Question 1

Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the company's margin of safety?

Accepted Answer

The margin of safety is the difference between actual (or expected) sales and the break-even sales. First, calculate the break-even point in dollars: Fixed Costs / (Selling Price per Unit - Variable Cost per Unit) = $356,860 / ($275 - $135) = $356,860 / $140 = 2,549 units (break-even point). Then, convert this to dollars: 2,549 units * $275 = $700,975 (break-even sales in dollars). Finally, subtract the break-even sales from the expected sales: $825,000 - $700,975 = $124,025.

Question 2

Holding all other factors constant, the break-even point will decline if

Accepted Answer

The break-even point is the level of sales at which a company neither earns a profit nor incurs a loss. It can be calculated using the following formula: Break-even point = Fixed costs/Contribution margin per unit. Holding all other factors constant, if the contribution margin per unit increases, the break-even point will decline because the company will need to sell fewer units to cover its fixed costs and start earning a profit. Therefore, option B is the correct answer.

Question 3

Oak Hill Furniture has a contribution margin ratio of 20%, and a contribution margin per unit of $12. If fixed costs are $156,000, how much sales revenue must the company generate in order to reach its break-even point?

Accepted Answer

The break-even point in sales revenue can be calculated using the following formula:

Break-even point (in units) = Fixed costs / Contribution margin per unit

In this case, the contribution margin per unit is $12, and the fixed costs are $156,000. Therefore, the break-even point in units would be:

Break-even point (in units) = $156,000 / $12 per unit = 13,000 units

To convert this to sales revenue, we can simply multiply the break-even point in units by the selling price per unit:

Break-even point (in sales revenue) = 13,000 units x Selling price per unit

Since we don't know the selling price per unit, we can use the contribution margin ratio to calculate it:

Contribution margin ratio = Contribution margin / Selling price

Solving for selling price, we get:

Selling price = Contribution margin / Contribution margin ratio

In this case, the contribution margin is $12 per unit, and the contribution margin ratio is 20%. Therefore, the selling price would be:

Selling price = $12 / 20% = $60 per unit

Now we can plug this into the formula for the break-even point in sales revenue:

Break-even point (in sales revenue) = 13,000 units x $60 per unit = $780,000

Question 4

SkyBucks Bagels sells boxes of bagels each with a variable cost of 45% of sales. Its fixed costs are $36,000 per year. Each box has a contribution margin of $8. How much sales revenue does SkyBucks need to break-even per year if bagels are its only product?

Accepted Answer

The answer of SkyBucks Bagels sells boxes of bagels each...

Question 5

Plant Bottling needs to reduce the selling price of its acrylic water bottles in order to be competitive. Currently, it has fixed costs of $110,000 and variable costs per unit of $4.10. If Plant Bottling can sell 40,000 units, what price should it charge in order to break-even?

Accepted Answer

To break even, the total revenue must equal the total cost.

Total cost = Fixed cost + Variable cost per unit * Number of units 
Total cost = $110,000 + $4.10 * 40,000 
Total cost = $266,000

To find the price to charge per unit:

Total revenue = Price per unit * Number of units 
$266,000 = Price per unit * 40,000 
Price per unit = $6.65

Therefore, Plant Bottling should charge a price of $6.85 ($6.65 rounded up) to break even.

Question 6

MDI Enterprises prepared the following income statement for June: $\begin{array}{lrr}
\text { Sales revenue ( } 6,000 \text { units) } & & \$ 150,000 \
\text { Cost of goods sold: } & & \
\quad \text { Fixed costs } & \$ 18,000 & \
\text { Variable costs } & 30,000 & 48,000\\text { Gross profit }&&102,000\
\text { Operating expenses: }\
\text { Fixed costs } & 27,000 & \
\text { Variable costs } & 12,000 & 39,000 \
\text { Operating income } & & \$ 63,000
\end{array}$ How many units must MDI sell in order to break-even?

Accepted Answer

The answer of MDI Enterprises prepared the following income statement...

Question 7

WayFair Clothing has total fixed costs of $34,000 per month. It sells a single product with variable costs of $5.60 per unit. If 8,000 units can be sold this month, what price must Wayfair charge in order to break-even?

