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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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What is the break-even point for a company?

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The break-even point is where ...

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Question 2

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Which of the following statements regarding Company A is incorrect?

A) If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its break-even point in units is 36,000 units.
B) If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its variable expenses must be $20 per unit.
C) If Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, once it has covered its fixed costs, net income will increase by $30 for each additional unit sold.
D) Both if Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its break-even point in units is 36,000 units and if Company A has fixed costs of $720,000, a selling price of $50 per unit, and contribution margin of $30 per unit, its variable expenses must be $20 per unit are incorrect.

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Question 3

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Rose Corporation sells backpacks. Variable costs for this product are $30 per unit, and the sales price per unit is $50 per unit. Total fixed costs amount to $100,000. How many backpacks does Rose need to sell to achieve a desired profit of $60,000?

At its $60 selling price, Atlantic Company has sales of $15,000, variable manufacturing costs of $4,000, fixed manufacturing costs of $1,000, variable selling and administrative costs of $2,000 and fixed selling and administrative costs of $1,000. What is the company's contribution margin per unit?

To attain a target profit, the total gross margin generated from sales must be sufficient to cover total fixed costs plus the target profit.

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:

Mitchell Company sells its product for $100 per unit. The company's accountant provided the following cost information: What is the company's break-even point in units? $\begin{array} { | l | l | } \hline \text { Manufacturing costs } & \$ 25,000 + 45 \% \text { of sales } \\\hline \text { Selling costs } & \$ 15,000 + 20 \% \text { of sales } \\\hline \text { Administrative costs } & \$ 25,000 + 10 \% \text { of sales } \\\hline\end{array}$

If a company experiences an increase in rent expense, the total cost line on the cost-volume-profit graph will:

Martinez Company sells one product that has a sales price of $20 per unit, variable costs of $8 per unit, and total fixed costs of $200,000, what is the contribution margin ratio?

Assume that the company sells two products, X and Y, with contribution margins per unit of $12 and $10, respectively. What happens to the break-even point if the sales mix shifts to favor product X? (In other words, sales of product X will make up a higher percentage of the sales mix.)

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?

The Varsity Club sells souvenir items at university sporting events for $24 each. The souvenir items cost $16 each. The club is negotiating with the university administration to sell the items in a kiosk in the university student center. Three rental arrangements are under consideration: Option 1: Pay rent of $2,000 Option 2: Pay rent of $1,200 plus 10% of revenue Option 3: Pay the university 25% of revenue The club estimates that it will be able to sell 300 souvenir items during the period.Required: 1) Compute the break-even point in units for each of the three options.2) Assuming the club reaches its sales target, which option should be chosen?

Joseph Company has variable costs of $80 per unit, total fixed costs of $200,000, and a break-even point of 5,000 units. If the variable cost per unit decreases by $8, how many units must Joseph Company sell to break-even?

Zed Company sells two kinds of mainframe computer power supplies. The company projected the following cost information for the two products: Assume that total fixed costs are $428,400. How many units of the standard supply unit would be included in the total number of units required to break-even with the projected sales mix (round your answer to the nearest whole unit) ? $\begin{array} { | l | r | r | } \hline & { \begin{array} { l } \text { Standard } \\\text { Supply }\end{array} } & { \begin{array} { l } \text { Heavy-Duty } \\\text { Supply }\end{array} } \\\hline \text { Unit selling price } & \$ 250 & \$ 120 \\\hline \text { Unit variable cost } & \$ 110 & \$ 50 \\\hline \begin{array} { l } \text { Number of units produced and } \\\text { sold }\end{array} & 7,000 & 3,000 \\\hline\end{array}$

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?

The pricing strategy that begins with the determination of a price at which a product will sell and then focuses on developing a cost structure for the product that will yield a profit is known as

Consider the following cost-volume-profit graph: The area designated by the letter (C) represents which of the following?

Taylor Mayberry is sales manager for a specialty products company that has over 100 product lines. The company uses twenty-five vendors and competes with dozens of competitors. It has been the company's practice to match competitor prices on the products it sells. Describe a technique that will assist Taylor in assessing the impact of constantly changing purchase costs, selling prices, and volumes.

Sensitivity analysis is performed in order to determine optimal sales mix.

Target costing begins with determining the cost of the product and then focusing on developing ways to sell the product at a price that will enable the company to achieve its desired profit margin.