Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 52
Ex. 187
Erickson, Inc. makes student book bags that sell for $20 each. For the coming year, management
expects fixed costs to be $225,000. Variable costs are $15 per unit.
Instructions
(a) Compute break-even sales in dollars using the mathematical equation.
(b) Compute break-even sales using the contribution margin ratio.
(c) Compute margin of safety ratio assuming actual sales are $1,200,000.
(d) Compute the sales required to earn net income of $150,000, using the mathematical
equation.
Cost-Volume-Profit
FOR INSTRUCTOR USE ONLY
18 - 53
Ex. 188
Melody Manufacturing produces a hip-hop CD that is sold for $20. The contribution margin ratio is
40%. Fixed expenses total $9,200.
Instructions
(a) Compute the variable cost per unit.
(b) Compute how many CDs Melody Manufacturing will have to sell in order to break even.
(c) Compute how many CDs Melody Manufacturing will have to sell in order to make a target net
income of $16,200.
Ex. 189
Usher, Inc. has prepared the following cost-volume-profit graph:
Instructions
For the items listed below, enter to the left of the item, the letter in the graph which best
corresponds to the item.
____ 1. Activity base
____ 2. Break-even point
____ 3. Dollars
____ 4. Fixed costs
____ 5. Loss
I
BH
D
G
E
A
F
C
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
18 - 54
Ex. 189 (cont.)
____ 6. Profit
____ 7. Revenues
____ 8. Total costs
____ 9. Variable costs
Ex. 190
Holder Manufacturing had $125,000 of net income in 2012 when the selling price per unit was
$100, the variable costs per unit were $70, and the fixed costs were $475,000. Management
expects per unit data and total fixed costs to remain the same in 2013. The president of Holder
Manufacturing is under pressure from stockholders to increase net income by $60,000 in 2013.
Instructions
(a) Compute the number of units sold in 2012.
(b) Compute the number of units that would have to be sold in 2013 to reach the stockholders'
desired profit level.
(c) Assume that Holder Manufacturing sells the same number of units in 2013 as it did in 2012.
What would the selling price have to be in order to reach the stockholders' desired profit
level.
Cost-Volume-Profit
18 - 55
Solution 190 (10–14 min.)
Ex. 191
Englehart, Inc. reports the following operating results for the month of August: Sales $400,000
(units 5,000); variable costs $280,000; and fixed costs $95,000. Management is considering the
following independent courses of action to increase net income.
1. Increase selling price by 10% with no change in total variable costs.
2. Reduce variable costs to 65% of sales.
3. Reduce fixed costs by $15,000.
Instructions
Compute the net income to be earned under each alternative. Which course of action will produce
the highest net income?
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 56
Solution 191 (6 min.)
Ex. 192
Kreter, Inc. earned net income of $300,000 last year. This year it wants to earn net income of
$450,000. The company's fixed costs are expected to be $300,000, and variable costs are
expected to be 70% of sales.
Instructions
(a) Determine the required sales to meet the target net income of $450,000 using the
mathematical equation.
(b) Using a CVP income statement format, prove your answer.
Ex. 193
Cunningham Industries reported actual sales of $2,000,000, and fixed costs of $510,000. The
contribution margin ratio is 30%.
Instructions
Compute the margin of safety in dollars and the margin of safety ratio.
Cost-Volume-Profit
18 - 57
Solution 193 (7 min.)
COMPLETION STATEMENTS
194. Knowledge of cost behavior is important in ______________________ analysis.
195. A _________________ cost remains constant per unit at every level of activity.
196. Unit fixed costs __________________ with the changes in the level of activity.
197. Total fixed costs are ___________ over various levels of activities, whereas total variable
costs __________________ directly and ________________ with changes in the activity
level.
198. An assumption of CVP analysis is that variable and fixed costs have a _______________
relationship with an activity base.
199. The range over which a company expects to operate is referred to as the _____________
range.
