Cost-Volume-Profit Relationships
True/False Questions
1. One way to compute the total contribution margin is to add total fixed expenses to net operating income.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
2. On a CVP graph for a profitable company, the total revenue line will be steeper than the total cost line.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
3. In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
4. If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
5. The impact on net operating income of any given dollar change in total sales can be estimated by multiplying the CM ratio by the dollar change in total sales.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
6. 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.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
7. 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.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 6 Level: Medium
8. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
9. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
10. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Medium
11. All other things the same, the margin of safety in dollars at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium
12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
13. A company with high operating leverage will experience a lower reduction in net operating income in a period of declining sales than will a company with low operating leverage.
Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
14. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense per unit, and F is the total fixed expense, then the degree of operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]
Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Hard
15. A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point.
Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Medium
Multiple Choice Questions
16. Contribution margin can be defined as:
A) the amount of sales revenue necessary to cover variable expenses.
B) sales revenue minus fixed expenses.
C) the amount of sales revenue necessary to cover fixed and variable expenses.
D) sales revenue minus variable expenses.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
17. Which of the following statements is correct with regard to a CVP graph?
A) A CVP graph shows the maximum possible profit.
B) A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.
C) A CVP graph assumes that total expense varies in direct proportion to unit sales.
D) A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy
18. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?
| |Contribution margin ratio |Break-even point |
|A) |Decrease |Increase |
|B) |Increase |Decrease |
|C) |Decrease |Decrease |
|D) |Increase |Increase |
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Medium Source: CMA; adapted
19. Which of the following is true regarding the contribution margin ratio of a single product company?
A) As fixed expenses decrease, the contribution margin ratio increases.
B) The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.
C) The contribution margin ratio will decline as unit sales decline.
D) The contribution margin ratio equals the selling price per unit less the variable expense ratio.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
20. If a company is operating at the break-even point:
A) its contribution margin will be equal to its variable expenses.
B) its margin of safety will be equal to zero.
C) its fixed expenses will be equal to its variable expenses.
D) its selling price will be equal to its variable expense per unit.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 7 Level: Medium
21. At the break-even point:
A) sales would be equal to contribution margin.
B) contribution margin would be equal to fixed expenses.
C) contribution margin would be equal to net operating income.
D) sales would be equal to fixed expenses.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
22. The break-even point would be increased by:
A) a decrease in total fixed expenses.
B) a decrease in the ratio of variable expenses to sales.
C) an increase in the contribution margin ratio.
D) none of these.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
23. Which of the following strategies could be used to reduce the break-even point?
| |Fixed expenses |Contribution margin |
|A) |Increase |Increase |
|B) |Decrease |Decrease |
|C) |Decrease |Increase |
|D) |Increase |Decrease |
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
24. Break-even analysis assumes that:
A) Total revenue is constant.
B) Unit variable expense is constant.
C) Unit fixed expense is constant.
D) Selling prices must fall in order to generate more revenue.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
25. Target profit analysis is used to answer which of the following questions?
A) What sales volume is needed to cover all expenses?
B) What sales volume is needed to cover fixed expenses?
C) What sales volume is needed to earn a specific amount of net operating income?
D) What sales volume is needed to avoid a loss?
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
26. The margin of safety can be calculated by:
A) Sales − (Fixed expenses/Contribution margin ratio).
B) Sales − (Fixed expenses/Variable expense per unit).
C) Sales − (Fixed expenses + Variable expenses).
D) Sales − Net operating income.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium
27. If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:
A) unit contribution margin.
B) revenue.
C) variable expense.
D) net operating income.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy Source: CMA; adapted
28. Which of the following is the correct calculation for the degree of operating leverage?
A) net operating income divided by total expenses.
B) net operating income divided by total contribution margin.
C) total contribution margin divided by net operating income.
D) variable expense divided by total contribution margin.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
29. Which of the following is an assumption underlying standard CVP analysis?
A) In multiproduct companies, the sales mix is constant.
B) In manufacturing companies, inventories always change.
C) The price of a product or service is expected to change as volume changes.
D) Fixed expenses will change as volume increases.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
30. Hopi Corporation expects the following operating results for next year:
| |Sales |$400,000 |
| |Margin of safety |$100,000 |
| |Contribution margin ratio |75% |
| |Degree of operating leverage |4 |
What is Hopi expecting total fixed expenses to be next year?
A) $75,000
B) $100,000
C) $200,000
D) $225,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1; 3; 8 Level: Hard
Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation, we will have:
$400,000 − Breakeven sales = $100,000
Breakeven sales = $300,000
Breakeven sales = Fixed expenses ÷ Contribution margin ratio
Substituting the given information into the above equation, we will have:
$300,000 = Fixed expenses ÷ 0.75
Fixed expenses = $225,000
31. Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product.
| |Sales (8,400 units) |$764,400 |
| |Variable expenses | 445,200 |
| |Contribution margin |319,200 |
| |Fixed expenses | 250,900 |
| |Net operating income |$ 68,300 |
If the company sells 8,200 units, its total contribution margin should be closest to:
A) $301,000
B) $311,600
C) $319,200
D) $66,674
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in units = Contribution margin per unit
$319,200 ÷ 8,400 = $38 contribution margin per unit
If 8,200 units are sold, the total contribution margin will be 8,200 × $38, or $311,600.
32. Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November.
| |Sales (5,700 units) |$319,200 |
| |Variable expenses | 188,100 |
| |Contribution margin |131,100 |
| |Fixed expenses | 106,500 |
| |Net operating income |$ 24,600 |
If the company sells 5,300 units, its net operating income should be closest to:
A) $24,600
B) $2,200
C) $22,874
D) $15,400
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current sales dollars ÷ Current sales in units = Sales price per unit
$319,200 ÷ 5,700 = $56 sales price per unit
Current variable expenses ÷ Current sales in units = Variable expense per unit
$188,100 ÷ 5,700 = $33 variable expense per unit
| |Sales (5,300 units × $56) |$296,800 |
| |Variable expenses (5,300 units × $33) | 174,900 |
| |Contribution margin |121,900 |
| |Fixed expenses | 106,500 |
| |Net operating income |$ 15,400 |
33. Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January.
| |Sales (4,200 units) |$155,400 |
| |Variable expenses | 100,800 |
| |Contribution margin |54,600 |
| |Fixed expenses | 42,400 |
| |Net operating income |$ 12,200 |
If the company sells 4,600 units, its total contribution margin should be closest to:
A) $54,600
B) $59,800
C) $69,400
D) $13,362
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in units = Contribution margin per unit
$54,600 ÷ 4,200 = $13 contribution margin per unit
If 4,600 units are sold, the total contribution margin will be 4,600 × $13, or $59,800.
34. Decaprio Inc. produces and sells a single product. The company has provided its contribution format income statement for June.
| |Sales (8,800 units) |$528,000 |
| |Variable expenses | 290,400 |
| |Contribution margin |237,600 |
| |Fixed expenses | 211,700 |
| |Net operating income |$ 25,900 |
If the company sells 9,200 units, its net operating income should be closest to:
A) $27,077
B) $49,900
C) $36,700
D) $25,900
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current sales dollars ÷ Current sales in units = Sales price per unit
$528,000 ÷ 8,800 = $60 sales price per unit
Current variable expenses ÷ Current sales in units = Variable expense per unit
$290,400 ÷ 8,800 = $33 variable expense per unit
| |Sales (9,200 units × $60 ) |$552,000 |
| |Variable expenses (9,200 units × $33) | 303,600 |
| |Contribution margin |248,400 |
| |Fixed expenses | 211,700 |
| |Net operating income |$ 36,700 |
35. The Bronco Birdfeed Company reported the following information:
| |Sales (400 cases) |$100,000 |
| |Variable expenses |60,000 |
| |Contribution margin |40,000 |
| |Fixed expenses |35,000 |
| |Net operating income |$5,000 |
How much will the sale of one additional case add to Bronco's net operating income?
A) $250.00
B) $100.00
C) $150.00
D) $12.50
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in cases = Contribution margin per case
$40,000 ÷ 400 = $100 contribution margin per case
If one additional case is sold, net operating income will increase by $100.
36. 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
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5; 7 Level: Hard
Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation, we will have:
$120,000 - Breakeven sales = $24,000
Breakeven sales = $96,000
Sales - Variable expenses = Contribution margin
$120,000 - $80,000 = $40,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $ 40,000 ÷ $120,000
Contribution margin ratio = 0.33333
Breakeven sales = Fixed costs ÷ Contribution margin ratio
Substituting the given information into the above equation, we will have:
$96,000 = Fixed costs ÷ 0.33333
Fixed costs = $32,000
37. 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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Medium
Solution:
Answer A is not correct because:
Sales = Variable expenses + Fixed expenses + Profit
$100Q = $60Q + $12,000 + $0
$40Q = $12,000
Q = $12,000 ÷ $40 per unit = 300 units
300 units × $100 selling price per unit = $30,000 breakeven sales in dollars
Answer B is not correct because fixed costs change as activity level changes
Answer C is correct because:
Contribution margin per unit = Selling price per unit - Variable expenses per unit
= $100 - $60 = $40
Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit
Contribution margin ratio = $40 ÷ $100
Contribution margin ratio = 40%
38. Holt Company's variable expenses are 70% of sales. At a $300,000 sales level, the degree of operating leverage is 10. If sales increase by $60,000, the degree of operating leverage will be:
A) 12
B) 10
C) 6
D) 4
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 8 Level: Hard
Solution:
| |Sales |$300,000 |
| |Variable expenses ($300,000 × 70%) | 210,000 |
| |Contribution margin |90,000 |
| |Fixed expenses | ? |
| |Net operating income |$ ? |
Current degree of operating leverage = Current contribution margin ÷ Current net operating income
10 = $90,000 ÷ Current net operating income
Current net operating income = $90,000 ÷ 10 = $9,000
Contribution margin = Fixed expenses - Net operating income
$90,000 = Fixed expenses - $9,000
Fixed expenses = $90,000 - $9,000 = $81,000
| |Sales ($300,000 + $60,000) |$360,000 |
| |Variable expenses ($360,000 × 70%) | 252,000 |
| |Contribution margin |108,000 |
| |Fixed expenses | 81,000 |
| |Net operating income |$ 27,000 |
Degree of operating leverage = Contribution margin ÷ Net operating income
= $108,000/$27,000 = 4.0
39. Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84,000. If the company's sales for a month are $738,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.
A) $565,440
B) $654,000
C) $88,560
D) $4,560
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
| |Sales |$738,000 |
| |Variable expenses ($738,000 × 88%) | 649,440 |
| |Contribution margin ($738,000 × 12%) |88,560 |
| |Fixed expenses | 84,000 |
| |Net operating income |$ 4,560 |
40. Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are $36,000. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $103,000?
A) $23,740
B) $59,740
C) $67,000
D) $7,260
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
| |Sales |$103,000 |
| |Variable expenses ($103,000 × 42%) | 43,260 |
| |Contribution margin ($103,000 × 58%) |59,740 |
| |Fixed expenses | 36,000 |
| |Net operating income |$ 23,740 |
41. Creswell Corporation's fixed monthly expenses are $29,000 and its contribution margin ratio is 56%. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $95,000?
A) $12,800
B) $24,200
C) $53,200
D) $66,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
| |Sales |$95,000 |
| |Variable expenses ($95,000 × 44%) | 41,800 |
| |Contribution margin ($95,000 × 56%) |53,200 |
| |Fixed expenses | 29,000 |
| |Net operating income |$24,200 |
42. 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 operating income?