Accepted Answer

To break-even, the total revenue must cover both fixed costs and variable costs. The total variable costs would be:
$5.60 per unit x 8000 units = $44,800
So the total revenue must be at least:
$34,000 (fixed costs) + $44,800 (variable costs) = $78,800
To find the price to charge per unit, we divide the total revenue by the number of units:
$78,800 / 8,000 = $9.85 per unit

Question 8

Which of the following is not an assumption of CVP analysis?

Accepted Answer

Fixed costs per unit do not remain constant within the relevant range; instead, total fixed costs remain constant. The assumption in B incorrectly describes the behavior of fixed costs on a per-unit basis.

Question 9

Diva Products produces scarves. The estimated fixed costs for the year are $164,500, and the estimated variable costs per unit are $9. The company expects to produce and sell 40,000 scarves at a unit selling price of $16 per unit. By how much can sales revenue drop before Diva Products incurs a loss?

Accepted Answer

To determine the sales revenue drop before incurring a loss, first calculate the break-even point. The break-even point in units is calculated as Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Here, it's $164,500 / ($16 - $9) = $164,500 / $7 = 23,500 units. The break-even sales revenue is 23,500 units * $16/unit = $376,000. The initial expected sales revenue is 40,000 units * $16/unit = $640,000. The difference between the expected sales revenue and the break-even sales revenue is $640,000 - $376,000 = $264,000. This is the amount by which sales revenue can drop before the company incurs a loss.

Question 10

Splurge Electronics sells homework machines for $80 each. Variable costs per unit are $45 and total fixed costs are $43,750. Splurge is considering the purchase of new equipment that would increase fixed costs to $48,700, but decrease the variable costs per unit by $5. At that level, Splurge Electronics expects it can sell 1,500 units next year. What is the company's break-even point in units if it purchases the new equipment, assuming the selling price remains constant? (Round your answer to the nearest whole number.)

Accepted Answer

To find the break-even point, we need to use the formula:

Break-even point (in units) = Total fixed costs / Contribution margin per unit

Contribution margin per unit = Selling price per unit - Variable costs per unit

Without the new equipment, the contribution margin per unit is:

$80 - $45 = $35

So the current break-even point is:

$43,750 / $35 = 1,250 units

If we purchase the new equipment, the contribution margin per unit will increase to:

$80 - ($45 - $5) = $40

So the new break-even point is:

$48,700 / $40 = 1,218.5 units

Rounding up to the nearest whole number, the answer is 1,218 units. Therefore, the best choice is B.

Question 11

One Finger Staples produces a single stapler that it sells for $15 per unit. If variable costs per unit are $6 and fixed costs total $42,300, how many units must the company sell in order to earn a profit of $12,150?

Accepted Answer

The answer of One Finger Staples produces a single stapler...

Question 12

Diva Products produces scarves. The estimated fixed costs for the year are $164,500, and the estimated variable costs per unit are $9. The company expects to produce and sell 40,000 scarves at a unit selling price of $16 per unit. How much is the break-even point in units?

Accepted Answer

The answer of Diva Products produces scarves. The estimated fixed...

Question 13

At Bahama Foods, the break-even point is 1,600 units. If fixed costs total $44,000 and variable costs are $12 per unit, what is the selling price per unit?

Accepted Answer

The answer of At Bahama Foods, the break-even point is...

Question 14

Widgely Sales Company's break-even point is 12,200 units. Each unit incurs variable costs of $2.20 and is sold for $4.90. How much are total fixed costs?

Accepted Answer

The answer of Widgely Sales Company's break-even point is 12,200...

Question 15

MDI Enterprises prepared the following income statement for June: $\begin{array}{lrr}
\text { Sales revenue ( } 6,000 \text { units) } & & \$ 150,000 \
\text { Cost of goods sold: } & & \
\quad \text { Fixed costs } & \$ 18,000 & \
\text { Variable costs } & 30,000 & 48,000\\text { Gross profit }&&102,000\
\text { Operating expenses: }\
\text { Fixed costs } & 27,000 & \
\text { Variable costs } & 12,000 & 39,000 \
\text { Operating income } & & \$ 63,000
\end{array}$ How much is MDI's total contribution margin?

