Question 1

Sutton Company produces flash drives for computers, which it sells for $20 each.Each flash drive costs $6 of variable costs to make.During April, 700 drives were sold.Fixed costs for April were $4 per unit for a total of $2,800 for the month.How much does Sutton's operating income increase for each $1,000 increase in revenue per month?

Accepted Answer

The answer of Sutton Company produces flash drives for computers,...

Question 2

Which concept answers the following question: 'If budgeted revenues are above break-even and decline, how far can they fall before the break-even point is reached?'

Accepted Answer

The margin of safety measures how far revenues can fall before reaching the break-even point, indicating the buffer or cushion a company has before it starts incurring losses.

Question 3

Stacker requires sales of $500,000 to cover its fixed costs of $100,000 and to earn net income of $80,000.What percent are variable costs of sales?

Accepted Answer

Variable costs are calculated as a percentage of sales by subtracting the desired net income and fixed costs from sales, then dividing by sales. Here, ($500,000 - $100,000 - $80,000) / $500,000 = 64%.

Question 4

Wardley Corporation sells its product for $40.The variable costs are $18 per unit.Fixed costs are $16,000.The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs.Which of the following is true about the break-even point in units?

Accepted Answer

The current contribution margin (selling price - variable cost) per unit is $22 ($40 - $18). With the automated machine, the contribution margin per unit will increase to $24 ($40 - $16).

To calculate the break-even point in units, we can use the formula:

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

Before the purchase of the automated machine:

Break-even point (units) = $16,000 / $22 = 727.27 units

After the purchase of the automated machine:

Break-even point (units) = ($16,000 + $5,000) / $24 = 875 units

Therefore, the break-even point in units will increase from 727.27 units to 875 units if the company purchases the automated machine, which means the correct answer is C.

Question 5

Needles, Inc.was evaluating its margin of safety.Which one of the following is true?

Accepted Answer

Margin of safety is the amount by which actual or expected sales exceed the break-even sales. It is calculated by subtracting break-even point from actual or expected sales. A higher ratio of margin of safety indicates that a company can cover its fixed costs easily, and it has a buffer against any future decline in sales. Therefore, option B is correct, as a higher ratio leads to a greater margin of safety.

Question 6

Goose Bay Sync's management established its target net income for the year.What did the company do?

Accepted Answer

The company established its target net income for the year, which implies that it established its desired annual income for its product lines. Therefore, the best choice is D. The other options may also be necessary for achieving the target net income, but they are not specifically indicated in the given information.

Question 7

Organizer Company has fixed costs of $200,000 and variable costs are 60% of sales.How much will Organizer Company report as sales when its net income equals $20,000?

Accepted Answer

To find the sales amount when the net income equals $20,000, we can use the formula for profit: Profit = Sales - Variable Costs - Fixed Costs. Given that the variable costs are 60% of sales, we can express variable costs as 0.60 * Sales. The fixed costs are given as $200,000. Setting up the equation with the given net income ($20,000) gives us: $20,000 = Sales - 0.60 * Sales - $200,000. Simplifying, we get $20,000 = 0.40 * Sales - $200,000. Adding $200,000 to both sides and then dividing by 0.40 gives us Sales = $550,000.

Question 8

A company requires $600,000 in sales to meet its target net income after tax.Its contribution margin is 40%, and fixed costs are $80,000.How much is the target net income, given that its after-tax rate is 70%?

Accepted Answer

First, we need to calculate the total variable cost as a percentage of sales:

Contribution Margin = Sales - Variable Costs 
40% = Sales - Variable Costs 
Variable Costs = 60% of Sales

Next, we can use the contribution margin ratio to find the break-even point:

Break-even Point = Fixed Costs / Contribution Margin Ratio 
Break-even Point = $80,000 / 40% 
Break-even Point = $200,000

To reach a target net income of $600,000, we need to add $400,000 in profit ($600,000 - $200,000 = $400,000).

To calculate the required sales to achieve this profit, we can use the following formula:

Sales = (Fixed Costs + Target Net Income) / Contribution Margin Ratio 
Sales = ($80,000 + $400,000) / 40% 
Sales = $1,200,000

Finally, we need to adjust for the after-tax rate of 70%:

Net Income After Tax = Target Net Income / (1 - Tax Rate) 
Net Income After Tax = $400,000 / (1 - 0.70) 
Net Income After Tax = $1,333,333

Therefore, the answer is D) $112,000.

Question 9

A key reason for management to build in a margin of safety in its projections is

Accepted Answer

The answer of A key reason for management to build...

Question 10

The margin of safety ratio

Accepted Answer

The margin of safety ratio indicates what percent decline in sales could be sustained before the company would operate at a loss.

Question 11

Sample, Inc.determined its unit variable cost increased by 15%.Which one of the following will NOT increase as a direct result?

Accepted Answer

Contribution margin is calculated by deducting unit variable cost from sales price, so an increase in unit variable cost will directly decrease contribution margin. Therefore, option C will not increase as a direct result. However, options A, B, and D will increase as direct results of an increase in unit variable cost.

Question 12

Tiny Tots Toys has actual sales of $400,000 and a break-even point of $260,000.How much is its margin of safety ratio?

Accepted Answer

The answer of Tiny Tots Toys has actual sales of...

Question 13

Old Canadian Company has sales of $500,000, variable costs of $425,000, and fixed costs of $25,000.New World Company has sales of $500,000, variable costs of $200,000, and fixed costs of $250,000.New World's margin of safety ratio is

Accepted Answer

The answer of Old Canadian Company has sales of $500,000,...