A) $175,000
B) $190,000
C) $205,000
D) $365,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium Source: CPA; adapted
Solution:
| |Sales (110,000 units × $11.50) |$1,265,000 |
| |Variable expenses (110,000 units × $6*) | 660,000 |
| |Contribution margin |605,000 |
| |Fixed expenses ($300,000 + $100,000) | 400,000 |
| |Net operating income |$ 205,000 |
* Current variable expenses ÷ Current sales in units = Variable expense per unit
$600,000 ÷ 100,000 = $6 variable expense per unit
43. Data concerning Kardas Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$140 |100% |
| |Variable expenses | 28 | 20% |
| |Contribution margin |$112 | 80% |
The company is currently selling 8,000 units per month. Fixed expenses are $719,000 per month. The marketing manager believes that a $20,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $160
B) increase of $20,160
C) decrease of $20,000
D) increase of $160
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |8,000 units |8,180 units |
| |Sales (8,000 units, 8,180 units × $140) |$1,120,000 |$1,145,200 |
| |Variable expenses | 224,000 | 229,040 |
| |($1,120,000, $1,145,200 × 20%) | | |
| |Contribution margin |896,000 |916,160 |
| |Fixed expenses | 719,000 | 739,000 |
| |Net operating income |$ 177,000 |$ 177,160 |
Increase in net operating income: $177,160 - $177,000 = $160
44. Kuzio Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$130 |100% |
| |Variable expenses | 78 | 60% |
| |Contribution margin |$ 52 | 40% |
The company is currently selling 6,000 units per month. Fixed expenses are $263,000 per month. The marketing manager believes that a $5,000 increase in the monthly advertising budget would result in a 140 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $2,280
B) increase of $7,280
C) decrease of $5,000
D) decrease of $2,280
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |6,000 units |6,140 units |
| |Sales (6,000 units, 6,140 units × $130) |$780,000 |$798,200 |
| |Variable expenses | 468,000 | 478,920 |
| |($780,000, $798,200 × 60%) | | |
| |Contribution margin |312,000 |319,280 |
| |Fixed expenses | 263,000 | 268,000 |
| |Net operating income |$ 49,000 |$ 51,280 |
Increase in net operating income: $51,280 - $49,000 = $2,280
45. Data concerning Dorazio Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$160 |100% |
| |Variable expenses | 48 | 30% |
| |Contribution margin |$112 | 70% |
Fixed expenses are $87,000 per month. The company is currently selling 1,000 units per month. Management is considering using a new component that would increase the unit variable cost by $28. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $5,600
B) increase of $33,600
C) decrease of $5,600
D) decrease of $33,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |1,000 units |1,400 units |
| |Sales (1,000 units, 1,400 units × $160) |$160,000 |$224,000 |
| |Variable expenses | 48,000 | 106,400 |
| |(1,000 units × $48, 1,400 units × $76) | | |
| |Contribution margin |112,000 |117,600 |
| |Fixed expenses | 87,000 | 87,000 |
| |Net operating income |$ 25,000 |$ 30,600 |
Increase in net operating income: $30,600 - $25,000 = $5,600
46. Chovanec Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$170 |100% |
| |Variable expenses | 68 | 40% |
| |Contribution margin |$102 | 60% |
Fixed expenses are $521,000 per month. The company is currently selling 7,000 units per month. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $48,000
B) decrease of $6,000
C) increase of $48,000
D) increase of $6,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |7,000 units |7,500 units |
| |Sales (7,000 units, 7,500 units × $170) |$1,190,000 |$1,275,000 |
| |Variable expenses | 476,000 | 555,000 |
| |(7,000 units × $68, 7,500 units × $74) | | |
| |Contribution margin |714,000 |720,000 |
| |Fixed expenses | 521,000 | 521,000 |
| |Net operating income |$ 193,000 |$ 199,000 |
Increase in net operating income: $199,000 - $193,000 = $6,000
47. Data concerning Pellegren Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$200 |100% |
| |Variable expenses | 40 | 20% |
| |Contribution margin |$160 | 80% |
Fixed expenses are $531,000 per month. The company is currently selling 4,000 units per month. The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $35,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $18,000
B) increase of $38,000
C) decrease of $38,000
D) increase of $58,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |4,000 units |4,500 units |
| |Sales (4,000 units × $200, 4,500 units × $186) |$800,000 |$837,000 |
| |Variable expenses | 160,000 | 180,000 |
| |(4,000 units × $40, 4,500 units × $40) | | |
| |Contribution margin |640,000 |657,000 |
| |Fixed expenses | 531,000 | 566,000 |
| |Net operating income |$109,000 |$ 91,000 |
Decrease in net operating income: $109,000 - $91,000 = $18,000
48. Cobble Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$160 |100% |
| |Variable expenses | 48 | 30% |
| |Contribution margin |$112 | 70% |
Fixed expenses are $499,000 per month. The company is currently selling 5,000 units per month. The marketing manager would like to cut the selling price by $13 and increase the advertising budget by $33,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 900 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $56,100
B) decrease of $8,900
C) increase of $99,300
D) decrease of $56,100
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |5,000 units |5,900 units |
| |Sales (5,000 units × $160, 5,900 units × $147) |$800,000 |$867,300 |
| |Variable expenses | 240,000 | 283,200 |
| |(5,000 units × $48, 5,900 units × $48) | | |
| |Contribution margin |560,000 |584,100 |
| |Fixed expenses | 499,000 | 532,000 |
| |Net operating income |$ 61,000 |$ 52,100 |
Decrease in net operating income: $61,000 - $52,100 = $8,900
49. Data concerning Bazin Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$100 |100% |
| |Variable expenses | 20 | 20% |
| |Contribution margin |$ 80 | 80% |
Fixed expenses are $384,000 per month. The company is currently selling 6,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $46,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $27,500
B) decrease of $64,500
C) increase of $41,500
D) increase of $507,500
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |6,000 units |6,500 units |
| |Sales (6,000 units × $100, 6,500 units × $100) |$600,000 |$650,000 |
| |Variable expenses | 120,000 | 188,500 |
| |(6,000 units × $20, 6,500 units × $29) | | |
| |Contribution margin |480,000 |461,500 |
| |Fixed expenses | 384,000 | 338,000 |
| |Net operating income |$ 96,000 |$123,500 |
Increase in net operating income: $123,500 - $96,000 = $27,500
50. Sannella Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$220 |100% |
| |Variable expenses | 66 | 30% |
| |Contribution margin |$154 | 70% |
Fixed expenses are $991,000 per month. The company is currently selling 8,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $74,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $1,246,600
B) increase of $14,600
C) decrease of $133,400
D) increase of $71,800
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |8,000 units |8,200 units |
| |Sales (8,000 units × $220, 8,200 units × $220) |$1,760,000 |$1,804,000 |
| |Variable expenses | 528,000 | 631,400 |
| |(8,000 units × $66, 8,200 units × $77) | | |
| |Contribution margin |1,232,000 |1,172,600 |
| |Fixed expenses | 991,000 | 917,000 |
| |Net operating income |$ 241,000 |$ 255,600 |
Increase in net operating income: $255,600 - $241,000 = $14,600
51. Cherry Street Market reported the following information for the sales of their only product, cherries sold by the pint:
| | |Total |Per Unit |
| |Sales |$31,500 |$4.50 |
| |Variable expenses | 9,450 | 1.35 |
| |Contribution margin |22,050 |$3.15 |
| |Fixed expenses | 13,000 | |
| |Net operating income |$ 9,050 | |
Cherry Street would like to increase their selling price by 50 cents per unit, and feel that this will decrease sales volume by 10%. Should Cherry Street increase the price, and what will the effect be on net operating income?
A) Yes; $3,500 increase
B) Yes; $945 increase
C) No; no change
D) No; $945 decrease
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Current sales (dollars) = Current per unit price × Current sales (units)
$31,500 = $4.50 × Current sales (units)
7,000 = Current sales (units)
| | |7,000 units |6,300 units |
| |Sales (7,000 units × $4.50, 6,300 units × $5.00) |$31,500 |$31,500 |
| |Variable expenses | 9,450 | 8,505 |
| |(7,000 units × $1.35, 6,300 units × $1.35) | | |
| |Contribution margin |22,050 |22,995 |
| |Fixed expenses | 13,000 | 13,000 |
| |Net operating income |$ 9,050 |$ 9,995 |
Increase in net operating income: $9,995 - $9,050 = $945
52. A company makes a single product that it sells for $16 per unit. Fixed costs are $76,800 per month and the product has a contribution margin ratio of 40%. If the company's actual sales are $224,000, its margin of safety is:
A) $32,000
B) $96,000
C) $128,000
D) $192,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 7 Level: Medium Source: CIMA; adapted
Solution:
Break-even in total sales dollars = Fixed expenses/CM ratio
= $76,800/0.400 = $192,000
Margin of safety in dollars = Sales - Break-even sales
= $224,000 - $192,000 = $32,000
53. The following data are available for the Phelps Company for a recent month:
| | |Product A |Product B |Product C |Total |
| |Sales |$150,000 |$130,000 |$90,000 |$370,000 |
| |Variable expenses | 91,000 | 104,000 | 27,000 | 222,000 |
| |Contribution margin |$ 59,000 |$ 26,000 |$63,000 |148,000 |
| |Fixed expenses | | | | 55,000 |
| |Net operating income | | | |$ 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
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 9 Level: Medium
Solution:
| | |Product A |Product B |Product C |Total |
| |Sales |$150,000 |$130,000 |$90,000 |$370,000 |
| |Variable expenses | 91,000 | 104,000 | 27,000 | 222,000 |
| |Contribution margin |$ 59,000 |$ 26,000 |$63,000 |148,000 |
| |Fixed expenses | | | | 55,000 |
| |Net operating income | | | |$ 93,000 |
Overall CM ratio = Total contribution margin/Total sales
= $148,000/$370,000 = 0.40
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $55,000/0.40 = $137,500
54. Hartl Corporation is a single product firm with the following selling price and cost structure for next year:
| |Selling price per unit |$1.80 |
| |Contribution margin ratio |40% |
| |Total fixed expenses for the year |$218,700 |
How many units will Hartl have to sell next year in order to break-even?
A) 121,500
B) 202,500
C) 303,750
D) 546,750
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Variable cost per unit = $1.80 × (1 - 40%)
Variable cost per unit = $1.08
Sales = Variable expenses + Fixed expenses + Profit
$1.80Q = $1.08Q + $218,700 + $0
$0.72Q = $218,700
Q = $218,700 ÷ $0.72 per unit = 303,750 units
55. Borich Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$150.00 |
| |Variable expense per unit |$73.50 |
| |Fixed expense per month |$308,295 |
The break-even in monthly unit sales is closest to:
A) 2,055
B) 4,030
C) 4,194
D) 3,426
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$150.00Q = $73.50Q + $308,295 + $0
$76.50Q = $308,295
Q = $308,295 ÷ $76.50 per unit = 4,030 units
56. Data concerning Buchenau Corporation's single product appear below:
| |Selling price per unit |$150.00 |
| |Variable expense per unit |$34.50 |
| |Fixed expense per month |$466,620 |
The break-even in monthly unit sales is closest to:
A) 3,111
B) 6,892
C) 4,040
D) 13,525
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$150.00Q = $34.50Q + $466,620 + $0
$115.50Q = $466,620
Q = $466,620 ÷ $115.50 per unit = 4,040 units
57. Hevesy Inc. produces and sells a single product. The selling price of the product is $200.00 per unit and its variable cost is $80.00 per unit. The fixed expense is $300,000 per month. The break-even in monthly unit sales is closest to:
A) 2,500
B) 1,500
C) 3,750
D) 2,583
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$200.00Q = $80.00Q + $300,000 + $0
$120.00Q = $300,000
Q = $300,000 ÷ $120.00 per unit = 2,500 units
58. Wenstrom Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$130.00 |
| |Variable expense per unit |$41.60 |
| |Fixed expense per month |$109,616 |
The break-even in monthly dollar sales is closest to:
A) $342,550
B) $204,455
C) $109,616
D) $161,200
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$130.00Q = $41.60Q + $109,616 + $0
$88.40Q = $109,616
Q = $109,616 ÷ $88.40 per unit = 1,240 units
1,240 units × $130.00 selling price = $161,200
59. Data concerning Follick Corporation's single product appear below:
| |Selling price per unit |$110.00 |
| |Variable expense per unit |$30.80 |
| |Fixed expense per month |$321,552 |
The break-even in monthly dollar sales is closest to:
A) $1,148,400
B) $638,851
C) $321,552
D) $446,600
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$110.00Q = $30.80Q + $321,552 + $0
$79.20Q = $321,552
Q = $321,552 ÷ $79.20 per unit = 4,060 units
4,060 units × $110.00 selling price = $446,600
60. Wimpy Inc. produces and sells a single product. The selling price of the product is $150.00 per unit and its variable cost is $58.50 per unit. The fixed expense is $366,915 per month.
The break-even in monthly dollar sales is closest to:
A) $601,500
B) $366,915
C) $636,408
D) $940,808
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$150.00Q = $58.50Q + $366,915 + $0
$91.50Q = $366,915
Q = $366,915 ÷ $91.50 per unit = 4,010 units
4,010 units × $150.00 selling price = $601,500
61. The Saginaw Ice Company had sales of $400,000, with variable expenses of $162,000 and fixed expenses of $98,000. Which of the following is closest to Saginaw's break-even point?
A) $260,000
B) $165,000
C) $140,000
D) $238,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
| | |Total |Percent of Sales |
| |Sales |$400,000 |100.0% |
| |Variable expenses | 162,000 | 40.5% |
| |Contribution margin and contribution margin ratio |$ 238,000 | 59.5% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $98,000/0.595 = $164,705.88
62. Product Y sells for $15 per unit, and has related variable expenses of $9 per unit. Fixed expenses total $300,000 per year. How many units of Product Y must be sold each year to yield an annual profit of $90,000:
A) 50,000 units
B) 65,000 units
C) 15,000 units
D) 43,333 units
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$15Q = $9Q + $300,000 + $90,000
$6Q = $390,000
Q = $390,000 ÷ $6 per unit = 65,000 units
63. Caneer Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$240.00 |
| |Variable expense per unit |$81.60 |
| |Fixed expense per month |$997,920 |
The unit sales to attain the company's monthly target profit of $44,000 is closest to:
A) 7,896
B) 12,769
C) 6,578
D) 4,341
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$240.00Q = $81.60Q + $997,920 + $44,000
$158.40Q = $1,041,920
Q = $1,041,920 ÷ $158.40 per unit = 6,578 units (rounded)
64. Data concerning Bedwell Enterprises Corporation's single product appear below:
| |Selling price per unit |$160.00 |
| |Variable expense per unit |$65.60 |
| |Fixed expense per month |$387,040 |
The unit sales to attain the company's monthly target profit of $17,000 is closest to:
A) 6,159
B) 4,280
C) 2,525
D) 4,321
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$160.00Q = $65.60Q + $387,040 + $17,000
$94.40Q = $404,040
Q = $404,040 ÷ $94.40 per unit = 4,280 units (rounded)
65. Hettrick International Corporation's only product sells for $120.00 per unit and its variable expense is $52.80. The company's monthly fixed expense is $396,480 per month. The unit sales to attain the company's monthly target profit of $13,000 is closest to:
A) 7,755
B) 6,093
C) 5,753
D) 3,412
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$120.00Q = $52.80Q + $396,480 + $13,000
$67.20Q = $409,480
Q = $409,480 ÷ $67.20 per unit = 6,093 units (rounded)
66. Logsdon Corporation produces and sells a single product whose contribution margin ratio is 63%. The company's monthly fixed expense is $720,720 and the company's monthly target profit is $28,000. The dollar sales to attain that target profit is closest to:
A) $471,694
B) $454,054
C) $1,188,444
D) $1,144,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($720,720 + $28,000)/0.63 = $1,188,444 (rounded)
67. The contribution margin ratio of Mountain Corporation's only product is 52%. The company's monthly fixed expense is $296,400 and the company's monthly target profit is $7,000. The dollar sales to attain that target profit is closest to:
A) $570,000
B) $157,768
C) $583,462
D) $154,128
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($296,400 + $7,000)/0.52 = $583,462 (rounded)
68. Majid Corporation sells a product for $240 per unit. The product's current sales are 41,300 units and its break-even sales are 36,757 units.