Accepted Answer

The answer of MDI Enterprises prepared the following income statement...

Question 16

Rogers Racers makes toy race cars that sell for $12 each with a variable cost of $5 per car. Annual fixed costs are $7,000. How much will profit increase if 600 more units are sold?

Accepted Answer

First, let's calculate the current profit:
Profit = (Revenue - Variable Costs) - Fixed Costs
Profit = (12 - 5) * x - 7,000
where x is the number of units sold.

Now, we can calculate the profit with 600 more units sold:
Profit = (12 - 5) * (x + 600) - 7,000

The increase in profit will be:
Increased Profit = Profit with 600 more units - Current Profit
Increased Profit = (12 - 5) * (x + 600) - 7,000 - [(12 - 5) * x - 7,000]
Increased Profit = (12 - 5) * 600
Increased Profit = $4,200

Therefore, the best choice is B as the profit will increase by $4,200 if 600 more units are sold.

Question 17

Splurge Electronics sells homework machines for $80 each. Variable costs per unit are $45 and total fixed costs are $43,750. Splurge Electronics expects it can sell 1,500 units next year. By how many units can Splurge's sales drop before the company incurs a loss?

Accepted Answer

First, we need to calculate the contribution margin per unit:

Selling price per unit - Variable costs per unit = Contribution margin per unit

$80 - $45 = $35

Next, we can calculate the total contribution margin:

Contribution margin per unit X number of units sold = Total contribution margin

$35 X 1,500 = $52,500

To break even, total contribution margin must equal total fixed costs:

$52,500 = $43,750 + (contribution margin per unit X units sold to break even)

$8,750 = $35 X units sold to break even

Units sold to break even = 250

Therefore, sales can drop by 250 units before the company incurs a loss.

Question 18

Revert Creations sells a single product at a price of $50 per unit. Fixed costs total $312,000 and variable costs per unit are $24. Revert is considering the purchase of new equipment that would reduce variable costs per unit to $21, but fixed costs would increase to $334,370. Above what volume would Revert be profitable with the new machine, assuming the selling price remains constant?

Accepted Answer

To determine the volume at which Revert would break even, we can use the formula:

Profit = (Price per unit x Volume) - Total costs

If we let V be the volume at which Revert breaks even, we can set the profit equal to zero:

0 = (50 x V) - [(24 x V) + 312,000]

Simplifying this equation, we get:

0 = 26V - 312,000

V = 12,000

Therefore, Revert would break even at a volume of 12,000 units using the old equipment.

Now, we can use the same formula to find the volume at which Revert would break even with the new equipment:

0 = (50 x V) - [(21 x V) + 334,370]

Simplifying this equation, we get:

0 = 29V - 334,370

V = 11,530

Therefore, Revert would break even at a volume of 11,530 units with the new equipment.

This means that above 11,530 units, Revert would be profitable with the new machine, assuming the selling price remains constant. Therefore, the answer is B.

Question 19

Which of the following is not involved in determining the break-even point?

Accepted Answer

Anticipated sales for the next period are not involved in determining the break-even point. The break-even point is calculated by dividing the total fixed costs by the contribution margin per unit, which is calculated by subtracting the variable cost per unit from the selling price per unit.

Question 20

The president of DynaMark will not receive a bonus next year unless the company's profits are at least $435,000. DynaMark sells a single product at a price of $27 per unit. If variable costs are $12 per unit and fixed costs total $150,000, what amount of unit sales must DynaMark generate in order for the president to receive a bonus?

Accepted Answer

To find the number of unit sales required, we can use the formula:

Profit = (Price per unit x Unit sales) - (Variable costs per unit x Unit sales) - Fixed costs

We know that the required profit for the president to receive a bonus is $435,000. Substituting the given values, we get:

$435,000 = ($27 x Unit sales) - ($12 x Unit sales) - $150,000

Simplifying the equation, we get:

Unit sales = ($435,000 + $150,000) / ($27 - $12) = 39,000 units

Therefore, the president of DynaMark must generate unit sales of at least 39,000 to receive a bonus. The answer is B.

Quiz 4: Cost-Volume-Profit Analysis