200. A cost that has both variable and fixed elements is referred to as a _________________
cost.
201. The amount of revenue remaining after deducting total variable costs is called the
_________________________.
202. The _______________ point is when total revenues equal total costs.
203. _________________ divided by the contribution margin ratio will give the amount of
_________________ to break even.
204. The difference between actual or expected sales and break-even sales is called the
__________________________.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 58
Answers to Completion Statements
MATCHING
205. Match the items in the two columns below by entering the appropriate code letter in the
space provided.
A. Activity index F. Mixed costs
B. Variable costs G. Break-even point
C. Fixed costs H. Contribution margin
D. High-low method I. Margin of safety
E. Relevant range J. Contribution margin ratio
____ 1. The amount of revenue remaining after deducting variable costs.
____ 2. Costs that contain both a variable and a fixed element.
____ 3. The percentage of sales dollars available to cover fixed costs and produce income.
____ 4. Identifies the activity which causes changes in the behavior of costs.
____ 5. The difference between actual or expected sales and sales at the break-even point.
____ 6. Costs that vary in total directly and proportionately with changes in the activity level.
____ 7. The level of activity at which total revenues equal total costs.
____ 8. The range over which the company expects to operate during the year.
____ 9. Costs that remain the same in total regardless of changes in the activity level.
____ 10. A method that uses the total costs incurred at the high and low levels of activity.
Cost-Volume-Profit
18 - 59
SHORT-ANSWER ESSAY QUESTIONS
S-A E 206
A cost-volume-profit graph is frequently used in business meetings because it presents a picture
of cost relationships within a company. Briefly describe the type of information and data that you
would need in order to prepare a CVP graph. After a CVP graph is prepared, what are the major
points that could be made from the graph that would be of interest to management?
S-A E 207
A CVP income statement is frequently prepared for internal use by management. Describe the
features of the CVP income statement that make it more useful for management decision-making
than the traditional income statement that is prepared for external users.
S-A E 208
(a) Matt Sampson asks your help in understanding the term "activity index." Explain the
meaning and importance of this term for Matt.
(b) State the two ways that variable costs may be defined.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
FOR INSTRUCTOR USE ONLY
18 - 60
S-A E 209
How should mixed costs be classified in CVP analysis? What approach is used to effect the
appropriate classification?
S-A E 210 (Ethics)
Hanson, Inc. requires its marketing managers to submit estimated cost-volume-profit data on all
requests for new products, or expansions of a product line.
Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at
$100,000 and a variable cost of $5. Since the selling price is only $15 for the proposed product,
10,000 would need to be sold to break even. That is approximately twice the volume estimate for
the first year. She shares her dismay with Patti Patterson, another manager.
Patti strongly advises her to revise her estimates. She points out that several of the costs that had
been classified as fixed costs could be considered variable, since they are step costs and mixed
costs. When the data has been revised classifying those costs as variable costs, the project
appears viable.
Required:
1. Who are the stakeholders in this decision?
2. Is it ethical for Nancy to revise the costs as indicated? Briefly explain.
3. What should Nancy do?
Cost-Volume-Profit
FOR INSTRUCTOR USE ONLY
18 - 61
S-A E 211 (Communication)
For two years, Annette Larson has been the manager of the production department of a company
manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose
"clothes" are made of acetate, and stay on the doll with static electricity. The company's sales
were mainly to large educational institutions until last year, when the dolls were sold for the first
time to a large discount retailer. The dolls were sold out immediately, and enough orders were
received to keep the department at full capacity for the immediate future.
The fixed costs for the department are $50,000, with $1 per unit variable costs. A paper doll and
one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume,
Ms. Larson is considering two options to improve profitability. One would reduce variable costs to
$0.75, and the other would reduce fixed costs to $35,000.
Required:
Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms.
Larson about which option she should choose. Support your recommendation with a calculation
showing her how profitability will change with each option.
