Question 1

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

Accepted Answer

The break-even point in units is obtained by dividing total fixed expenses by the contribution margin per unit, not the contribution margin ratio. The contribution margin ratio is used to determine the break-even point in sales dollars.

Question 2

If the fixed expenses increase in a company,and all other factors remain unchanged,then one would expect the margin of safety to decrease.

Accepted Answer

Margin of safety is the difference between the level of sales and the break-even point. If fixed expenses increase, the break-even point will increase, which means the level of sales needed to cover all expenses will also increase. As a result, the margin of safety will decrease.

Question 3

Wright Corporation's contribution format income statement for last month appears below:
$\begin{array} {| l | r | } 
\hline \text { Sales } & \$ 45,000 \
\hline \text { Less: variable expenses } & \underline { 27,000 } \
\hline \text { Contribution margin } & 18,000 \
\hline \text { Less: fixed expenses } & \underline { 12,000 } \
\hline \text { Operating income } & \$ 6,000 \
\hline
\end{array}$There were no beginning or ending inventories. The company produced and sold 3,000 units during the month

-The company has an opportunity to secure a special order of 800 units if it is willing to drop the selling price on these units to $13.Costs of securing the special order would be $1,000.The special order would not affect the company's regular sales.If the special order is accepted,what will be the impact on the company's overall operating income?

Accepted Answer

The special order's impact on operating income can be calculated as follows: Revenue from special order = 800 units * $13/unit = $10,400. Variable costs = ($27,000 / 3,000 units) * 800 units = $7,200. Costs of securing the special order = $1,000. Net impact = $10,400 - $7,200 - $1,000 = $2,200 increase in operating income.

Question 4

Hooper Corporation produces and sells two models of vacuum cleaners, Standard and Deluxe. The company records show the following monthly data relating to these two products:
$\begin{array} {| l | r | r | } 
\hline & \text { Standard } & \text { Deluxe } \
\hline \text { Selling price per unit } & \$ 150 & \$ 165 \
\hline \text { Variable production costs } & \$ 120 & \$ 126 \
\hline \begin{array} { l } 
\text { Variable selling expense per } \
\text { unit }
\end{array} & \$ 16 & \$ 13 \
\hline \begin{array} { l } 
\text { Expected monthly sales in } \
\text { units }
\end{array} & 600 & 1,200 \
\hline \begin{array} { l } 
\text { Total monthly fixed cost } \
\text { (common in both) }
\end{array} & & \$ 15,000 \
\hline
\end{array}$

-If the expected monthly sales in units were divided equally between the two models (900 Standard and 900 Deluxe),where would the break-even level of sales be as compared to the expected sales mix?

Accepted Answer

The break-even level of sales would be higher with an equal sales mix because the Deluxe model has a higher contribution margin per unit than the Standard model. By selling more of the Standard model and less of the Deluxe model, the average contribution margin per unit decreases, requiring a higher volume of sales to cover the fixed costs.

Question 5

Hurst Co. manufactures and sells a single product. Price and cost data regarding this product are as follows:$\begin{array}{|l|r|}
\hline \text { Selling price } & \$ 40 \text { per unit } \
\hline \text { Variable manufacturing cost } & \$ 20 \text { per unit } \
\hline \text { Variable selling \& administrative expenses } & \$ 6 \text { per unit } \
\hline \text { Fixed manufacturing overhead } & \$ 208,000 \text { per year } \
\hline \text { Fixed selling \& administrative expenses } & \$ 324,000 \text { per year } \
\hline
\end{array}$

-In the current year,the company sold 43,000 units.Due to competition,management will be forced to lower the selling price by 10% next year.How many units must be sold next year to earn the same operating income as was earned in the current year?

Accepted Answer

The answer of  Hurst Co. manufactures and sells a...

Question 6

In two companies making the same product and with the same total sales and total expenses,the contribution margin ratio will tend to be lower in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

The contribution margin ratio is calculated as (Sales - Variable Expenses) / Sales, and it is not directly affected by the proportion of fixed expenses in a company's cost structure.

Question 7

The formula for the break-even point is the same as the formula to attain a given target operating profit for the special case where the target operating profit is zero.

Accepted Answer

The formula for the break-even point is Total Fixed Costs / (Sales Price per Unit - Variable Cost per Unit). This is the same formula used to attain a given target operating profit, except in that case the numerator of the equation would be Total Fixed Costs plus the target operating profit. However, if the target operating profit is zero, then the numerator reverts back to Total Fixed Costs, making the formula for the break-even point and the formula to attain a given target operating profit the same.

Question 8

If fixed expenses increase by $10,000 per year,then the level of sales needed to break even will also increase by $10,000.

Accepted Answer

The break-even point is calculated based on the ratio of fixed costs to the contribution margin per unit (or percentage). An increase in fixed expenses requires a higher level of sales to cover the new fixed cost amount, not just an increase in sales equal to the increase in fixed expenses.

Question 9

A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole.

Accepted Answer

When a company shifts its sales mix towards products with a high contribution margin ratio, it means that the company is generating more profit per unit sold. This, in turn, will reduce the break-even point for the company as a whole as fixed costs will be spread over a smaller number of units. Therefore, the statement is true.

Question 10

For a given level of sales,a low contribution margin ratio will produce less operating income than a high contribution margin ratio.

Accepted Answer

Contribution margin ratio refers to the percentage of revenue that is left over after variable costs are deducted. This means that a higher contribution margin ratio indicates that more revenue is available to cover fixed costs and contribute towards operating income. Therefore, a low contribution margin ratio will produce less operating income than a high contribution margin ratio for the same level of sales.

