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Exam 3: Analysis of Cost, volume, and Pricing to Increase Profitability

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Question 1

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When drawing a cost-volume-profit graph,how are the axes labeled?

A) The horizontal axis would be labeled with dollars (of cost or revenue) , while the vertical axis would be labeled with number of units (volume or activity) .
B) The horizontal axis would be labeled with dollars (of total fixed costs) , while the vertical axis would be labeled with dollars (of total variable costs) .
C) The horizontal axis would be labeled with number of units (volume or activity) , while the vertical axis would be labeled with dollars (of cost or revenue) .
D) None of these answers is correct.

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C

Question 2

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Anton Company produces and sells bicycles for $500.The variable costs per unit are $300 plus a sales commission of 15% of the selling price.Total fixed costs consist of $16,000 in fixed overhead and $9,000 in fixed selling and administrative costs. Required: 1)Compute the contribution margin per unit. 2)Compute the break-even point in units and dollars. 3)How many units must be sold to earn a profit of $20,000? 4)What would be the break-even point in units if the sales commission is reduced to $20 per unit sold?

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1)Contribution margin per unit = $500 − ...

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Question 3

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What are the assumptions on which cost-volume-profit analysis is based? Are there any additional assumptions for a multiproduct company?

Assuming a company uses a markup equal to 25% of cost,the cost of a product that sells for $100 is $75.

Which of the following statements regarding cost-volume-profit analysis is incorrect?

Newton Company currently produces and sells 4,000 units of a product that has a contribution margin of $6 per unit.The company sells the product for a sales price of $20 per unit.Fixed costs are $18,000.The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs.The company expects the new technology to increase production and sales to 9,000 units of product.What sales price would have to be charged to earn a $99,000 target profit assuming the investment in technology is made?

If total fixed costs increase while variable costs and sales price are unchanged,what happens to the break-even point?

Company A makes and sells a single product.What happens to the break-even point when variable cost per unit increases and total fixed costs decrease?

Goff Corporation sells products for $75 each that have variable costs of $50 per unit.Goff's fixed cost is $350,000. Required: Calculate the contribution margin per unit,then use the per unit contribution margin approach to find the break-even point in units and dollars.

Which of the following statements about a cost-volume-profit graph is correct?

Assume that the company sells two products,X and Y,with contribution margins per unit of $8 and $4,respectively.What happens to the break-even point in sales dollars if the sales mix shifts to favor product Y? (In other words,sales of product Y will make up a higher percentage of the sales mix.)

Kingston Company sells its product for $200 per unit.The company's accountant provided the following cost information: $\begin{array} { l l l } \text { Manufacturing costs } & \$ 25,000 + 40 \% \text { of sales } \\\text { Selling costs } & \$ 10,000 + 20 \% \text { of sales } \\\text { Administrative costs } & \$ 15,000 + 10 \% \text { of sales }\end{array}$ What is Kingston Company's contribution margin ratio?

If a company is operating beyond its break-even point,sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

For a company that sells several products,different sales mixes generally give rise to different break-even sales levels,even if overall sales volume remains unchanged.

Columbus Industries makes a product that sells for $25 a unit.The product has a $5 per unit variable cost and total fixed costs of $9,000.At budgeted sales of 2,000 units,the margin of safety ratio is:

Wayans Company has a contribution margin ratio of 60%.This means that its variable costs are 60% of sales.

Heavener Company produces and sells storage sheds.Its current sales are $500,000.The company's accountant provided the following cost information: $\begin{array} { l l } \text { Marnufacturing costs } & \$ 100,000 + 40 \% \text { of sales } \\\text { Selling costs } & \$ 30,000 + 10 \% \text { of sales } \\\text { Adrninistrative costs } & \$ 45,000 + 10 \% \text { of sales }\end{array}$ Required: 1)Compute the product's contribution margin ratio. 2)Compute the company's current net income. 3)Compute the product's break-even point in dollars. 4)Compute the amount of revenue necessary to earn $60,000 in profit. 5)Compute the company's current margin of safety ratio. 6)Should the company accept a proposal that increases sales by 20% and total fixed costs by 25%?

Acme Company has variable costs equal to 30% of sales.The company is considering a proposal that will increase sales by $10,000 and total fixed costs by $7,000.By what amount will net income increase?

Jarvis Company produces a product that has a selling price of $20.00 and a variable cost of $15.00 per unit.The company's fixed costs are $50,000.What is the break-even point measured in sales dollars?

If a company changes from a labor-intensive system that incurs significant hourly wage cost to an automated system that increases fixed cost,the total cost line on the company's cost-volume-profit graph will shift up and have a steeper slope.