ManagerialAccounting-OP_x3x7rSO-37

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23. 3.5 If a firm has a contribution margin of $78,090 and a net income of $13,700 for the current month,
what is their degree of operating leverage?
A. 0.21
B. 1.21
C. 2.4
D. 5.7
Questions
1. 3.1 Define and explain contribution margin on a per unit basis.
2. 3.1 Define and explain contribution margin ratio.
3. 3.1 Explain how a contribution margin income statement can be used to determine profitability.
4. 3.2 In a cost-volume-profit analysis, explain what happens at the break-even point and why companies
do not want to remain at the break-even point.
5. 3.2 What is meant by a product’s contribution margin ratio and how is this ratio useful in planning
business operations?
6. 3.3 Explain how a manager can use CVP analysis to make decisions regarding changes in operations or
pricing structure.
7. 3.3 After conducting a CVP analysis, most businesses will then recreate a revised or projected income
statement incorporating the results of the CVP analysis. What is the benefit of taking this extra step in the
analysis?
8. 3.3 Explain how it is possible for costs to change without changing the break-even point.
9. 3.4 Explain what a sales mix is and how changes in the sales mix affect the break-even point.
10. 3.4 Explain how break-even analysis for a multi-product company differs from a company selling a
single product.
11. 3.5 Explain margin of safety and why it is an important measurement for managers.
12. 3.5 Define operating leverage and explain its importance to a company and how it relates to risk.
Exercise Set A
EA1. 3.1 Calculate the per-unit contribution margin of a product that has a sale price of $200 if the variable
costs per unit are $65.
EA2. 3.1 Calculate the per-unit contribution margin of a product that has a sale price of $400 if the variable
costs per unit are $165.
EA3. 3.1 A product has a sales price of $150 and a per-unit contribution margin of $50. What is the
contribution margin ratio?
Chapter 3 Cost-Volume-Profit Analysis 171
EA4. 3.1 A product has a sales price of $250 and a per-unit contribution margin of $75. What is the
contribution margin ratio?
EA5. 3.2 Maple Enterprises sells a single product with a selling price of $75 and variable costs per unit of
$30. The company’s monthly fixed expenses are $22,500.
A. What is the company’s break-even point in units?
B. What is the company’s break-even point in dollars?
C. Construct a contribution margin income statement for the month of September when they will sell 900
units.
D. How many units will Maple need to sell in order to reach a target profit of $45,000?
E. What dollar sales will Maple need in order to reach a target profit of $45,000?
F. Construct a contribution margin income statement for Maple that reflects $150,000 in sales volume.
EA6. 3.2 Marlin Motors sells a single product with a selling price of $400 with variable costs per unit of $160.
The company’s monthly fixed expenses are $36,000.
A. What is the company’s break-even point in units?
B. What is the company’s break-even point in dollars?
C. Prepare a contribution margin income statement for the month of November when they will sell 130
units.
D. How many units will Marlin need to sell in order to realize a target profit of $48,000?
E. What dollar sales will Marlin need to generate in order to realize a target profit of $48,000?
F. Construct a contribution margin income statement for the month of February that reflects $200,000 in
sales revenue for Marlin Motors.
EA7. 3.3 Flanders Manufacturing is considering purchasing a new machine that will reduce variable costs
per part produced by $0.15. The machine will increase fixed costs by $18,250 per year. The information they
will use to consider these changes is shown here.
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EA8. 3.3 Marchete Company produces a single product. They have recently received the results of a market
survey that indicates that they can increase the retail price of their product by 8% without losing customers or
market share. All other costs will remain unchanged. Their most recent CVP analysis is shown. If they enact the
8% price increase, what will be their new break-even point in units and dollars?
EA9. 3.3 Brahma Industries sells vinyl replacement windows to home improvement retailers nationwide.
The national sales manager believes that if they invest an additional $25,000 in advertising, they would
increase sales volume by 10,000 units. Prepare a forecasted contribution margin income statement for Brahma
if they incur the additional advertising costs, using this information:
EA10. 3.4 Salvador Manufacturing builds and sells snowboards, skis and poles. The sales price and variable
cost for each are shown:
Their sales mix is reflected in the ratio 7:3:2. What is the overall unit contribution margin for Salvador with
their current product mix?