Question 11

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.

Accepted Answer

This statement is true.

Question 12

Once the break-even point has been reached,increases in contribution margin will be reflected dollar for dollar in increased operating income.

Accepted Answer

This statement is true. Once the break-even point is reached, any increase in contribution margin will directly increase the operating income. This is because all fixed costs have been covered by the sales revenue and any additional revenue will now contribute to profit.

Question 13

Wright Corporation's contribution format income statement for last month appears below:
$\begin{array} {| l | r | } 
\hline \text { Sales } & \$ 45,000 \
\hline \text { Less: variable expenses } & \underline { 27,000 } \
\hline \text { Contribution margin } & 18,000 \
\hline \text { Less: fixed expenses } & \underline { 12,000 } \
\hline \text { Operating income } & \$ 6,000 \
\hline
\end{array}$There were no beginning or ending inventories. The company produced and sold 3,000 units during the month

-If sales decrease by 500 units in the next month,by how much would fixed expenses have to be reduced to maintain the current operating income?

Accepted Answer

Fixed expenses would need to be reduced by $3,000 to maintain the current operating income after a decrease in sales by 500 units. The contribution margin per unit is $18,000 / 3,000 units = $6 per unit. A decrease of 500 units would result in a decrease in total contribution margin by 500 units * $6/unit = $3,000. To maintain the same operating income, fixed expenses would need to be reduced by this amount.

Question 14

At the break-even point: Sales - Variable expenses = Fixed expenses.

Accepted Answer

At the break-even point, total sales revenue is equal to total variable expenses plus total fixed expenses. This is expressed as: Sales - Variable expenses = Fixed expenses.

Question 15

Company Y is considering two production technologies,Bronze and Platinum,for producing its new product.The cost structures of the two technologies are as follows:
$$\begin{array} { | l | r | r | } 
\hline & \text { Bronze } & \text { Platinum } \
\hline \text { Selling price per unit } & \$ 150 & \$ 150 \
\hline \begin{array} { l } 
\text { Variable production costs } \
\text { per urit }
\end{array} & \$ 120 & \$ 50 \
\hline \text { Total fixed production costs } & \$ 300,000 & \$ 1,210,000 \
\hline
\end{array}$$
At what level of sales volume in units (rounded to the nearest whole unit)would Company Y be indifferent in choosing between the Bronze and Platinum technologies?

Accepted Answer

The indifference point is where total costs for both technologies are equal. Set up the equation: $300,000 + 120x = 1,210,000 + 50x$. Solving for $x$, we get $x = 13,000$ units.

Question 16

Hooper Corporation produces and sells two models of vacuum cleaners, Standard and Deluxe. The company records show the following monthly data relating to these two products:
$\begin{array} {| l | r | r | } 
\hline & \text { Standard } & \text { Deluxe } \
\hline \text { Selling price per unit } & \$ 150 & \$ 165 \
\hline \text { Variable production costs } & \$ 120 & \$ 126 \
\hline \begin{array} { l } 
\text { Variable selling expense per } \
\text { unit }
\end{array} & \$ 16 & \$ 13 \
\hline \begin{array} { l } 
\text { Expected monthly sales in } \
\text { units }
\end{array} & 600 & 1,200 \
\hline \begin{array} { l } 
\text { Total monthly fixed cost } \
\text { (common in both) }
\end{array} & & \$ 15,000 \
\hline
\end{array}$

-The break-even in sales dollars for the expected sales mix is closest to which of the following?

Accepted Answer

The answer of  Hooper Corporation produces and sells two...

Question 17

A company with sales of $80,000 and variable expenses of $40,000 should spend $12,000 on increased advertising,if the increased advertising will increase sales by $22,000.
CM ratio = 50% so incremental CM = 22,000 *.5 which is less than $12,000.

Accepted Answer

The correct calculation for incremental contribution margin is $22,000 x 0.5 = $11,000. This is less than the proposed advertising expense of $12,000. Therefore, the company should not spend $12,000 on increased advertising as it will not generate a positive contribution margin.

Question 18

The total volume in sales dollars that would be required to attain a given target operating profit is determined by dividing the sum of the fixed expenses and the target operating profit by the contribution margin ratio.

Accepted Answer

This statement is true. The formula to calculate the total sales necessary to attain a target operating profit is:

Total sales = (Fixed expenses + Target operating profit) / Contribution margin ratio.

Question 19

Junsin Corporation's budget for next year appears below. The budget assumes the company will sell 30,000 units.
$\begin{array}{|l|r|r|}
\hline \text { Sales } & & \$ 600,000 \
\hline \text { Less: expenses } & & \
\hline \text { Variable } & \$ 390,000 & \
\hline \text { Fixed } &  \$ 140,000& \$ 530,000 \
\hline \text { Operating income } & & \$ 70,000 \
\hline
\end{array}$

-What is the company's margin of safety as a percentage of sales,rounded to the nearest whole percent?

Accepted Answer

The margin of safety is calculated as (Actual Sales - Break-even Sales) / Actual Sales. Break-even sales = Fixed Costs / Contribution Margin Ratio. Contribution Margin Ratio = (Sales - Variable Costs) / Sales = (600,000 - 390,000) / 600,000 = 35%. Break-even sales = 140,000 / 0.35 = 400,000. Margin of safety = (600,000 - 400,000) / 600,000 = 33%.

Question 20