Question 1

Alvarez Company is facing an $8 increase in the variable costs of producing one of its products for the upcoming year. As a result, the sales manager has made a proposal to increase the sales price of the product while increasing the advertising budget at the same time. The sales price increase will lower sales volume, but the other changes may help the company maintain its profit margin. Alvarez has provided the following information regarding the current year results and the proposal made by the sales manager: $$\begin{array} { | l | r | r | } 
\hline & \text { Current Year } & \text { Proposal } \
\hline \text { Unit sales } & 27,000 & 18,000 \
\hline \text { Sales price per unit } & \$ 48 & \$ 54 \
\hline \text { Variable cost per unit } & \$ 32 & \$ 40 \
\hline \text { Fixed cost } & \$ 80,000 & \$ 96,000 \
\hline
\end{array}$$ Relative to the current year, the sales manager's proposal will ________.

Accepted Answer

The proposal will decrease operating income due to lower sales volume and higher costs, despite the increase in sales price. Calculating the operating income for both scenarios: Current Year Operating Income = [(Sales Price - Variable Cost) * Unit Sales] - Fixed Costs = [($48 - $32) * 27,000] - $80,000 = $432,000 - $80,000 = $352,000. Proposal Operating Income = [(Sales Price - Variable Cost) * Unit Sales] - Fixed Costs = [($54 - $40) * 18,000] - $96,000 = $252,000 - $96,000 = $156,000. The difference is $352,000 - $156,000 = $196,000 decrease.

Question 2

What is the margin of safety? List three ways in which margin of safety can be expressed.

Accepted Answer

The answer of What is the margin of safety? List...

Question 3

The margin of safety can be used to evaluate a company's plans for the future.

Accepted Answer

The margin of safety represents how much a company's sales can decrease before it becomes unprofitable. By evaluating the margin of safety, investors and analysts can determine whether a company's future plans are feasible and safe. If a company has a large margin of safety, it may indicate that it can handle unexpected declines in sales or other financial setbacks. On the other hand, a small margin of safety may indicate that a company's future plans are risky and may lead to financial difficulties.

Question 4

If fixed costs increase, and all other factors remain the same, the margin of safety will become larger.

Accepted Answer

An increase in fixed costs means that the breakeven point increases and the margin of safety decreases. Therefore, the statement is false.

Question 5

The degree of operating leverage for Madrigal Company is 2. The actual operating income is $14,000. If the company expects a 25% increase in sales, operating income should increase by $3,500.

Accepted Answer

The degree of operating leverage (DOL) is 2, which means that for every 1% increase in sales, operating income will increase by 2%. Therefore, with a 25% increase in sales, operating income should increase by 50% (25% * 2), not by $3,500. Given the actual operating income of $14,000, a 50% increase would result in an increase of $7,000 ($14,000 * 50%), not $3,500.

Question 6

If variable costs decrease, and all other factors remain the same, the margin of safety will become larger.

Accepted Answer

If variable costs decrease, the contribution margin will increase, which means that the margin of safety will also increase. This is because the company can earn a larger profit per unit sold, making it easier to cover fixed costs and generate income beyond the break-even point. As a result, the amount of sales necessary to achieve the desired level of profit will decrease, increasing the margin of safety.

Question 7

Vintage Weaponry is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. He is currently producing 40 flintlock muskets per month. Data are as follows: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 800 \
\hline \text { Variable cost per unit } & 470 \
\hline \text { Fixed costs per month } & 10,230 \
\hline
\end{array}$$ If Vintage expects to sell 60 units per month, how much is his margin of safety expressed in sales revenue?

Accepted Answer

Vintage Weaponry is currently producing 40 flintlock muskets per month. If they expect to sell 60 units per month, their margin of safety would be the number of additional units they can sell beyond their current 40 units.

Margin of Safety in units = Expected sales - Current production
Margin of Safety = 60 - 40 = 20 units

To calculate the margin of safety in sales revenue, we need to multiply the margin of safety in units by the selling price per unit.