Question 14

How many sales are required to earn a target after-tax net income of $80,000 if total fixed costs are $100,000, the contribution margin ratio is 40%, and the tax rate is 25%?

Accepted Answer

First, we need to calculate the amount of revenue needed to earn an after-tax net income of $80,000:

Target After-tax Net Income = [Target Pretax Net Income - (Target Pretax Net Income x Tax Rate)] 
$80,000 = [Pretax net income - (Pretax net income x 0.25)] 
$80,000 = (Pretax net income x 0.75) 
Pretax net income = $106,667

Next, we need to calculate the amount of revenue needed to reach the target pretax net income:

Target Pretax Net Income = Total Fixed Costs + (Contribution Margin Ratio x Revenue) 
$106,667 = $100,000 + (0.40 x Revenue) 
$6,667 = 0.40 x Revenue 
Revenue = $16,667

Therefore, the number of sales required to reach the target after-tax net income of $80,000 is:

$16,667 / (1 - 0.40) = $16,667 / 0.60 = $27,778

So, the answer is C - $516,667, as this is the closest option to $27,778.

Question 15

Forms, Inc.wants to sell a sufficient quantity of products to earn an after-tax profit of $40,000.If the unit sales price is $10, unit variable cost is $8, and total fixed costs are $80,000, how many units must be sold to earn income of $40,000? Forms, Inc has a tax rate of 40%.

Accepted Answer

Profit before taxes can be calculated as follows:

P = (Selling price per unit x Quantity) - (Variable cost per unit x Quantity) - Total fixed costs

$40,000 = ($10 x Q) - ($8 x Q) - $80,000

$40,000 = $2Q - $80,000

$120,000 = $2Q

Q = 60,000

Therefore, the company must sell 60,000 units to earn a profit of $40,000 before taxes.

To calculate the number of units needed to earn an after-tax profit of $40,000, we need to take into account the tax rate of 40%.

Profit after taxes can be calculated as follows:

Profit after taxes = Profit before taxes x (1 - Tax rate)

Profit after taxes = $40,000 x (1 - 0.4)

Profit after taxes = $24,000

The contribution margin per unit can be calculated as follows:

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

Contribution margin per unit = $10 - $8

Contribution margin per unit = $2

To earn a profit of $24,000 after taxes, the company needs to generate a total contribution margin of:

Total contribution margin = Profit after taxes / Contribution margin per unit

Total contribution margin = $24,000 / $2

Total contribution margin = 12,000 units

Therefore, the company needs to sell 12,000 units to earn a profit of $24,000 after taxes.

To find the number of units needed to earn an after-tax profit of $40,000, we need to add back the taxes and calculate the contribution margin per unit including taxes:

Contribution margin per unit including taxes = Contribution margin per unit x (1 - Tax rate)

Contribution margin per unit including taxes = $2 x (1 - 0.4)

Contribution margin per unit including taxes = $1.20

Total contribution margin including taxes = Profit after taxes / Contribution margin per unit including taxes

Total contribution margin including taxes = $40,000 / $1.20

Total contribution margin including taxes = 33,334 units

Therefore, the company needs to sell 33,334 units to earn an after-tax profit of $40,000.

Adding the number of units needed to earn a profit before taxes and the number of units needed to earn an after-tax profit:

Total number of units needed = 60,000 + 33,334

Total number of units needed = 93,334

Therefore, the closest option is A) 73,334 units.

Question 16

Proops Company has a weighted-average unit contribution margin of $30 for its two products, Drew and Carey.Expected sales for Proops are 40,000 Drews and 60,000 Careys.Fixed expenses are $1,800,000.At the expected sales level, Proops' net income will be

Accepted Answer

First, we need to calculate the total contribution margin for both products:

Total Contribution Margin = (40,000 Drews x $30) + (60,000 Careys x $30) = $3,000,000

Next, we can calculate the total expenses:

Total Expenses = Fixed Expenses = $1,800,000

Finally, we can calculate the net income:

Net Income = Total Contribution Margin - Total Expenses = $3,000,000 - $1,800,000 = $1,200,000

Therefore, the answer is C, Proops' net income will be $1,200,000 at the expected sales level.

Question 17

Swashbuckler, Inc.produces buckets.The selling price is $20 per unit and the variable costs are $8 per bucket.Fixed costs per month are $4,800.If Swashbuckler sells 10 more units beyond break-even, how much does profit increase as a result?

Accepted Answer

The profit per unit is the selling price minus the variable costs, which is $20 - $8 = $12 per bucket. Selling 10 more units beyond the break-even point would increase profit by 10 units * $12/unit = $120.

Question 18

Sulingo, Inc.calculated how many units it needed in order to earn net income totalling $67,750 for the month.What calculation did Sulingo perform?

Accepted Answer

Sulingo, Inc. calculated the number of units it needs to sell in order to earn a net income of $67,750 for the month. This is done by using the following formula: (Fixed costs + Target net income) ÷ Contribution margin per unit. The formula allows Sulingo to calculate the number of units it needs to sell at the current contribution margin per unit in order to earn its desired net income. Hence, option C is the correct answer.

Question 19

If M&H Ltd.has a margin of safety of $100,000, which of the following statements is correct?

Accepted Answer

The answer of If M&H Ltd.has a margin of safety...

Question 20

The following monthly data are available for Wackadoos, Inc.which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units.How much is the margin of safety for the company for June?

Accepted Answer

The answer of The following monthly data are available for...

Quiz 6: Decision-Making: Costvolumeprofit