What is the margin of safety in dollars?
A) $8,821,680
B) $6,608,000
C) $9,912,000
D) $1,090,320
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $240 per unit × 36,757 = $8,821,680
Current sales = $240 per unit × 41,300 = $9,912,000
Margin of safety in dollars = Sales - Break-even sales
= $9,912,000 - $8,821,680 = $1,090,320
69. Mcmurtry Corporation sells a product for $170 per unit. The product's current sales are 10,000 units and its break-even sales are 8,100 units. The margin of safety as a percentage of sales is closest to:
A) 23%
B) 81%
C) 19%
D) 77%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $170 per unit × 8,100 = $1,377,000
Current sales = $170 per unit × 10,000 = $1,700,000
Margin of safety in dollars = Sales - Break-even sales
= $1,700,000 - $1,377,000 = $323,000
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $323,000 ÷ $1,700,000 = 19%
70. Cubie Corporation has provided the following data concerning its only product:
| |Selling price |$100 per unit |
| |Current sales |10,600 units |
| |Break-even sales |9,540 units |
What is the margin of safety in dollars?
A) $1,060,000
B) $106,000
C) $954,000
D) $706,667
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $100 per unit × 9,540 = $954,000
Current sales = $100 per unit × 10,600 = $1,060,000
Margin of safety in dollars = Sales - Break-even sales
= $1,060,000 - $954,000 = $106,000
71. Ensley Corporation has provided the following data concerning its only product:
| |Selling price |$200 per unit |
| |Current sales |30,300 units |
| |Break-even sales |21,816 units |
The margin of safety as a percentage of sales is closest to:
A) 61%
B) 28%
C) 72%
D) 39%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $200 per unit × 30,300 = $6,060,000
Current sales = $200 per unit × 21,816 = $4,363,200
Margin of safety in dollars = Sales - Break-even sales
= $6,060,000 - $4,363,200 = $1,696,800
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $1,696,800 ÷ $4,363,200 = 39% (rounded)
72. The following is Noble Company's contribution format income statement last month:
| |Sales (12,000 units) |$600,000 |
| |Variable expenses | 375,000 |
| |Contribution margin |225,000 |
| |Fixed expenses | 150,000 |
| |Net operating income |$ 75,000 |
What is the company's margin of safety percentage to the nearest whole percent?
A) 42%
B) 38%
C) 33%
D) 25%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Sales = Sales price × Units sold
$600,000 = 12,000 × Sales price
$50 = Sales price
Variable expenses = Per-unit cost × Units sold
$375,000 = 12,000 × Per-unit cost
$31.25 = Per-unit cost
Break-even sales:
Sales = Variable expenses + Fixed expenses + Profit
$50.00Q = $31.25Q + $150,000 + $0
$18.75Q = $150,000
Q = 8,000 units
Margin of safety in dollars:
Break-even sales = $50 per unit × 8,000 = $400,000
Current sales = $50 per unit × 12,000 = $600,000
Margin of safety in dollars = Sales - Break-even sales
= $600,000 - $400,000 = $200,000
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $200,000 ÷ $600,000 = 33% (rounded)
73. Ostler Company's net operating 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 percent, net operating income can be expected to increase by:
A) 20%
B) 16%
C) 160%
D) 40%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin ÷ Net operating income
Degree of operating leverage = $50,000 ÷ $10,000 = 5
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 8% × 5 = 40%
74. The February contribution format income statement of Mcabier Corporation appears below:
a. Degree of operating leverage = Contribution margin/Net operating income
= $251,100/$41,300 = 6.08
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 19% × 6.08 = 115.52%
| |Sales |$211,200 |
| |Variable expenses | 96,000 |
| |Contribution margin |115,200 |
| |Fixed expenses | 84,100 |
| |Net operating income |$ 31,100 |
The degree of operating leverage is closest to:
A) 0.27
B) 6.79
C) 3.70
D) 0.15
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $115,200/$31,100 = 3.70
75. Serfass Corporation's contribution format income statement for July appears below:
| |Sales |$260,000 |
| |Variable expenses | 176,000 |
| |Contribution margin |84,000 |
| |Fixed expenses | 71,800 |
| |Net operating income |$ 12,200 |
The degree of operating leverage is closest to:
A) 0.05
B) 0.15
C) 21.31
D) 6.89
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $84,000/$12,200 = 6.89
76. Rushenberg Corporation's operating leverage is 10.8. If the company's sales increase by 14%, its net operating income should increase by about:
A) 151.2%
B) 14.0%
C) 77.1%
D) 10.8%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 14% × 10.8 = 151.2%
77. Bendel Inc. has an operating leverage of 7.3. If the company's sales increase by 3%, its net operating income should increase by about:
A) 243.3%
B) 7.3%
C) 21.9%
D) 3.0%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 3% × 7.3 = 21.9%
78. E.D. Manufacturing, Inc. produces and sells ice skates. The current net operating income is $40,000, with a degree of operating leverage of 3. If sales increase by 10%, how much total net operating income should be expected?
A) $12.000
B) $52,000
C) $44,000
D) None of the above.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 10% × 3 = 30%
Current net operating income × Percent increase = Increase in net operating income
$40,000 × 30% = $12,000 Increase in net operating income
Current net operating income + Increase in net operating income = Expected net operating income = $40,000 + $12,000 = $52,000
79. Mcdale Inc. produces and sells two products. Data concerning those products for the most recent month appear below:
| | |Product I49V |Product Z50U |
| |Sales |$15,000 |$14,000 |
| |Variable expenses |$3,300 |$2,790 |
The fixed expenses of the entire company were $18,460. The break-even point for the entire company is closest to:
A) $23,367
B) $10,540
C) $24,550
D) $18,460
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
Solution:
Multi B/E Solution:
| | |Product I49V |Product Z50U |Total |
| |Sales |$15,000 |$14,000 |$29,000 |
| |Variable expenses | 3,300 | 2,790 | 6,090 |
| |Contribution margin |$11,700 |$11,210 |22,910 |
| |Fixed expenses | | | 18,460 |
| |Net operating income | | |$ 4,450 |
Overall CM ratio = Total contribution margin/Total sales
= $22,910/$29,000 = 0.79
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $18,460/0.79 = $23,367 (rounded)
80. Roddam Corporation produces and sells two products. Data concerning those products for the most recent month appear below:
| | |Product K09E |Product G17B |
| |Sales |$28,000 |$38,000 |
| |Variable expenses |$11,200 |$8,600 |
The fixed expenses of the entire company were $41,970. If the sales mix were to shift toward Product K09E with total sales remaining constant, the overall break-even point for the entire company:
A) would increase.
B) could increase or decrease.
C) would not change.
D) would decrease.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
81. Newham Corporation produces and sells two products. In the most recent month, Product R10L had sales of $28,000 and variable expenses of $6,440. Product X96N had sales of $22,000 and variable expenses of $7,560. And the fixed expenses of the entire company were $32,710. The break-even point for the entire company is closest to:
A) $32,710
B) $45,431
C) $46,710
D) $17,290
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
Solution:
Multi B/E Solution:
| | |Product R10L |Product X96N |Total |
| |Sales |$28,000 |$22,000 |$50,000 |
| |Variable expenses | 6,440 | 7,560 | 14,000 |
| |Contribution margin |$21,560 |$14,440 |36,000 |
| |Fixed expenses | | | 32,710 |
| |Net operating income | | |$ 3,290 |
Overall CM ratio = Total contribution margin/Total sales
= $36,000/$50,000 = 0.72
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $32,710/0.72 = $45,431 (rounded)
82. Flesch Corporation produces and sells two products. In the most recent month, Product C90B had sales of $24,000 and variable expenses of $6,480. Product Y45E had sales of $29,000 and variable expenses of $11,010. And the fixed expenses of the entire company were $32,280. If the sales mix were to shift toward Product C90B with total sales remaining constant, the overall break-even point for the entire company:
A) would decrease.
B) would increase.
C) could increase or decrease.
D) would not change.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
83. Zachary's Bike Shop sells two products. Sales and contribution margin ratios for the two products follow:
| | |Product A |Product B |
| |Sales in dollars |$10,000 |$40,000 |
| |Contribution margin ratio |25% |75% |
Given these data, the contribution margin ratio for the company as a whole would be:
A) 25%
B) 50%
C) 65%
D) It is impossible to determine from the given data.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Medium
Solution:
Multi B/E Solution:
| | |Product A |Product B |Total |
| |Sales |$10,000 |$40,000 |$50,000 |
| |Contribution margin (Sales × CM ratio) |$2,500 |$30,000 |$32,500 |
Overall CM ratio = Total contribution margin/Total sales
= $32,500/$50,000 = 0.65
Use the following to answer questions 84-86:
A cement manufacturer has supplied the following data:
| |Tons of cement produced and sold |680,000 |
| |Sales revenue |$2,788,000 |
| |Variable manufacturing expense |$1,156,000 |
| |Fixed manufacturing expense |$760,000 |
| |Variable selling and administrative expense |$272,000 |
| |Fixed selling and administrative expense |$294,000 |
| |Net operating income |$306,000 |
84. What is the company's unit contribution margin?
A) $0.45
B) $2.10
C) $2.00
D) $4.10
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Contribution margin = Sales - Variable expenses
Contribution margin = $2,788,000 - ($1,156,000 + $272,000)
Contribution margin = $1,360,000
Unit contribution margin = Contribution margin ÷ Tons of cement
Unit contribution margin = $1,360,000 ÷ 680,000
Unit contribution margin = $2.00
85. The company's contribution margin ratio is closest to:
A) 39.0%
B) 51.2%
C) 11.0%
D) 48.8%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Contribution margin = Sales - Variable expenses
Contribution margin = $2,788,000 - ($1,156,000 + $272,000)
Contribution margin = $1,360,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $1,360,000 ÷ $2,788,000
Contribution margin ratio = 48.8%
86. If the company increases its unit sales volume by 4% without increasing its fixed expenses, then total net operating income should be closest to:
A) $12,240
B) $318,240
C) $360,400
D) $311,973
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
| |New contribution margin ($1,360,000 × 1.04) |$1,414,400 |
| |Fixed expenses ($760,000 + $294,000) | 1,054,000 |
| |Net operating income |$ 360,400 |
Use the following to answer questions 87-89:
Righway Corporation has supplied the following data:
| |Sales per period |1,000 units |
| |Selling price |$50 per unit |
| |Variable manufacturing cost |$20 per unit |
| |Selling expenses |$10,000 plus 5% of sales |
| |Administration expenses |$5,000 plus 15% of sales |
87. The total contribution margin per period is:
A) $22,500
B) $27,500
C) $30,000
D) $20,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium
Solution:
| |Sales (1,000 units × $50) |$50,000 |
| |Variable expenses* | 30,000 |
| |Contribution margin |$20,000 |
|* |Variable manufacturing cost (1,000 units × $20) |$20,000 |
| |Selling expenses ($50,000 × 5%) | 2,500 |
| |Administration expenses ($50,000 × 15%) | 7,500 |
| |Total variable expenses |$30,000 |
88. The break-even point per period is (round to nearest unit):
A) 750 units
B) 545 units
C) 500 units
D) 667 units
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$50Q = $30Q* + $15,000 + $0
$20Q = $15,000
Q = $15,000 ÷ $20 per unit = 750 units
*Variable expense per unit = $20 + (5% × $50) + (15% × $50) = $30
89. If the selling price is changed to $55 per unit, the break-even point will be (round to nearest unit):
A) 667 units
B) 545 units
C) 625 units
D) 500 units
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4; 5 Level: Medium
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$55Q = $31Q* + $15,000 + $0
$24Q = $15,000
Q = $15,000 ÷ $24 per unit = 625 units
*Variable expense per unit = $20 + (5% × $55) + (15% × $55) = $31
Use the following to answer questions 90-92:
Biskra Corporation is a single product firm that expects the following operating results next year:
| | |In Total |Per Unit |
| |Sales |$288,000 |$0.80 |
| |Variable expenses |$172,800 |$0.48 |
| |Fixed expenses |$72,000 |$0.20 |
90. Every unit that Biskra sells next year after the break-even point will increase net operating income by:
A) $0.12
B) $0.20
C) $0.32
D) $0.60
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1; 5 Level: Easy
Solution:
Sales per unit - Variable expenses per unit = Contribution margin per unit
= $0.80 - $0.48 = $0.32
91. What would Biskra's total sales dollars have to be next year to generate $180,000 of net operating income?
A) $450,000
B) $630,000
C) $588,000
D) $787,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
CM ratio
= (Sales - Variable expenses) ÷ Sales
= ($288,000 - $172,800) ÷ $288,000 = 40%
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($72,000 + $180,000)/0.40 = $630,000
92. What is Biskra's margin of safety percentage?
A) 15%
B) 24%
C) 37.5%
D) 40%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Break-even sales:
Sales = Variable expenses + Fixed expenses + Profit
$0.80Q = $0.48Q* + $72,000 + $0
$0.32Q = $72,000
Q = $72,000 ÷ $0.32 per unit = 225,000 units
Margin of safety in dollars:
Break-even sales = $0.80 per unit × 360,000 = $288,000
Current sales = $0.80 per unit × 225,000 = $180,000
Margin of safety in dollars = Sales − Break-even sales
= $288,000 − $180,000 = $108,000
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $108,000 ÷ $288,000 = 37.5%
Use the following to answer questions 93-95:
A manufacturer of premium wire strippers has supplied the following data:
| |Units produced and sold |580,000 |
| |Sales revenue |$4,176,000 |
| |Variable manufacturing expense |$2,871,000 |
| |Fixed manufacturing expense |$778,000 |
| |Variable selling and administrative expense |$348,000 |
| |Fixed selling and administrative expense |$104,000 |
| |Net operating income |$75,000 |
93. The company's margin of safety in units is closest to:
A) 234,222
B) 564,242
C) 45,455
D) 457,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium
Solution:
Break-even sales in units:
Sales = Variable expenses + Fixed expenses + Profit
$7.20Q* = $5.55Q** + $882,000 + $0
$1.65Q = $882,000
Q = $882,000 ÷ $1.65 per unit = 534,545 units
Margin of safety in units:
Margin of safety in units = Sales in units − Break-even sales in units
= 580,000 − 534,545 = 45,455 units
|* |$4,176,000 ÷ 580,000 units = $7.20 per unit | |
| | | |
|** |Manufacturing expense ($2,871,000 ÷ 580,000 units) |$4.95 |
| |Selling and administrative expense ($348,000 ÷ 580,000 units) | 0.60 |
| |Total variable expenses per unit |$5.55 |
94. The company's unit contribution margin is closest to:
A) $2.25
B) $5.55
C) $1.65
D) $6.60
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
| |Sales |$4,176,000 |
| |Variable expenses | 3,219,000 |
| |Contribution margin |$ 957,000 |
$957,000 ÷ 580,000 units = $1.65
95. The company's degree of operating leverage is closest to:
A) 55.68
B) 3.65
C) 7.73
D) 12.76
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
Solution:
| |Sales |$4,176,000 |
| |Variable expenses | 3,219,000 |
| |Contribution margin |$ 957,000 |
Degree of operating leverage = Contribution margin/Net operating income
= $957,000/$75,000 = 12.76
Use the following to answer questions 96-97:
Keomuangtai Corporation produces and sells a single product. The company has provided its contribution format income statement for October.