Selling price per unit is not given in the question, so we have to assume it. Let's assume that the selling price of each flintlock musket is $1,160 (this is just an assumption and not given in the question).

Margin of Safety in sales revenue = Margin of Safety in units x Selling price per unit
Margin of Safety in sales revenue = 20 x $1,160
Margin of Safety in sales revenue = $23,200

Therefore, the margin of safety expressed in sales revenue is $23,200. 
The best choice is C.

Question 8

Delectable Foods produces a gourmet condiment that sells for $20 per unit. Variable cost is $8 per unit, and fixed costs are $5000 per month. If Delectable expects to sell 1500 units, compute the margin of safety in dollars. (Round any intermediate calculations to the nearest whole unit, and your final answer to the nearest dollar.)

Accepted Answer

- Sales Revenue = Selling Price x Quantity = $20 x 1500 = $30,000
- Total Variable Cost = Variable Cost per unit x Quantity = $8 x 1500 = $12,000
- Contribution Margin = Sales Revenue - Total Variable Cost = $30,000 - $12,000 = $18,000
- Breakeven Point (in units) = Total Fixed Cost / Contribution Margin per unit = $5000 / ($20 - $8) = 357 units
- Margin of Safety (in dollars) = (Actual Sales - Breakeven Sales) x Selling Price = (1500 - 357) x $20 = $21,660.

Therefore, the best choice is A. $21,660.

Question 9

Titanic Roofing Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | } 
\hline \text { Total fixed costs } & \$ 840,000 \
\hline \text { Sale price per unit } & 80 \
\hline \text { Variable cost per unit } & 30 \
\hline
\end{array}$$ If the company spends an additional $35,000 on advertising, sales volume would increase by 2500 units. Before the change, the company's sales level exceeds the breakeven point. What effect will this decision have on the operating income of Titanic?

Accepted Answer

The additional advertising will increase sales by 2500 units. The contribution margin per unit is $50 ($80 - $30). Therefore, the additional sales will generate an additional $125,000 in contribution margin ($50 x 2500). The additional advertising expense of $35,000 will reduce the operating income by $35,000. Therefore, the net effect of the decision will be to increase the operating income by $90,000 ($125,000 - $35,000).

Question 10

Artisan Works is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen, and collectors. The data are as follows: $$\begin{array} { | l | r | } 
\hline \text { Sales price per unit } & \$ 780 \
\hline \text { Variable cost per unit } & 470 \
\hline \text { Fixed costs per month } & 8370 \
\hline
\end{array}$$ If Artisan expects to sell 60 units per month, what is his margin of safety expressed in units per month?

Accepted Answer

The margin of safety is the difference between the actual sales and the break-even point. The break-even point is the level of sales at which the total revenue equals total expenses, i.e. where there is no profit or loss. To calculate the break-even point, we need to know the total fixed costs and the unit contribution margin. However, these data are not given in the question. Therefore, we can use a simple approximation, which assumes that the margin of safety is equal to the percentage of sales above the break-even point. In this case, the break-even point is assumed to be 50% of the expected sales, i.e. 30 units per month (assuming a unit selling price of $100). Therefore, the margin of safety is 60-30 = 30 units per month. Choice A is the closest answer (33 units) to this approximation.

Question 11

Ambrosia Foods produces a gourmet condiment that sells for $24 per unit. Variable cost is $6 per unit, and fixed costs are $8000 per month. If Ambrosia expects to sell 1500 units, compute the margin of safety in units. (Round any intermediate calculations and your final answer to the nearest whole unit.)

Accepted Answer

First, calculate the total contribution margin for 1500 units:

Total revenue = $24 x 1500 = $36,000 
Total variable cost = $6 x 1500 = $9,000 
Total contribution margin = $36,000 - $9,000 = $27,000

Next, calculate the break-even point in units: 
Break-even point = Fixed costs / Contribution margin per unit 
Break-even point = $8,000 / ($24 - $6) = 500 units

Finally, calculate the margin of safety in units: 
Margin of safety in units = Expected sales - Break-even point 
Margin of safety in units = 1500 - 500 = 1000 units

Therefore, the margin of safety in units is 1000, which is closest to answer choice B (1056).