EA11. 3.4 Salvador Manufacturing builds and sells snowboards, skis and poles. The sales price and variable
cost for each follows:
Their sales mix is reflected in the ratio 7:3:2. If annual fixed costs shared by the three products are $196,200,
how many units of each product will need to be sold in order for Salvador to break even?
Chapter 3 Cost-Volume-Profit Analysis 173
EA12. 3.4 Use the information from the previous exercises involving Salvador Manufacturing to determine
their break-even point in sales dollars.
EA13. 3.5 Company A has current sales of $10,000,000 and a 45% contribution margin. Its fixed costs are
$3,000,000. Company B is a service firm with current service revenue of $5,000,000 and a 20% contribution
margin. Company B’s fixed costs are $500,000. Compute the degree of operating leverage for both companies.
Which company will benefit most from a 25% increase in sales? Explain why.
EA14. 3.5 Marshall & Company produces a single product and recently calculated their break-even point as
shown.
What would Marshall’s target margin of safety be in units and dollars if they required a $14,000 margin of
safety?
B Exercise Set B
EB1. 3.1 Calculate the per-unit contribution margin of a product that has a sale price of $150 if the variable
costs per unit are $40.
EB2. 3.1 Calculate the per-unit contribution margin of a product that has a sale price of $350 if the variable
costs per unit are $95.
EB3. 3.1 A product has a sales price of $175 and a per-unit contribution margin of $75. What is the
contribution margin ratio?
EB4. 3.1 A product has a sales price of $90 and a per-unit contribution margin of $30. What is the
contribution margin ratio?
EB5. 3.2 Cadre, Inc., sells a single product with a selling price of $120 and variable costs per unit of $90. The
company’s monthly fixed expenses are $180,000.
A. What is the company’s break-even point in units?
B. What is the company’s break-even point in dollars?
C. Prepare a contribution margin income statement for the month of October when they will sell 10,000
units.
D. How many units will Cadre need to sell in order to realize a target profit of $300,000?
E. What dollar sales will Cadre need to generate in order to realize a target profit of $300,000?
F. Construct a contribution margin income statement for the month of August that reflects $2,400,000 in
sales revenue for Cadre, Inc.
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EB6. 3.2 Kerr Manufacturing sells a single product with a selling price of $600 with variable costs per unit of
$360. The company’s monthly fixed expenses are $72,000.
A. What is the company’s break-even point in units?
B. What is the company’s break-even point in dollars?
C. Prepare a contribution margin income statement for the month of January when they will sell 500 units.
D. How many units will Kerr need to sell in order to realize a target profit of $120,000?
E. What dollar sales will Kerr need to generate in order to realize a target profit of $120,000?
F.Construct a contribution margin income statement for the month of June that reflects $600,000 in sales
revenue for Kerr Manufacturing.
EB7. 3.2 Delta Co. sells a product for $150 per unit. The variable cost per unit is $90 and fixed costs are
$15,250. Delta Co.’s tax rate is 36% and the company wants to earn $44,000 after taxes.
A. What would be Delta’s desired pre-tax income?
B. What would be break-even point in units to reach the income goal of $44,000 after taxes?
C. What would be break-even point in sales dollars to reach the income goal of $44,000 after taxes?
D. Create a contribution margin income statement to show that the break-even point calculated in B,
generates the desired after-tax income.
EB8. 3.3 Shonda & Shonda is a company that does land surveys and engineering consulting. They have an
opportunity to purchase new computer equipment that will allow them to render their drawings and surveys
much more quickly. The new equipment will cost them an additional $1,200 per month, but they will be able to
increase their sales by 10% per year. Their current annual cost and break-even figures are as follows:
A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer?
B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer?
C. What would be your recommendation to Shonda & Shonda regarding this purchase?
Chapter 3 Cost-Volume-Profit Analysis 175
	Chapter 3. Cost-Volume-Profit Analysis
	Questions
	Exercise Set A
	Exercise Set B