| |Sales (4,600 units) |$266,800 |
| |Variable expenses | 179,400 |
| |Contribution margin |87,400 |
| |Fixed expenses | 62,200 |
| |Net operating income |$ 25,200 |
96. If the company sells 4,500 units, its total contribution margin should be closest to:
A) $85,500
B) $24,652
C) $87,400
D) $81,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales price per unit = $266,800 ÷ 4,600 units = $58
Variable expense per unit = $179,400 ÷ 4,600 units = $39
| |Sales (4,500 units) |$261,000 |
| |Variable expenses | 175,500 |
| |Contribution margin |$ 85,500 |
97. If the company sells 4,200 units, its net operating income should be closest to:
A) $17,600
B) $23,009
C) $25,200
D) $2,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales price per unit = $266,800 ÷ 4,600 units = $58
Variable expense per unit = $179,400 ÷ 4,600 units = $39
| |Sales (4,200 units) |$243,600 |
| |Variable expenses | 163,800 |
| |Contribution margin |79,800 |
| |Fixed expenses | 62,200 |
| |Net operating income |$ 17,600 |
Use the following to answer questions 98-99:
Souza Inc, which produces and sells a single product, has provided its contribution format income statement for October.
| |Sales (4,000 units) |$88,000 |
| |Variable expenses | 40,000 |
| |Contribution margin |48,000 |
| |Fixed expenses | 41,700 |
| |Net operating income |$ 6,300 |
98. If the company sells 3,600 units, its total contribution margin should be closest to:
A) $39,200
B) $5,670
C) $43,200
D) $48,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales price per unit = $88,000 ÷ 4,000 units = $22
Variable expense per unit = $40,000 ÷ 4,000 units = $10
| |Sales (3,600 units) |$79,200 |
| |Variable expenses | 36,000 |
| |Contribution margin |$43,200 |
99. If the company sells 3,500 units, its net operating income should be closest to:
A) $5,513
B) $6,300
C) $300
D) -$4,700
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales price per unit = $88,000 ÷ 4,000 units = $22
Variable expense per unit = $40,000 ÷ 4,000 units = $10
| |Sales (3,500 units) |$77,000 |
| |Variable expenses | 35,000 |
| |Contribution margin |42,000 |
| |Fixed expenses | 41,700 |
| |Net operating income |$ 300 |
Use the following to answer questions 100-101:
Wight Corporation has provided its contribution format income statement for June. The company produces and sells a single product.
| |Sales (9,600 units) |$336,000 |
| |Variable expenses | 144,000 |
| |Contribution margin |192,000 |
| |Fixed expenses | 137,000 |
| |Net operating income |$ 55,000 |
100. If the company sells 9,100 units, its total contribution margin should be closest to:
A) $174,500
B) $192,000
C) $52,135
D) $182,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales price per unit = $336,000 ÷ 9,600 units = $35
Variable expense per unit = $144,000 ÷ 9,600 units = $15
| |Sales (9,100 units) |$318,500 |
| |Variable expenses | 136,500 |
| |Contribution margin |$182,000 |
101. If the company sells 9,700 units, its net operating income should be closest to:
A) $57,000
B) $55,000
C) $55,573
D) $58,500
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Sales price per unit = $336,000 ÷ 9,600 units = $35
Variable expense per unit = $144,000 ÷ 9,600 units = $15
| |Sales (9,700 units) |$339,500 |
| |Variable expenses | 145,500 |
| |Contribution margin |194,000 |
| |Fixed expenses | 137,000 |
| |Net operating income |$ 57,000 |
Use the following to answer questions 102-103:
The following information relates to Francisca Company:
| |Degree of operating leverage |2.5 |
| |Profit margin percentage |24% |
| |Margin of safety percentage |40% |
| |Contribution margin ratio |60% |
102. If Francisca's sales increase by 20%, by what percentage will its net operating income increase?
A) 4.8%
B) 8%
C) 12%
D) 50%
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
Solution:
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 20% × 2.5 = 50%
103. Francisca wants to give its sales staff a $60,000 increase in salary but still wants to make the same net operating income. If Francisca gives this increase, by how much would sales at Francisca have to increase in order for the company to maintain its current net operating income level?
A) $60,000
B) $100,000
C) $150,000
D) $250,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 4 Level: Medium
Solution:
Increase in sales dollars = Additional fixed expenses ÷ Contribution margin ratio
= $60,000 ÷ 0.60 = $100,000
Use the following to answer questions 104-108:
The 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.
104. The unit contribution margin per book is:
A) $10.30
B) $14.30
C) $10.80
D) $8.30
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Unit contribution margin = Unit sales price - Variable expense per unit
= $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30
105. The contribution margin ratio for the book is:
A) 71.5%
B) 54.0%
C) 51.5%
D) 51.9%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Unit contribution margin = Unit sales price - Variable expense per unit
= $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $10.30 ÷ $20.00
Contribution margin ratio = 51.5%
106. The break-even point in units is:
A) 8,247 books
B) 7,767 books
C) 7,407 books
D) 6,504 books
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
Sales = Variable expenses + Fixed expenses + Profit
$20.00Q = $9.70Q + $80,000 + $0
$10.30Q = $80,000
Q = $80,000 ÷ $10.30 per unit = 7,767 units (rounded)
107. 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
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Hard
Solution:
For June:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
| |Sales (8,000 units) |$160,000 |
| |Variable expenses | 77,600 |
| |Contribution margin |82,400 |
| |Fixed expenses | 80,000 |
| |Net operating income |$ 2,400 |
Degree of operating leverage = Contribution margin/Net operating income
= $82,400/$2,400 = 34.33
For July:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
| |Sales (10,000 units) |$200,000 |
| |Variable expenses | 97,000 |
| |Contribution margin |103,000 |
| |Fixed expenses | 80,000 |
| |Net operating income |$ 23,000 |
Degree of operating leverage = Contribution margin/Net operating income
= $103,000/$23,000 = 4.48
As sales increase past the breakeven point, the degree of operating leverage will decrease.
108. The degree of operating leverage for July is closest to:
A) 4.48
B) 3.48
C) 4.22
D) 8.70
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
Solution:
Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70
| |Sales (10,000 units) |$200,000 |
| |Variable expenses | 97,000 |
| |Contribution margin |103,000 |
| |Fixed expenses | 80,000 |
| |Net operating income |$ 23,000 |
Degree of operating leverage = Contribution margin/Net operating income
= $103,000/$23,000 = 4.48
Use the following to answer questions 109-111:
A manufacturer of cedar shingles has supplied the following data:
| |Bundles of cedar shakes produced and sold |360,000 |
| |Sales revenue |$2,412,000 |
| |Variable manufacturing expense |$1,170,000 |
| |Fixed manufacturing expense |$714,000 |
| |Variable selling and administrative expense |$414,000 |
| |Fixed selling and administrative expense |$82,000 |
| |Net operating income |$32,000 |
109. The company's break-even in unit sales is closest to:
A) 118,806
B) 206,957
C) 346,087
D) 14,775
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
Sales price per unit = $2,412,000 ÷ 360,000 units = $6.70
Variable expense per unit = ($1,170,000 + $414,000) ÷ 360,000 units = $4.40
Sales = Variable expenses + Fixed expenses + Profit
$6.70Q = $4.40Q + $796,000 + $0
$2.30Q = $796,000
Q = $796,000 ÷ $2.30 per unit = 346,087 units (rounded)
110. The company's contribution margin ratio is closest to:
A) 72.6%
B) 65.7%
C) 34.3%
D) 27.4%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Contribution margin = Sales - Variable expenses
Contribution margin = $2,412,000 - $1,584,000 = $828,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $828,000 ÷ $2,412,000
Contribution margin ratio = 34.3%
111. The company's degree of operating leverage is closest to:
A) 11.25
B) 25.88
C) 1.99
D) 75.38
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Medium
Solution:
| |Sales |$2,412,000 |
| |Variable expenses | 1,584,000 |
| |Contribution margin |828,000 |
| |Fixed expenses | 796,000 |
| |Net operating income |$ 32,000 |
Degree of operating leverage = Contribution margin/Net operating income
= $828,000/$32,000 = 25.88
Use the following to answer questions 112-113:
Carr Inc. produces small motors that sell for $15 each. Cost data on the motors are provided below:
| |Sales in units per year |7,000 |
| |Variable production cost |$5.00 per unit |
| |Variable selling expense |$2.00 per unit |
| |Variable administrative expense |$1.50 per unit |
| |Fixed expenses per year: | |
| |Building rent |$10,000 |
| |Equipment depreciation |4,000 |
| |Selling expense |8,000 |
| |Administrative expense |15,000 |
| |Total fixed expenses |$37,000 |
112. The contribution margin ratio is (round to nearest tenth of a percent):
A) 56.7%
B) 43.3%
C) 66.7%
D) 53.3%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Unit contribution margin = $15.00 - ($5.00 + $2.00 + $1.50) = $6.50
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $6.50 ÷ $15.00
Contribution margin ratio = 43.3%
113. If the selling price is increased by 10 percent, what will be the new break-even point in units (round to the nearest unit)?
A) 3,895 units
B) 4,625 units
C) 3,700 units
D) 3,217 units
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Variable expense per unit = $5.00 + $2.00 + $1.50 = $8.50
Sales = Variable expenses + Fixed expenses + Profit
$16.50Q = $8.50Q + $37,000 + $0
$8.00Q = $37,000
Q = $37,000 ÷ $8.00 per unit = 4,625 units
Use the following to answer questions 114-115:
(CPA, adapted) The Maxwell Company manufactures and sells a single product. Budgeted data follow:
| |Forecasted annual sales volume |120,000 units |
| |Selling price per unit |$25.00 |
| |Variable expenses per unit: | |
| |Raw materials |$11.00 |
| |Direct labor |5.00 |
| |Manufacturing overhead |2.50 |
| |Selling expenses | 1.30 |
| |Total variable expenses per unit |$19.80 |
| |Annual fixed expenses: | |
| |Manufacturing overhead |$192,000 |
| |Selling and administrative | 276,000 |
| |Total fixed expenses |$468,000 |
114. Maxwell's break-even point in units is:
A) 76,667
B) 90,000
C) 130,000
D) 72,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy Source: CPA; adapted
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$25.00Q = $19.80Q + $468,000 + $0
$5.20Q = $468,000
Q = $468,000 ÷ $5.20 per unit = 90,000 units
115. If Maxwell Company's direct labor costs increase 8 percent, what selling price per unit of product must it charge to maintain the same contribution margin ratio?