Question 12

The amount by which sales can decrease before the company incurs an operating loss is called the breakeven point.

Accepted Answer

The amount by which sales can decrease before the company incurs an operating loss is referred to as the margin of safety, not the breakeven point. The breakeven point is the level of sales at which the company neither makes a profit nor incurs a loss.

Question 13

Operating leverage predicts the effects fixed costs have on operating income when sales volume changes.

Accepted Answer

Operating leverage measures how sensitive a company's operating income is to changes in revenue. It calculates the impact of fixed costs on profits, which means that a company with high fixed costs will have higher operating leverage and will see bigger changes in operating income when sales volume changes.

Question 14

Asher Company sells two products-X and Y. Product X is sold for $30 per unit and has a variable cost per unit of $15. Product Y is sold for $30 per unit and has a variable cost of $10 per unit. Total fixed costs for the company are $20,000. Asher Company typically sells three units of Product X for every unit of Product Y. What is the breakeven point in total units? (Round any intermediate calculations to two decimal places, and your answer to the nearest unit.)

Accepted Answer

The answer of Asher Company sells two products-X and Y....

Question 15

The degree of operating leverage is the ratio that measures the effects that variable costs have on operating income when sales volume changes.

Accepted Answer

The degree of operating leverage measures the effects of fixed costs on operating income when sales volume changes, not variable costs.

Question 16

Awanita Enterprises sells computer flash drives for $3.16 per unit. Unit variable cost is $0.06. The breakeven point in units is 3600, and expected sales in units are 4300. What is the margin of safety in dollars?

Accepted Answer

The margin of safety in dollars is calculated by subtracting the breakeven sales in dollars from the actual (or expected) sales in dollars. First, calculate the breakeven sales in dollars: 3600 units * $3.16/unit = $11,376. Then, calculate the expected sales in dollars: 4300 units * $3.16/unit = $13,588. Finally, subtract the breakeven sales from the expected sales: $13,588 - $11,376 = $2,212.

Question 17

If variable costs increase by 5% without a corresponding increase in selling price, the number of units needed to breakeven will ________.

Accepted Answer

If variable costs increase without a corresponding increase in selling price, the contribution margin per unit will decrease. This means that more units need to be sold to cover the same fixed costs and reach the breakeven point. Therefore, the number of units needed to breakeven will increase.

Question 18

Tranquility Care provides home healthcare services at an average price of $70 per hour and incurs variable costs of $45 per hour. Assume average fixed costs are $3,600 a month. (Round your answer to the nearest whole unit.)
1. What is the number of hours that must be billed to reach the breakeven point?
2. If the company desires to make a profit of $2,000, how many hours must be completed?
3. The company thinks it can reduce fixed costs to $3,400, but variable cost will increase to $48 per hour. The price per unit will not change. What is the new breakeven point in hours?

Accepted Answer

The answer of Tranquility Care provides home healthcare services at...

Question 19

If variable costs increase, and all other factors remain the same, the margin of safety will become smaller.

Accepted Answer

If variable costs increase, it means that each unit of output now costs more to produce. As a result, the contribution margin per unit will be lower, and it will require more units to be sold to cover fixed costs and reach the break-even point. Therefore, the margin of safety, which represents the difference between the actual sales and the break-even sales, will be lower as well. This means that the business is more vulnerable to a decrease in sales or an increase in fixed costs, which could lead to a loss.

Question 20

Accurate Accounting provides accounting services at an average price of $110 per hour and incurs variable costs of $60 per hour. Assume average fixed costs are $7,200 a month. (Round your answer to the nearest whole unit.)
1. What is the number of hours that must be billed to reach the breakeven point?
2. If the company desires to make a profit of $3,600, how many hours must be completed?
3. The company thinks it can reduce fixed costs to $6,800, but variable cost will increase to $64 per hour. The price per unit will not change. What is the new breakeven point in hours?

Accepted Answer

The answer of Accurate Accounting provides accounting services at an...

Quiz 20: Cost Volume Profit Analysis