown Shuttle provides a water taxi across the St. Johns River for $4 per ride. It has
provided the following data concerning its costs of operating its water taxi:
January
February
March
April
May
# of riders
2,500
2,800
4,200
4,100
2,600
Operating costs
$7,475
$8,120
$11,130
$11,225
$7,390
a. Use the high-low method to answer the following:
1. Variable cost per rider
2. Fixed costs per month
3. Write the cost equation in good form.
b. How many water taxi customers does RiverTown need to generate a profit of $4,190
per month?
Answer
Chapter 4 Cost-Volume-Profit Analysis
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192. Duplicator Shipping, Inc. provides 11 inch by 17 inch color copying as an added service at its
shipping store for $1.20 cents per copy. Information for two months of operations appears
below:
Month
Cost
Number of Copies
June
$6,500
11,000
July
$7,800
15,000
a. Indicate the type of cost behavior of this cost and justify your choice. Include
computations.
b. Write the cost equation in good form.
c. Determine the break-even point in units for Duplicator Shipping. (Round to the nearest
d. whole number.)
Answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
4-44
SHORT-ANSWER ESSAYS
193. What is a mixed cost? How are mixed costs handled in a CVP analysis?
Answer
194. Fixed and variable costs can be estimated using account analysis or regression analysis.
Briefly explain each of these techniques and any advantages or disadvantages associated
with each of them.
Answer
195. Identify the strengths and weaknesses of the high-low method of separating mixed costs? Do
you believe it would be widely selected over the regression method in practice today? Why or
why not?
Answer
196. What is the relevant range? Why is it important in CVP analysis?
Chapter 4 Cost-Volume-Profit Analysis
4-45
197. How would each of the following events affect a company’s break-even point? Each item is
independent of the others. Use I for increase, D for decrease, and N for no effect.
______ a. decrease in fixed manufacturing cost
______ b. increase in variable cost per unit
______ c. increase in the number of units sold
______ d. increase in the selling price
______ e. decrease in fixed selling and administrative costs
198. When is the contribution margin ratio approach to CVP analysis most useful? Why?
Answer
199. What is operating leverage? What effect does operating leverage have on a company’s profit?
Answer