A) $25.51
B) $27.00
C) $25.40
D) $26.64
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 5 Level: Hard Source: CPA; adapted
Solution:
Current contribution margin per unit = Selling price per unit − Total variable expenses per unit = $25.00 − $19.80 = $5.20
Current contribution margin ratio = Contribution margin ÷ Selling price per unit
$5.20 ÷ $25.00 = 20.8%
Direct labor per unit × 0.08 = Increase in variable expense
$5.00 × 0.08 = $0.40
New total variable expenses per unit = $19.80 + $0.40 = $20.20
0.208 = (Selling price − $20.20) ÷ Selling price
0.208 × Selling price = Selling price − $20.20
$20.20 = Selling price − 0.208 × Selling price
$20.20 = 0.792 × Selling price
Selling price = $25.51
Use the following to answer questions 116-117:
The following data was provided by Green Corporation:
| | |Product A |Product B |Product C |
| |Sales in dollars |$80,000 |$120,000 |$100,000 |
| |Contribution margin ratio |30% |45% |27% |
116. The contribution margin ratio for the company as a whole is:
A) 34%
B) 65%
C) 35%
D) 66.7%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
Solution:
| | |Product A |Product B |Product C |Total |
| |Sales |$80,000 |$120,000 |$100,000 |$300,000 |
| |Contribution margin (Sales × Contribution |$24,000 |$54,000 |$27,000 |105,000 |
| |margin ratio) | | | | |
Overall CM ratio = Total contribution margin/Total sales
= $105,000/$300,000 = 35%
117. If total units sold remain unchanged, but the sales mix shifts more heavily toward Product B, one would expect the overall contribution margin ratio to:
A) increase
B) decrease
C) remain unchanged
D) none of these
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
Use the following to answer questions 118-120:
Next year, Mudd Face Cosmetics, a single product company, expects to sell 9,000 jars of miracle glaze. Mudd Face is budgeting the following operating results for next year:
| |Sales |$450,000 |
| |Variable expenses | 135,000 |
| |Contribution margin |315,000 |
| |Fixed expenses | 252,000 |
| |Net operating income |$ 63,000 |
118. How many jars of glaze would Mudd Face have to sell next year in order to break-even?
A) 2,700
B) 5,040
C) 6,750
D) 7,200
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium
Solution:
| | |Total |Percent of Sales |
| |Sales |$450,000 |100.0% |
| |Variable expenses | 135,000 | 30.0% |
| |Contribution margin and contribution margin ratio |$ 315,000 | 70.0% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $252,000/0.700 = $360,000
Selling price per unit = $450,000 ÷ 9,000 jars = $50 per jar
Break-even in units = Break-even sales dollars ÷ Selling price per unit
= $360,000 ÷ $50 = 7,200 jars
119. What would Mudd Face's total sales dollars have to be next year in order to increase its projected net operating income by 25%?
A) $465,750
B) $472,500
C) $499,500
D) $562,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4; 6 Level: Medium
Solution:
Contribution margin ratio = $315,000 ÷ $450,000 = 70%
Desired net operating income = ($63,000 × 1.25) = $78,750
Sales dollars needed to earn $78,750 = (Fixed expenses + Target net operating income) ÷ Contribution margin ratio = ($252,000 + $78,750) ÷ 0.70 = $472,500
120. If sales next year at Mudd Face are 10% higher than expected, its net operating income should be:
A) $4,410 higher than expected.
B) $6,300 higher than expected.
C) $31,500 higher than expected.
D) $44,100 higher than expected.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Degree of operating leverage = Contribution margin ÷ Net operating income
= $315,000 ÷ $63,000 = 5
Therefore, increase in net operating income will be 5 × 10%, or 50%, higher.
Current net operating income × 50% = $63,000 × 50% = $31,500 increase
Use the following to answer questions 121-122:
Mrs. Rafter has supplied the following data for her small business:
| |Selling price |$10 per unit |
| |Variable expenses |$6 per unit |
| |Rent |$400 per week |
| |Salaries |$600 per week |
| |Other fixed expenses |$200 per week |
121. If 500 units are sold in a week, the net operating income (loss) would be:
A) $1,800
B) $(2,000)
C) $2,000
D) $800
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| |Sales |$5,000 |
| |Variable expenses | 3,000 |
| |Contribution margin |2,000 |
| |Fixed expenses | 1,200 |
| |Net operating income |$ 800 |
122. If sales commissions $(1.00 per unit) are discontinued in favor of a $300 increase in salaries, the break-even point in units would:
A) increase
B) decrease
C) remain the same
D) none of these
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4; 5 Level: Medium
Use the following to answer questions 123-126:
Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following operating results for next year:
| |Sales |$800,000 |
| |Variable expenses | 288,000 |
| |Contribution margin |512,000 |
| |Fixed expenses | 192,000 |
| |Net operating income |$320,000 |
123. What is Rad's margin of safety for next year?
A) $480,000
B) $500,000
C) $512,000
D) $608,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium
Solution:
| | |Total |Percent of Sales |
| |Sales |$800,000 |100.0% |
| |Variable expenses | 288,000 | 36% |
| |Contribution margin and contribution margin ratio |$ 512,000 | 64% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $192,000/0.64 = $300,000
Margin of safety in dollars = Sales − Break-even sales
= $800,000 − $300,000 = $500,000
124. What is Rad's degree of operating leverage for next year?
A) 1.50
B) 1.56
C) 1.60
D) 2.50
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $512,000/$320,000 = 1.60
125. How many shirts would Rad have to sell next year in order to generate $480,000 of net operating income?
A) 38,400
B) 48,000
C) 60,000
D) 42,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Medium
Solution:
Sales price = $800,000 ÷ 32,000 units = $25
Variable expense per unit = $288,000 ÷ 32,000 units = $9
Sales = Variable expenses + Fixed expenses + Target profit
$25Q = $9Q + $192,000 + $480,000
$16Q = $672,000
Q = $672,000 ÷ $16 per unit = 42,000 units
126. Rad is considering increasing its advertising by $48,000 next year. By how much would sales have to increase in order for Rad to still generate a $320,000 net operating income?
A) $48,000
B) $75,000
C) $76,800
D) $120,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard
Solution:
| | |Current |Proposed | |
| |Sales |$800,000 | | |
| |Variable expenses | 288,000 | | |
| |Contribution margin |512,000 |$560,000 |* |
| |Fixed expenses | 192,000 | 240,000 | |
| |Net operating income |$320,000 |$320,000 | |
*Work backwards to obtain the number.
Sales price = $800,000 ÷ 32,000 units = $25
Variable expense per unit = $288,000 ÷ 32,000 units = $9
Contribution margin per unit = $25 − $9 = $16
$560,000 ÷ $16 = 35,000 units
35,000 − 32,000 = 3,000 unit increase
3,000 × $25 = $75,000 increase in sales
Use the following to answer questions 127-130:
Houpe Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$140 |100% |
| |Variable expenses | 42 | 30% |
| |Contribution margin |$ 98 | 70% |
Fixed expenses are $490,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently.
127. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $14,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $700
B) increase of $14,700
C) decrease of $14,000
D) decrease of $700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |6,000 units |6,150 units |
| |Sales (6,000 units × $140, 6,150 units × $140) |$840,000 |$861,000 |
| |Variable expenses (6,000 units × $42, 6,150 units × $42) | 252,000 | 258,300 |
| |Contribution margin |588,000 |602,700 |
| |Fixed expenses | 490,000 | 504,000 |
| |Net operating income |$ 98,000 |$ 98,700 |
Increase in net operating income: $98,700 − $98,000 = $700
128. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable cost by $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $2,100
B) decrease of $27,900
C) increase of $2,100
D) increase of $27,900
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |6,000 units |6,300 units |
| |Sales (6,000 units × $140, 6,300 units × $140) |$840,000 |$882,000 |
| |Variable expenses (6,000 units × $42, 6,300 units × $47) | 252,000 | 296,100 |
| |Contribution margin |588,000 |585,900 |
| |Fixed expenses | 490,000 | 490,000 |
| |Net operating income |$ 98,000 |$ 95,900 |
Decrease in net operating income: $98,000 − $95,900 = $2,100
129. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.
The marketing manager would like to cut the selling price by $7 and increase the advertising budget by $28,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $17,500
B) increase of $17,500
C) decrease of $24,500
D) increase of $38,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| | |6,000 units |6,500 units |
| |Sales (6,000 units × $140, 6,500 units × $133) |$840,000 |$864,500 |
| |Variable expenses (6,000 units × $42, 6,500 units × $42) | 252,000 | 273,000 |
| |Contribution margin |588,000 |591,500 |
| |Fixed expenses | 490,000 | 518,000 |
| |Net operating income |$ 98,000 |$ 73,500 |
Decrease in net operating income: $98,000 − $73,500 = $24,500
130. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $58,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $700
B) increase of $56,900
C) decrease of $115,300
D) increase of $588,700
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| | |6,000 units |6,100 units |
| |Sales (6,000 units × $140, 6,100 units × $140) |$840,000 |$854,000 |
| |Variable expenses (6,000 units × $42, 6,100 units × $53) | 252,000 | 323,300 |
| |Contribution margin |588,000 |530,700 |
| |Fixed expenses | 490,000 | 432,000 |
| |Net operating income |$ 98,000 |$ 98,700 |
Increase in net operating income: $98,700 − $98,000 = $700
Use the following to answer questions 131-134:
Data concerning Lemelin Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$230 |100% |
| |Variable expenses | 115 | 50% |
| |Contribution margin |$115 | 50% |
The company is currently selling 7,000 units per month. Fixed expenses are $581,000 per month. Consider each of the following questions independently.
131. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable cost by $3. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $22,400
B) decrease of $1,400
C) increase of $22,400
D) increase of $1,400
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |7,000 units |7,200 units |
| |Sales (7,000 units × $230, 7,200 units × $230) |$1,610,000 |$1,656,000 |
| |Variable expenses (7,000 units × $115, 7,200 units × $118) | 805,000 | 849,600 |
| |Contribution margin |805,000 |806,400 |
| |Fixed expenses | 581,000 | 581,000 |
| |Net operating income |$ 224,000 |$ 225,400 |
Increase in net operating income: $225,400 − $224,000 = $1,400
132. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $11,000 increase in the monthly advertising budget would result in a 100 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $11,000
B) increase of $11,500
C) decrease of $500
D) increase of $500
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |7,000 units |7,100 units |
| |Sales (7,000 units × $230, 7,100 units × $230) |$1,610,000 |$1,633,000 |
| |Variable expenses (7,000 units × $115, 7,100 units × $115) | 805,000 | 816,500 |
| |Contribution margin |805,000 |816,500 |
| |Fixed expenses | 581,000 | 592,000 |
| |Net operating income |$ 224,000 |$ 224,500 |
Increase in net operating income: $224,500 − $224,000 = $500
133. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $20 per unit. In exchange, the sales staff would accept a decrease in their salaries of $113,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $224,500
B) increase of $107,000
C) increase of $1,500
D) increase of $806,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| | |7,000 units |7,300 units |
| |Sales (7,000 units × $230, 7,300 units × $230) |$1,610,000 |$1,679,000 |
| |Variable expenses (7,000 units × $115, 7,300 units × $135) | 805,000 | 985,500 |
| |Contribution margin |805,000 |693,500 |
| |Fixed expenses | 581,000 | 468,000 |
| |Net operating income |$ 224,000 |$ 225,500 |
Increase in net operating income: $225,500 − $224,000 = $1,500
134. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question.
The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $37,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,600 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $118,200
B) increase of $302,200
C) decrease of $118,200
D) decrease of $7,800
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| | |7,000 units |8,600 units |
| |Sales (7,000 units × $230, 8,600 units × $212) |$1,610,000 |$1,823,200 |
| |Variable expenses (7,000 units × $115, 8,600 units × $115) | 805,000 | 989,000 |
| |Contribution margin |805,000 |834,200 |
| |Fixed expenses | 581,000 | 618,000 |
| |Net operating income |$ 224,000 |$ 216,200 |
Decrease in net operating income: $224,000 − $216,200 = $7,800
Use the following to answer questions 135-138:
Thornbrough Corporation produces and sells a single product with the following characteristics:
| | |Per Unit |Percent of Sales |
| |Selling price |$220 |100% |
| |Variable expenses | 44 | 20% |
| |Contribution margin |$176 | 80% |
The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month. Consider each of the following questions independently.
135. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable cost by $11. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $82,500
B) decrease of $5,500
C) decrease of $82,500
D) increase of $5,500
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |7,000 units |7,500 units |
| |Sales (7,000 units × $220, 7,500 units × $220) |$1,540,000 |$1,650,000 |
| |Variable expenses (7,000 units × $44, 7,500 units × $55) | 308,000 | 412,500 |
| |Contribution margin |1,232,000 |1,237,500 |
| |Fixed expenses | 901,000 | 901,000 |
| |Net operating income |$ 331,000 |$ 336,500 |
Increase in net operating income: $336,500 − $331,000 = $5,500
136. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $28,000 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $28,000
B) increase of $33,440
C) increase of $5,440
D) decrease of $5,440
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
Solution:
| | |7,000 units |7,190 units |
| |Sales (7,000 units × $220, 7,190 units × $220) |$1,540,000 |$1,581,800 |
| |Variable expenses (7,000 units × $44, 7,190 units × $44) | 308,000 | 316,360 |
| |Contribution margin |1,232,000 |1,265,440 |
| |Fixed expenses | 901,000 | 929,000 |
| |Net operating income |$ 331,000 |$ 336,440 |
Increase in net operating income: $336,440 − $331,000 = $5,440
137. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.
The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $53,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,000 units. What should be the overall effect on the company's monthly net operating income of this change?
A) decrease of $105,000
B) increase of $149,000
C) increase of $105,000
D) decrease of $21,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| | |7,000 units |8,000 units |
| |Sales (7,000 units × $220, 8,000 units × $202) |$1,540,000 |$1,616,000 |
| |Variable expenses (7,000 units × $44, 8,000 units × $44) | 308,000 | 352,000 |
| |Contribution margin |1,232,000 |1,264,000 |
| |Fixed expenses | 901,000 | 954,000 |
| |Net operating income |$ 331,000 |$ 310,000 |
Decrease in net operating income: $331,000 − $310,000 = $21,000
138. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question.
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change?
A) increase of $1,269,500
B) increase of $37,500
C) increase of $61,700
D) decrease of $92,500
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium
Solution:
| | |7,000 units |7,300 units |
| |Sales (7,000 units × $220, 7,300 units × $220) |$1,540,000 |$1,606,000 |
| |Variable expenses (7,000 units × $44, 7,300 units × $55) | 308,000 | 401,500 |
| |Contribution margin |1,232,000 |1,204,500 |
| |Fixed expenses | 901,000 | 836,000 |
| |Net operating income |$ 331,000 |$ 368,500 |
Increase in net operating income: $368,500 − $331,000 = $37,500
Use the following to answer questions 139-140:
Tricia Corporation is a single product firm that sells its product for $2.50 per unit. Variable expense per unit at Tricia is $1.00. Tricia expects fixed expenses to total $18,000 for next year.
