Deck 18: Cost-Volume-Profit Relationships

Question 1

"Break-even" is the point at which total sales equals total fixed costs.

Answer 1

False

Question 2

"Break-even" is the point at which total sales equals total variable costs.

Answer 2

False

Question 3

"Break-even" is the point at which total sales equals total costs.

Answer 3

True

Question 4

Contribution margin ratio = Contribution Margin / Sales

Question 5

A company's "margin of safety" is the difference between a company's current sales and its break-even point in sales.

Question 6

Oches Company has analyzed its overhead costs and derived a general formula for their behavior: $50,000 + $18 per direct labor hour employed. The company expects to use 40,000 direct labor hours during the next accounting period.
What overhead rate per direct labor hour should be applied to jobs worked during the period?

Question 7

Chad Company charges a selling price of $25 per unit for its single product, incurs variable costs of $17 per unit, and total fixed costs of $140,000.
Required:
a. What unit sales volume is necessary to earn a net income before tax of $32,000?
b. What sales volume is necessary to earn a net income after tax of $36,000, assuming a tax rate of 25%?

Question 8

Stewart Company charges a selling price of $50 per unit for its single product, incurs variable costs of $30 per unit, and total fixed costs of $400,000.
Required:
a. What unit sales volume is necessary to earn a net income before tax of $65,000?
b. What sales volume is necessary to earn a net income after tax of $72,000, assuming a tax rate of 25%?

Question 9

What is the "break-even" point?

Question 10

What is a company's margin of safety?

Question 11

What is operating leverage, and how is it calculated?

Question 12

SwiftyShop is a gas station that sells 3 types of fuel: Regular Unleaded, Diesel, and Ethanol. The sales mix among the 3 fuel types remains relatively stable. SwiftyShop recorded the following data for the most recent month:
SwiftyShop's fixed expenses are $15,600 / month. SwiftyShop's tax rate is 20%.
If SwiftyShop wants to generate after-tax net income of $14,000 next month, how many gallons of Ethanol will it need to sell? (Round unit contribution margins to the nearest cent. For both intermediate and final calculations, round the number of units up to the next full unit).

Question 13

Harvest Growers, Inc. owns 4 types of apple orchards: Granny, Red Delicious, Fiji, and Golden Delicious. Some orchards are larger than others and therefore produce more apples, but proportions of total apple production tends to remain relatively constant. Harvest Growers recorded the following data from this month's sales:
Each bushel incurs the same variable costs, regardless of apple type. This month's total costs were $11,000. Total production last month was 250 bushels, and total costs were $10,000. The applicable tax rate is 25%.
If Harvest Growers desires that after-tax net income increase by 15% next month, how many bushels of Fuji apples does Harvest Growers need to sell? (Use the high-low method to calculate the cost equation. For intermediate and final calculations, round per-unit amounts to the nearest cent and the number of units up to the next whole unit).