139. How many units would Tricia have to sell next year in order to break-even?
A) 7,200
B) 12,000
C) 30,000
D) 45,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$2.50Q = $1.00Q + $18,000 + $0
$1.50Q = $18,000
Q = $18,000 ÷ $1.50 per unit = 12,000 units
140. What would Tricia's total sales dollars have to be next year in order to generate $45,000 of net operating income?
A) $30,000
B) $42,000
C) $75,000
D) $105,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Contribution margin = Sales price - Variable expense per unit
Contribution margin = $2.50 - $1.00 = $1.50
CM ratio = $1.50 ÷ $2.50 = 0.60
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($18,000 + $45,000)/0.60 = $105,000
Use the following to answer questions 141-142:
Zanetti Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$110.00 |
| |Variable expense per unit |$34.10 |
| |Fixed expense per month |$132,066 |
141. The break-even in monthly unit sales is closest to:
A) 3,873
B) 1,740
C) 1,201
D) 2,271
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$110.00Q = $34.10Q + $132,066 + $0
$75.90Q = $132,066
Q = $132,066 ÷ $75.90 per unit = 1,740 units
142. The break-even in monthly dollar sales is closest to:
A) $191,400
B) $249,810
C) $426,030
D) $132,110
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
| | |Per Unit |Percent of Sales |
| |Sales |$110.00 |100.0% |
| |Variable expenses | 34.10 | 31.0% |
| |Contribution margin and contribution margin ratio |$ 75.90 | 69.0% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $132,066/0.69 = $191,400
Use the following to answer questions 143-144:
Data concerning Sinisi Corporation's single product appear below:
| |Selling price per unit |$200.00 |
| |Variable expense per unit |$58.00 |
| |Fixed expense per month |$407,540 |
143. The break-even in monthly unit sales is closest to:
A) 2,038
B) 7,027
C) 2,870
D) 3,978
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$200Q = $58Q + $407,540 + $0
$142Q = $407,540
Q = $407,540 ÷ $142 per unit = 2,870 units
144. The break-even in monthly dollar sales is closest to:
A) $407,600
B) $1,405,400
C) $574,000
D) $795,600
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
| | |Per Unit |Percent of Sales |
| |Sales |$200 |100.0% |
| |Variable expenses | 58 | 29.0% |
| |Contribution margin and contribution margin ratio |$142 | 71.0% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $407,540/0.71 = $574,000
Use the following to answer questions 145-146:
Heathman Inc. produces and sells a single product. The selling price of the product is $230.00 per unit and its variable cost is $89.70 per unit. The fixed expense is $308,660 per month.
145. The break-even in monthly unit sales is closest to:
A) 2,328
B) 1,342
C) 3,441
D) 2,200
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Profit
$230.00Q = $89.70Q + $308,660 + $0
$140.30Q = $308,660
Q = $308,660 ÷ $140.30 per unit = 2,200 units
146. The break-even in monthly dollar sales is closest to:
A) $791,436
B) $535,365
C) $506,000
D) $308,660
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
Solution:
| | |Per Unit |Percent of Sales|
| |Sales |$230.00 |100.0% |
| |Variable expenses | 89.70 | 39.0% |
| |Contribution margin and contribution margin ratio |$140.30 | 61.0% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $308,660/0.61 = $506,000
Use the following to answer questions 147-148:
Maziarz Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$220.00 |
| |Variable expense per unit |$72.60 |
| |Fixed expense per month |$548,328 |
147. Assume the company's monthly target profit is $14,000. The unit sales to attain that target profit is closest to:
A) 7,746
B) 2,556
C) 4,706
D) 3,815
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$220.00Q = $72.60Q + $548,328 + $14,000
$147.40Q = $562,328
Q = $562,328 ÷ $147.40 per unit = 3,815 units (rounded)
148. Assume the company's monthly target profit is $16,000. The dollar sales to attain that target profit is closest to:
A) $564,328
B) $1,710,085
C) $1,038,898
D) $842,281
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Contribution margin per unit = Sales price - Variable expense per unit
Contribution margin per unit = $220.00 - $72.60 = $147.40
CM ratio = $147.40 ÷ $220.00 = 0.67
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($548,328 + $16,000)/0.67 = $842,281 (rounded)
Use the following to answer questions 149-150:
Data concerning Strite Corporation's single product appear below:
| |Selling price per unit |$150.00 |
| |Variable expense per unit |$42.00 |
| |Fixed expense per month |$421,200 |
149. Assume the company's monthly target profit is $17,000. The unit sales to attain that target profit is closest to:
A) 5,804
B) 2,921
C) 4,057
D) 10,433
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$150Q = $42Q + $421,200 + $17,000
$108Q = $438,200
Q = $438,200 ÷ $108 per unit = 4,057 units (rounded)
150. Assume the company's monthly target profit is $8,000. The dollar sales to attain that target profit is closest to:
A) $596,111
B) $1,532,857
C) $852,723
D) $429,200
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Contribution margin per unit = Sales price - Variable expense per unit
Contribution margin per unit = $150.00 - $42.00 = $108.00
CM ratio = $108.00 ÷ $150.00 = 0.72
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($421,200 + $8,000)/0.72 = $596,111 (rounded)
Use the following to answer questions 151-152:
Speckman Enterprises, Inc., produces and sells a single product whose selling price is $200.00 per unit and whose variable expense is $68.00 per unit. The company's monthly fixed expense is $514,800.
151. Assume the company's monthly target profit is $11,000. The unit sales to attain that target profit is closest to:
A) 2,629
B) 3,983
C) 4,781
D) 7,732
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Sales = Variable expenses + Fixed expenses + Target profit
$200.00Q = $68.00Q + $514,800 + $11,000
$132.00Q = $525,800
Q = $525,800 ÷ $132 per unit = 3,983 units (rounded)
152. Assume the company's monthly target profit is $12,000. The dollar sales to attain that target profit is closest to:
A) $1,549,412
B) $798,182
C) $526,800
D) $958,131
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
Solution:
Contribution margin per unit = Sales price - Variable expense per unit
Contribution margin per unit = $200.00 - $68.00 = $132.00
CM ratio = $132.00 ÷ $200.00 = 0.66
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($514,800 + $12,000)/0.66 = $798,182 (rounded)
Use the following to answer questions 153-154:
Jerrel Corporation sells a product for $230 per unit. The product's current sales are 24,000 units and its break-even sales are 17,280 units.
153. What is the margin of safety in dollars?
A) $5,520,000
B) $1,545,600
C) $3,974,400
D) $3,680,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $230 per unit × 17,280 units = $3,974,400
Current sales = $230 per unit × 24,000 units = $5,520,000
Margin of safety in dollars = Sales − Break-even sales
= $5,520,000 − $3,974,400 = $1,545,600
154. The margin of safety as a percentage of sales is closest to:
A) 61%
B) 28%
C) 72%
D) 39%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $230 per unit × 17,280 units = $3,974,400
Current sales = $230 per unit × 24,000 units = $5,520,000
Margin of safety in dollars = Sales − Break-even sales
= $5,520,000 − $3,974,400 = $1,545,600
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $1,545,600 ÷ $5,520,000 = 28%
Use the following to answer questions 155-156:
Maruska Corporation has provided the following data concerning its only product:
| |Selling price |$180 per unit |
| |Current sales |29,800 units |
| |Break-even sales |25,032 units |
155. What is the margin of safety in dollars?
A) $4,505,760
B) $858,240
C) $3,576,000
D) $5,364,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $180 per unit × 25,032 = $4,505,760
Current sales = $180 per unit × 29,800 = $5,364,000
Margin of safety in dollars = Sales − Break-even sales
= $5,364,000 − $4,505,760 = $858,240
156. The margin of safety as a percentage of sales is closest to:
A) 19%
B) 16%
C) 84%
D) 81%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
Solution:
Margin of safety in dollars:
Break-even sales = $180 per unit × 25,032 = $4,505,760
Current sales = $180 per unit × 29,800 = $5,364,000
Margin of safety in dollars = Sales − Break-even sales
= $5,364,000 − $4,505,760 = $858,240
Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $858,240 ÷ $5,364,000 = 16%
Use the following to answer questions 157-158:
Bois Corporation has provided its contribution format income statement for January.
| |Sales |$426,400 |
| |Variable expenses | 260,000 |
| |Contribution margin |166,400 |
| |Fixed expenses | 120,900 |
| |Net operating income |$ 45,500 |
157. The degree of operating leverage is closest to:
A) 0.11
B) 9.37
C) 0.27
D) 3.66
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $166,400/$45,500 = 3.66
158. If the company's sales increase by 7%, its net operating income should increase by about:
A) 26%
B) 7%
C) 66%
D) 11%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $166,400/$45,500 = 3.66
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 7% × 3.66 = 26%
Use the following to answer questions 159-160:
The July contribution format income statement of Doxtater Corporation appears below:
| |Sales |$564,400 |
| |Variable expenses | 312,800 |
| |Contribution margin |251,600 |
| |Fixed expenses | 193,800 |
| |Net operating income |$ 57,800 |
159. The degree of operating leverage is closest to:
A) 0.23
B) 0.10
C) 4.35
D) 9.76
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $251,600/$57,800 = 4.35
160. If the company's sales increase by 19%, its net operating income should increase by about:
A) 10%
B) 19%
C) 83%
D) 186%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
Solution:
Degree of operating leverage = Contribution margin/Net operating income
= $251,600/$57,800 = 4.35
Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 19% × 4.35 = 83%
Use the following to answer questions 161-162:
Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60% and 40% of the total sales dollars of Taylor, respectively. The unit variable expense as a percentage of the selling price is 60% for Acdom and 85% for Belnom. Total fixed expenses are $150,000. There are no other costs.
161. What is Taylor's break-even point in sales dollars?
A) $150,000
B) $214,286
C) $300,000
D) $500,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Hard
Solution:
Each product’s contribution margin rate is (1 − variable expense percentage)
Acdom = 1 − 0.6 = 0.4
Belnom = 1 − 0.85 = 0.15
To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars:
(60% × 0.4%) + (40% × 0.15%) =
0.24% + 0.06% = 0.30%
To calculate the break-even point in sales dollars:
Fixed expenses ÷ Weighted average contribution margin ratio
= $150,000 ÷ 0.30 = $500,000
162. Assuming that the total fixed expenses of Taylor increase by 30% and the sales mix remains constant, what amount of sales dollars would be necessary to generate a net operating income of $9,000?
A) $204,000
B) $464,000
C) $659,000
D) $680,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Hard
Solution:
Each product’s contribution margin rate is (1 − variable expense percentage)
Acdom = 1 − 0.6 = 0.4
Belnom = 1 − 0.85 = 0.15
To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars:
(60% × 0.4%) + (40% × 0.15%) = 0.24 + 0.06 = 0.30
New fixed expenses = ($150,000 × 1.30) = $195,000
Sales dollars needed = (Fixed expenses + Target net operating income) ÷ Weighted average contribution margin ratio
= ($195,000 + $9,000) ÷ 0.30 = $680,000
Use the following to answer questions 163-164:
Dietrick Corporation produces and sells two products. Data concerning those products for the most recent month appear below:
| | |Product B32L |Product K84B |
| |Sales |$46,000 |$27,000 |
| |Variable expenses |$13,800 |$14,670 |
Fixed expenses for the entire company were $42,550.
163. The break-even point for the entire company is closest to:
A) $42,550
B) $71,020
C) $69,754
D) $30,450
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
Solution:
| | |Product B32L |Product K84B |Total |
| |Sales |$46,000 |$27,000 |$73,000 |
| |Variable expenses | 13,800 | 14,670 | 28,470 |
| |Contribution margin |$32,200 |$12,330 |44,530 |
| |Fixed expenses | | | 42,550 |
| |Net operating income | | |$ 1,980 |
Overall CM ratio = Total contribution margin/Total sales
= $44,530/$73,000 = 0.61
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $42,550/0.61 = $69,754 (rounded)
164. If the sales mix were to shift toward Product B32L with total sales remaining constant, the overall break-even point for the entire company:
A) could increase or decrease.
B) would decrease.
C) would not change.
D) would increase.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Medium
Use the following to answer questions 165-166:
Ingrum Corporation produces and sells two products. In the most recent month, Product R38T had sales of $20,000 and variable expenses of $7,400. Product X08S had sales of $39,000 and variable expenses of $6,170. And the fixed expenses of the entire company were $41,160.
165. The break-even point for the entire company is closest to:
A) $41,160
B) $17,840
C) $53,455
D) $54,730
Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
Solution:
| | |Product R38T |Product X08S |Total |
| |Sales |$20,000 |$39,000 |$59,000 |
| |Variable expenses | 7,400 | 6,170 | 13,570 |
| |Contribution margin |$12,600 |$32,830 |45,430 |
| |Fixed expenses | | | 41,160 |
| |Net operating income | | |$ 4,270 |
Overall CM ratio = Total contribution margin/Total sales
= $45,430/$59,000 = 0.77
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $41,160/0.77 = $53,455 (rounded)
166. If the sales mix were to shift toward Product R38T with total sales remaining constant, the overall break-even point for the entire company:
A) would not change.
B) would increase.
C) would decrease.
D) could increase or decrease.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Medium
Essay Questions
167. The following is Arkadia Corporation's contribution format income statement for last month:
| |Sales |$1,200,000 |
| |Variable expenses | 800,000 |
| |Contribution margin |400,000 |
| |Fixed expenses | 300,000 |
| |Net operating income |$ 100,000 |
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 operating 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?
Ans:
a. Contribution margin ratio:
CM ratio = Contribution margin ÷ Sales = $400,000 ÷ $1,200,000 = 0.333
b. Break-even units:
Selling price ($1,200,000 ÷ 20,000 units) = $60 per unit
Variable 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 per unit = 15,000 units
c. Increase in net operating 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 |× 100 units |
| |Increase in net operating 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 per unit = 21,250 units
e. Margin of safety in dollars:
Break-even sales = $60 per unit × 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 = Contribution margin ÷ Net operating income
= $400,000 ÷ $100,000 = 4.0
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1; 3; 5; 6; 7; 8 Level: Easy
168. The Garry Corporation's most recent contribution format income statement is shown below:
| | |Total |Per unit |
| |Sales (15,000 units) |$225,000 |$15 |
| |Variable expenses | 135,000 | 9 |
| |Contribution margin | 90,000 |$ 6 |
| |Fixed expenses | 35,000 | |
| |Net operating income |$ 55,000 | |
Required:
Prepare a new contribution format income statement under each of the following conditions (consider each case independently):
a. The sales volume increases by 10% and the price decreases by $0.50 per unit.
b. The selling price decreases $1.00 per unit, fixed expenses increase by $15,000, and the sales volume decreases by 5%.
c. The selling price increases by 25%, variable expense increases by $0.75 per unit, and the sales volume decreases by 15%.
d. The selling price increases by $1.50 per unit, variable cost increases by $1.00 per unit, fixed expenses decrease by $15,000, and sales volume decreases by 12%.
Ans:
|a. | |Total |Per unit |
| |Volume |16,500 units | |
| |Sales |$239,250 |$14.50 |
| |Variable expenses | 148,500 | 9.00 |
| |Contribution margin |90,750 |$ 5.50 |
| |Fixed expenses | 35,000 | |
| |Net operating income |$ 55,750 | |
|b. | |Total |Per unit |
| |Volume |14,250 units | |
| |Sales |$199,500 |$14.00 |
| |Variable expenses | 128,250 | 9.00 |
| |Contribution margin |71,250 |$ 5.00 |
| |Fixed expenses | 50,000 | |
| |Net operating income |$ 21,250 | |
|c. | |Total |Per unit |
| |Volume |12,750 units | |
| |Sales |$239,063 |$18.75 |
| |Variable expenses |124,313 |9.75 |
| |Contribution margin |114,750 |$9.00 |
| |Fixed expenses |35,000 | |
| |Net operating income |$79,750 | |
|d. | |Total |Per unit |
| |Volume |13,200 units | |
| |Sales |$217,800 |$16.50 |
| |Variable expenses | 132,000 | 10.00 |
| |Contribution margin |85,800 |$ 6.50 |
| |Fixed expenses | 20,000 | |
| |Net operating income |$ 65,800 | |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1; 4 Level: Easy
169. McConkey Corporation produces and sells a single product. The company's contribution format income statement for July appears below:
| |Sales (5,500 units) |$357,500 |
| |Variable expenses | 236,500 |
| |Contribution margin |121,000 |
| |Fixed expenses | 102,200 |
| |Net operating income |$ 18,800 |
Required:
Redo the company's contribution format income statement assuming that the company sells 5,800 units.
Ans:
| |Sales (5,800 units) |$377,000 |
| |Variable expenses | 249,400 |
| |Contribution margin |127,600 |
| |Fixed expenses | 102,200 |
| |Net operating income |$ 25,400 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1 Level: Easy
170. Giannini Inc., which produces and sells a single product, has provided the following contribution format income statement for March:
| |Sales (5,900 units) |$477,900 |
| |Variable expenses | 206,500 |
| |Contribution margin |271,400 |
| |Fixed expenses | 190,800 |
| |Net operating income |$ 80,600 |
Required:
Redo the company's contribution format income statement assuming that the company sells 5,500 units.
Ans:
| |Sales (5,500 units) |$445,500 |
| |Variable expenses | 192,500 |
| |Contribution margin |253,000 |
| |Fixed expenses | 190,800 |
| |Net operating income |$ 62,200 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1 Level: Easy
171. Mechem Corporation produces and sells a single product. In April, the company sold 2,100 units. Its total sales were $205,800, its total variable expenses were $107,100, and its total fixed expenses were $82,400.
Required:
a. Construct the company's contribution format income statement for April in good form.
b. Redo the company's contribution format income statement assuming that the company sells 2,200 units.
Ans:
|a. |Sales (2,100 units) |$205,800 |
| |Variable expenses | 107,100 |
| |Contribution margin |98,700 |
| |Fixed expenses | 82,400 |
| |Net operating income |$ 16,300 |
|b. |Sales (2,200 units) |$215,600 |
| |Variable expenses | 112,200 |
| |Contribution margin |103,400 |
| |Fixed expenses | 82,400 |
| |Net operating income |$ 21,000 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1 Level: Easy
172. In July, Meers Corporation sold 3,700 units of its only product. Its total sales were $107,300, its total variable expenses were $66,600, and its total fixed expenses were $34,800.
Required:
a. Construct the company's contribution format income statement for July in good form.
b. Redo the company's contribution format income statement assuming that the company sells 3,400 units.
Ans:
|a. |Sales (3,700 units) |$107,300 |
| |Variable expenses | 66,600 |
| |Contribution margin |40,700 |
| |Fixed expenses | 34,800 |
| |Net operating income |$ 5,900 |
|b. |Sales (3,400 units) |$98,600 |
| |Variable expenses | 61,200 |
| |Contribution margin |37,400 |
| |Fixed expenses | 34,800 |
| |Net operating income |$ 2,600 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement LO: 1 Level: Easy
173. Spencer Company's most recent monthly contribution format income statement is given below:
| |Sales |$60,000 |
| |Variable expenses | 45,000 |
| |Contribution margin |15,000 |
| |Fixed expenses | 18,000 |
| |Net operating 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 operating income? (Prepare a new income statement.)
Ans:
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 × 75% = $54,000.
c. 25% See part (a) above.
|d. |Sales ($60,000 × 1.1) |$66,000 |
| |Variable expenses ($45,000 × 1.1) |49,500 |
| |Contribution margin |16,500 |
| |Fixed expenses ($18,000 − $2,000) |16,000 |
| |Net operating income |$500 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3; 4; 5 Level: Medium
174. Sarratt Corporation's contribution margin ratio is 62% and its fixed monthly expenses are $91,000. Assume that the company's sales for May are expected to be $193,000.
Required:
Estimate the company's net operating income for May. Assume that the fixed monthly expenses do not change. Show your work!
Ans:
| |Sales |$193,000 |
| |Contribution margin ratio |62% |
| |Contribution margin (sales × contribution margin ratio) |$119,660 |
| |Fixed expenses | 91,000 |
| |Net operating income |$ 28,660 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
175. The management of Merklin Corporation expects sales in May to be $105,000. The company's contribution margin ratio is 70% and its fixed monthly expenses are $48,000.
Required:
Estimate the company's net operating income for May. Assume that the fixed monthly expenses do not change. Show your work!
Ans:
| |Sales |$105,000 |
| |Contribution margin ratio |70% |
| |Contribution margin (sales × contribution margin ratio) |$73,500 |
| |Fixed expenses | 48,000 |
| |Net operating income |$25,500 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
176. Huitron Inc. expects its sales in September to be $143,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $62,000.
Required:
Estimate the company's net operating income for September. Assume that the fixed monthly expenses do not change. Show your work!
Ans:
| |Sales |$143,000 |
| |Contribution margin ratio |65% |
| |Contribution margin (sales × contribution margin ratio) |$92,950 |
| |Fixed expenses |62,000 |
| |Net operating income |$30,950 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Easy
177. 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 |$540,000 |
| |Variable expenses | 360,000 |
| |Contribution margin |180,000 |
| |Fixed expenses | 120,000 |
| |Net operating income |$ 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 operating income of $90,000.
4. The margin of safety in dollars.
b. An important part of processing is performed by a machine that 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 operating income of $90,000.
Ans:
|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 per unit = 80,000 units
2. 80,000 units × $4.50 per unit = $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 per unit = 140,000 units
4. Margin of safety = Sales − Sales at breakeven = $540,000 − $360,000
= $180,000
b.
|1. | |As Is | |Proposed |
| | |Per Unit |Amount | |Per Unit |Amount |
| |Sales |$540,000 |$4.50 | |$540,000 |$4.50 |
| |Variable expense | 360,000 | 3.00 | | 372,000 | 3.10 |
| |Contribution margin |180,000 |1.50 | |168,000 |1.40 |
| |Fixed expense | 120,000 | 1.00 | | 100,000 | 0.83 |
| |Net operating income |$ 60,000 |$0.50 | |$ 68,000 |$0.57 |
Since net operating 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 per unit = 71,429 units
3. 71,429 units × $4.50 unit = $321,429
4. Sales = Variable expenses + Fixed expenses + Target profit
$4.50Q = $3.10Q + $100,000 + $90,000
$1.40Q = $190,000
Q = $190,000 ÷ $1.40 per unit = 135,714 units
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4; 5; 6 Level: Medium
178. Shelhorse Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$140 |100% |
| |Variable expenses | 56 | 40% |
| |Contribution margin |$ 84 | 60% |
Fixed expenses are $275,000 per month. The company is currently selling 4,000 units per month.
Required:
The marketing manager believes that a $13,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Ans:
| |Increase in total contribution margin ($84 per unit × 150 units) |$12,600 |
| |Less incremental fixed expenses | 13,000 |
| |Change in net operating income |($ 400) |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
179. Data concerning Cavaluzzi Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$110 |100% |
| |Variable expenses | 44 | 40% |
| |Contribution margin |$ 66 | 60% |
Fixed expenses are $440,000 per month. The company is currently selling 8,000 units per month.
Required:
The marketing manager believes that a $8,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Ans:
| |Increase in total contribution margin ($66 per unit × 150 units) |$9,900 |
| |Less incremental fixed expenses | 8,000 |
| |Change in net operating income |$1,900 |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
180. Naumann Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$100 |100% |
| |Variable expenses | 30 | 30% |
| |Contribution margin |$ 70 | 70% |
Fixed expenses are $234,000 per month. The company is currently selling 4,000 units per month.
Required:
Management is considering using a new component that would increase the unit variable cost by $7. Since the new component would improve the company’s product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company’s monthly net operating income of this change if fixed expenses are unaffected? Show your work!
Ans:
| |New variable cost per unit ($30 + $7) |$37 |
| |New contribution margin per unit ($100 − $37) |$63 |
| |New unit monthly sales (4,000 units + 500 units) |4,500 |
| |New total contribution margin: 4,500 units × $63 per unit |$283,500 |
| |Current total contribution margin: 4,000 units × $70 per unit | 280,000 |
| |Change in total contribution margin and in net operating income |$ 3,500 |
Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
181. Data concerning Milian Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$130 |100% |
| |Variable expenses | 39 | 30% |
| |Contribution margin |$ 91 | 70% |
Fixed expenses are $66,000 per month. The company is currently selling 1,000 units per month.
Required:
Management is considering using a new component that would increase the unit variable cost by $15. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!
Ans:
| |New variable cost per unit ($39 + $15) |$54 |
| |New contribution margin per unit ($130 − $54) |$76 |
| |New unit monthly sales (1,000 units + 200 units) |1,200 |
| |New total contribution margin: 1,200 units × $76 per unit |$91,200 |
| |Current total contribution margin: 1,000 units × $91 per unit | 91,000 |
| |Change in total contribution margin and in net operating income |$ 200 |
Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
182. Bethard Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$120 |100% |
| |Variable expenses | 24 | 20% |
| |Contribution margin |$ 96 | 80% |
Fixed expenses are $354,000 per month. The company is currently selling 5,000 units per month.
Required:
The marketing manager would like to cut the selling price by $8 and increase the advertising budget by $23,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Ans:
| |New selling price ($120 − $8) |$112 |
| |New contribution margin ($112 − $24) |$88 |
| |New unit monthly sales (5,000 units + 600 units) |5,600 |
| |New total contribution margin: 5,600 units × $88 per unit |$492,800 |
| |Present total contribution margin: 5,000 units × $96 per unit | 480,000 |
| |Change in total contribution margin |12,800 |
| |Less increase in advertising budget | 23,000 |
| |Change in net operating income |($10,200) |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
183. Data concerning Neuner Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$220 |100% |
| |Variable expenses | 88 | 40% |
| |Contribution margin |$132 | 60% |
Fixed expenses are $425,000 per month. The company is currently selling 4,000 units per month.
Required:
The marketing manager would like to cut the selling price by $11 and increase the advertising budget by $23,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 400 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Ans:
| |New selling price ($220 − $11) |$209 |
| |New contribution margin ($209 − $88) |$121 |
| |New unit monthly sales (4,000 units + 400 units) |4,400 |
| |New total contribution margin: 4,400 units × $121 per unit |$532,400 |
| |Present total contribution margin: 4,000 units × $132 per unit | 528,000 |
| |Change in total contribution margin |4,400 |
| |Less increase in advertising budget | 23,700 |
| |Change in net operating income |($19,300) |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
184. Hamiel Corporation produces and sells a single product. Data concerning that product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$240 |100% |
| |Variable expenses | 168 | 70% |
| |Contribution margin |$72 | 30% |
Fixed expenses are $301,000 per month. The company is currently selling 5,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $68,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Ans:
| |New contribution margin ($72 − $16) |$56 |
| |New unit monthly sales (5,000 units + 200 units) |5,200 |
| |New total contribution margin: 5,200 units × $56 per unit |$291,200 |
| |Present total contribution margin: 5,000 units × $72 per unit | 360,000 |
| |Change in total contribution margin |(68,800) |
| |Plus savings in salespersons’ salaries | 68,000 |
| |Change in net operating income |($ 800) |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
185. Data concerning Wislocki Corporation's single product appear below:
| | |Per Unit |Percent of Sales |
| |Selling price |$130 |100% |
| |Variable expenses | 26 | 20% |
| |Contribution margin |$104 | 80% |
Fixed expenses are $466,000 per month. The company is currently selling 6,000 units per month.
Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work!
Ans:
| |New contribution margin ($104 − $11) |$93 |
| |New unit monthly sales (6,000 units + 100 units) |6,100 |
| |New total contribution margin: 6,100 units × $93 per unit |$567,300 |
| |Present total contribution margin: 6,000 units × $104 per unit | 624,000 |
| |Change in total contribution margin |(56,700) |
| |Plus savings in salespersons’ salaries | 55,000 |
| |Change in net operating income |($ 1,700) |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy
186. Merlin Enterprises manufactures a cellular telephone. The company's partial contribution format income statement for the most recent year is below.
| | |Total |Per Unit |Ratio |
| |Sales |$300,000 |$60 | |
| |Variable expenses | | |55% |
| |Contribution margin | | | |
| |Fixed expenses |108,000 | | |
| |Net operating income | | | |
Required:
a. Complete the contribution income statement above.
b. Determine the breakeven sales and units using either the equation or the contribution approach.
c. Determine the sales necessary to earn a profit of $54,000.
d. Determine the margin of safety percentage for the year above.
Ans:
a. Variable expenses = 0.55 × $300,000 = $165,000
Variable expenses per unit = 0.55 × $60 = $33
| | |Total |Per Unit |Ratio |
| |Sales |$300,000 |$60 |100% |
| |Variable expenses | 165,000 |33 | 55% |
| |Contribution margin |135,000 |$27 | 45% |
| |Fixed expenses | 108,000 | | |
| |Net operating income |$ 27,000 | | |
b. Break-even in unit sales = $108,000/$27 per unit = 4,000 units
Break-even in dollar sales = $108,000/0.45 = $240,000
c. Dollar sales to attain target profit = ($108,000 + $54,000)/0.45 = $360,000
d. Margin of safety = $300,000 − $240,000 = $60,000
Margin of safety percentage = $60,000/$300,000 = 20%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5; 6; 7 Level: Easy
187. Frisch Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$170.00 |
| |Variable expense per unit |$83.30 |
| |Fixed expense per month |$138,720 |
Required:
Determine the monthly break-even in either unit or total dollar sales. Show your work!
Ans:
| |Per Unit |Percent of |
| | |Sales |
|Selling price per unit |$170.00 |100% |
|Variable expense per unit | 83.30 | 49% |
|Contribution margin per unit and contribution margin ratio |$ 86.70 | 51% |
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $138,720/$86.70 = 1,600
Break-even in total sales dollars = Fixed expenses/CM ratio
= $138,720/0.51 = $272,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
188. Hamernik, Inc., produces and sells a single product whose selling price is $240.00 per unit and whose variable expense is $72.00 per unit. The company's fixed expense is $372,960 per month.
Required:
Determine the monthly break-even in either unit or total dollar sales. Show your work!
Ans:
| |Per Unit |Percent of |
| | |Sales |
|Selling price per unit |$240.00 |100% |
|Variable expense per unit | 72.00 | 30% |
|Contribution margin per unit and contribution margin ratio |$168.00 | 70% |
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $372,960/$168 = 2,220
Break-even in total sales dollars = Fixed expenses/CM ratio
= $372,960/0.70 = $532,800
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
189. Yamakawa Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$200.00 |
| |Variable expense per unit |$64.00 |
| |Fixed expense per month |$670,480 |
Required:
Determine the monthly break-even in unit sales. Show your work!
Ans:
| |Selling price per unit |$200.00 |
| |Variable expense per unit | 64.00 |
| |Contribution margin per unit |$136.00 |
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $670,480/$136 = 4,930
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
190. Liz, Inc., produces and sells a single product. The product sells for $130.00 per unit and its variable expense is $48.10 per unit. The company's monthly fixed expense is $223,587.
Required:
Determine the monthly break-even in unit sales. Show your work!
Ans:
| |Selling price per unit |$130.00 |
| |Variable expense per unit | 48.10 |
| |Contribution margin per unit |$ 81.90 |
Break-even in unit sales = Fixed expenses/Unit contribution margin
= $223,587/$81.90 = 2,730
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
191. Cleghorn Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$160.00 |
| |Variable expense per unit |$70.40 |
| |Fixed expense per month |$153,216 |
Required:
Determine the monthly break-even in total dollar sales. Show your work!
Ans:
| |Per Unit |Percent of Sales |
|Selling price per unit |$160.00 |100% |
|Variable expense per unit | 70.40 | 44% |
|Contribution margin per unit and contribution margin ratio |$ 89.60 | 56% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $153,216/0.56 = $273,600
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
192. Malensek International, Inc., produces and sells a single product. The product sells for $240.00 per unit and its variable expense is $55.20 per unit. The company's monthly fixed expense is $249,480.
Required:
Determine the monthly break-even in total dollar sales. Show your work!
Ans:
| |Per Unit |Percent of Sales |
|Selling price per unit |$240.00 |100% |
|Variable expense per unit | 55.20 | 23% |
|Contribution margin per unit and contribution margin ratio |$184.80 |77% |
Break-even in total sales dollars = Fixed expenses/CM ratio
= $249,480/0.77 = $324,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy
193. Brihon Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$230.00 |
| |Variable expense per unit |$103.50 |
| |Fixed expense per month |$518,650 |
Required:
a. Assume the company's monthly target profit is $12,650. Determine the unit sales to attain that target profit. Show your work!
b. Assume the company's monthly target profit is $63,250. Determine the dollar sales to attain that target profit. Show your work!
Ans:
| | |Per Unit |Percent of Sales |
| |Selling price per unit |$230.00 |100% |
| |Variable expense per unit | 103.50 | 45% |
| |Contribution margin per unit and CM ratio |$126.50 | 55% |
a. Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($518,650 + $12,650)/$126.50 = 4,200
b. Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($518,650 + $63,250)/0.55 = $1,058,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
194. Rachal Corporation produces and sells a single product whose selling price is $150.00 per unit and whose variable expense is $57.00 per unit. The company's monthly fixed expense is $381,300.
Required:
a. Assume the company's monthly target profit is $9,300. Determine the unit sales to attain that target profit. Show your work!
b. Assume the company's monthly target profit is $18,600. Determine the dollar sales to attain that target profit. Show your work!
Ans:
| | |Per Unit |Percent of Sales |
| |Selling price per unit |$150.00 |100% |
| |Variable expense per unit | 57.00 | 38% |
| |Contribution margin per unit and CM ratio |$ 93.00 | 62% |
a. Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($381,300 + $9,300)/$93.00 = 4,200
b. Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($381,300 + $18,600)/0.62 = $645,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
195. Hawver Corporation produces and sells a single product. Data concerning that product appear below:
| |Selling price per unit |$180.00 |
| |Variable expense per unit |$81.00 |
| |Fixed expense per month |$594,000 |
Required:
Assume the company's monthly target profit is $19,800. Determine the unit sales to attain that target profit. Show your work!
Ans:
| |Selling price per unit |$180.00 |
| |Variable expense per unit | 81.00 |
| |Contribution margin per unit |$ 99.00 |
Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($594,000 + $19,800)/$99.00 = 6,200
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
196. The selling price of Old Corporation's only product is $180.00 per unit and its variable expense is $37.80 per unit. The company's monthly fixed expense is $483,480.
Required:
Assume the company's monthly target profit is $56,880. Determine the unit sales to attain that target profit. Show your work!
Ans:
| |Selling price per unit |$180.00 |
| |Variable expense per unit | 37.80 |
| |Contribution margin per unit |$142.20 |
Unit sales to attain target profit
= (Fixed expenses + Target profit)/Unit contribution margin
= ($483,480 + $56,880)/$142.20 = 3,800
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
197. Bussy Corporation produces and sells a single product whose contribution margin ratio is 54%. The company's monthly fixed expense is $561,600 and the company's monthly target profit is $34,560.
Required:
Determine the dollar sales to attain the company's target profit. Show your work!
Ans:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($561,600 + $34,560)/0.54 = $1,104,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
198. The contribution margin ratio of Kuck Corporation's only product is 75%. The company's monthly fixed expense is $585,000 and the company's monthly target profit is $11,250.
Required:
Determine the dollar sales to attain the company's target profit. Show your work!
Ans:
Total sales dollars to attain target profit
= (Fixed expenses + Target profit)/CM ratio
= ($585,000 + $11,250)/0.75 = $795,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy
199. Knezevich Corporation makes a product that sells for $230 per unit. The product's current sales are 36,900 units and its break-even sales are 32,103 units.
Required:
Compute the margin of safety in both dollars and as a percentage of sales.
Ans:
| |Sales (at the current volume of 36,900 units) (a) |$8,487,000 |
| |Break-even sales (at 32,103 units) | 7,383,690 |
| |Margin of safety (in dollars) (b) |$1,103,310 |
| |Margin of safety as a percentage of sales, (b) ÷ (a) |13% |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
200. Dickus Corporation's only product sells for $100 per unit. Its current sales are 35,600 units and its break-even sales are 29,192 units.
Required:
Compute the margin of safety in both dollars and as a percentage of sales.
Ans:
| |Sales (at the current volume of 35,600 units) (a) |$3,560,000 |
| |Break-even sales (at 29,192 units) | 2,919,200 |
| |Margin of safety (in dollars) (b) |$ 640,800 |
| |Margin of safety as a percentage of sales, (b) ÷ (a) |18% |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
201. Haslem Inc. has provided the following data concerning its only product:
| |Selling price |$100 per unit |
| |Current sales |37,300 units |
| |Break-even sales |26,483 units |
Required:
Compute the margin of safety in both dollars and as a percentage of sales.
Ans:
| |Sales (at the current volume of 37,300 units) (a) |$3,730,000 |
| |Break-even sales (at 26,483 units) |2,648,300 |
| |Margin of safety (in dollars) (b) |$1,081,700 |
| |Margin of safety as a percentage of sales, (b) ÷ (a) |29% |
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy
202. Mcquage Corporation has provided its contribution format income statement for July.
| |Sales |$558,000 |
| |Variable expenses | 306,900 |
| |Contribution margin |251,100 |
| |Fixed expenses | 209,800 |
| |Net operating income |$ 41,300 |
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 19% increase in sales.
Ans:
a. Degree of operating leverage = Contribution margin/Net operating income
= $251,100/$41,300 = 6.08
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 19% × 6.08 = 115.52%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
203. Lubke Corporation's contribution format income statement for the most recent month follows:
| |Sales |$506,000 |
| |Variable expenses | 236,500 |
| |Contribution margin |269,500 |
| |Fixed expenses | 241,700 |
| |Net operating income |$ 27,800 |
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 3% increase in sales.
Ans:
a. Degree of operating leverage = Contribution margin/Net operating income
= $269,500/$27,800 = 9.69
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 3% × 9.69 = 29.07%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
204. In the most recent month, Sardella Corporation's total contribution margin was $46,200 and its net operating income $13,200.
Required:
a. Compute the degree of operating leverage to two decimal places.
b. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 10% increase in sales.
Ans:
a. Degree of operating leverage = Contribution margin/Net operating income
= $46,200/$13,200 = 3.50
b. Percent increase in net operating income
= Percent increase in sales × Degree of operating leverage
= 10% × 3.50 = 35.00%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 8 Level: Easy
205. Brancati Inc. produces and sells two products. Data concerning those products for the most recent month appear below:
| | |Product W07C |Product B29Z |
| |Sales |$25,000 |$27,000 |
| |Variable expenses |$7,000 |$8,600 |
Fixed expenses for the entire company were $32,860.
Required:
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product W07C with no change in total sales, what will happen to the break-even point for the company? Explain.
Ans:
|a. | |Product W07C |Product B29Z |Total |
| |Sales |$25,000 |$27,000 |$52,000 |
| |Variable expenses | 7,000 | 8,600 | 15,600 |
| |Contribution margin |$18,000 |$18,400 |36,400 |
| |Fixed expenses | | | 32,860 |
| |Net operating income | | |$ 3,540 |
Overall CM ratio = Total contribution margin/Total sales
= $36,400/$52,000 = 0.70
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $32,860/0.70 = $46,943
|b. | |Product W07C |Product B29Z |
| |Sales (a) |$25,000 |$27,000 |
| |Contribution margin (b) |$18,000 |$18,400 |
| |CM ratio (b)÷(a) |0.720 |0.681 |
Since Product W07C’s CM ratio is greater than Product B29Z’s, a shift in the sales mix toward Product W07C will result in a decrease in the company’s overall break-even point.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
206. Veren Inc. produces and sells two products. During the most recent month, Product F73A's sales were $27,000 and its variable expenses were $9,450. Product L75P's sales were $14,000 and its variable expenses were $5,310. The company's fixed expenses were $21,060.
Required:
a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product F73A with no change in total sales, what will happen to the break-even point for the company? Explain.
Ans:
|a. | |Product F73A |Product L75P |Total |
| |Sales |$27,000 |$14,000 |$41,000 |
| |Variable expenses | 9,450 | 5,310 | 14,760 |
| |Contribution margin |$17,550 |$ 8,690 |26,240 |
| |Fixed expenses | | | 21,060 |
| |Net operating income | | |$ 5,180 |
Overall CM ratio = Total contribution margin/Total sales
= $26,240/$41,000 = 0.64
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $21,060/0.64 = $32,906
|b. | |Product F73A |Product L75P |
| |Sales (a) |$27,000 |$14,000 |
| |Contribution margin (b) |$17,550 |$8,690 |
| |CM ratio (b)÷(a) |0.650 |0.621 |
Since Product F73A’s CM ratio is greater than Product L75P’s, a shift in the sales mix toward Product F73A will result in a decrease in the company’s overall break-even point.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 9 Level: Easy
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