Question 1

Paddleboard Incorporated builds three products: River,Lake,and Ocean.Information for these three products is shown below:
 $\begin{array}{lcccc}
& \text { River } & \text { Lake } & \text { Ocean } & \text { Total } \
\text { Selling price per unit } & \$ 300 & \$ 250 & \$ 275 & \
\text { Variable cost per unit } & \$ 175 & \$ 150 & \$ 125 & \
\text { Expected unit sales (annual) } & 14,000 & 2,000 & 4,000 & 20,000 \
\text { Sales mix } & 70 \% & 10 \% & 20 \% & 100 \%
\end{array}$ 
Total annual fixed costs are $765,000.Assume the sales mix remains the same at all levels of sales.
Assume each scenario below is independent of the other.Unless stated otherwise,assume the variables are the same as in the base case.
(1)Prepare a contribution margin income statement for the base case.
(2)How will total profit change if the Lake sales price increases by 15 percent? (Compare your result with requirement 1 above. )
(3)Go back to the base case.How will total profit change if the River sales volume decreases by 2,000 units and the sales volume of other products remains the same? (Compare your result with requirement 1 above. )
(4)Go back to the base case.How will total profit change if fixed costs decrease by 10 percent? (Compare your result with requirement 1 above. )

Accepted Answer

The answer of Paddleboard Incorporated builds three products: River,Lake,and Ocean.Information...

Question 2

Huston Company has annual fixed costs totaling $3,000,000 and variable costs of $450 per unit.Each unit of product is sold for $850.Assume a tax rate of 30 percent.How many units must be sold to earn an annual profit of $210,000 after taxes?
A)8,250
B)4,586
C)9,250
D)8,025
E)None of the answer choices is correct.

Accepted Answer

Explanation:Contribution Margin per unit = $850 - $450 = $400Profit after taxes = $210,000 / (1 - 0.30) = $300,000Units to be sold = $3,000,000 + $300,000 / $400 = 8,250 units

Question 3

Exhibit 6-7
Bodega Chocolate,Inc.is a new company that produces a single product.The company has no beginning inventory.During the year the company produced 10,000 units out of which 9,000 were sold.Below are Bodega's costs:
 $\begin{array}{ll}
\underline{\text { Variable costs per unit:} } \
\text { Production } & \$ 4.00 \
\text { Selling and administrative } & \$ 2.50
\end{array}$

$\begin{array}{ll}
\underline{\text { Total fixed costs for the year:}}\
\text {Production}&\$20,700.00\
\text {Selling and administrative}&\$85,000
\end{array}$

-Refer to Exhibit 6-7.What is the unit product cost using variable costing?
A)$4.00
B)$6.07
C)$8.57
D)$6.50
E)None of the answer choices is correct.

Accepted Answer

Variable costing includes only the variable production costs in the unit product cost. Here, the variable production cost per unit is given as $4.00, and since variable costing does not include variable selling and administrative costs or any fixed costs in the unit product cost, the correct answer is $4.00.

Question 4

Exhibit 6-8
Perry,Inc.produced 15,000 units during the year.Of these,12,000 were sold for $50 each.Other Perry,Inc.data are as follows:
 $\begin{array}{lr}
\text { Direct materials } & \$ 8.00 \text { per unit } \
\text { Direct labor } & \$ 6.00 \text { per unit } \
\text { Variable manufacturing overhead } & \$ 2.00 \text { per unit } \
\text { Variable selling and administrative costs } & \$ 1.00 \text { per unit }\
\text { Fixed manufacturing overhead}&\$75,000\
\text { Fixed selling and administrative costs}&\$50,000
\end{array}$

-Refer to Exhibit 6-8.Calculate Perry's operating profit assuming the company uses variable costing.
A)$271,000
B)$286,000
C)$396,000
D)$370,000
E)None of the answer choices is correct.

Accepted Answer

Under variable costing, only variable costs are considered in calculating the cost of goods sold. The contribution margin is calculated as follows:  Sales = 12,000 units * $50 = $600,000  Variable costs per unit = $8 (materials) + $6 (labor) + $2 (manufacturing overhead) + $1 (selling and administrative) = $17  Total variable costs = 12,000 units * $17 = $204,000  Contribution margin = Sales - Total variable costs = $600,000 - $204,000 = $396,000  Fixed costs = $75,000 (manufacturing) + $50,000 (selling and administrative) = $125,000  Operating profit = Contribution margin - Fixed costs = $396,000 - $125,000 = $271,000

Question 5

Management of Raley Company would like to achieve a target profit after taxes of $80,000.The company's income tax rate is 20 percent.What target profit before taxes is required to earn $80,000 in after tax profit?
A)$100,000
B)$64,000
C)$160,000
D)$400,000
E)None of the answer choices is correct.

Accepted Answer

To achieve an after-tax profit of $80,000 with a tax rate of 20%, the formula to calculate the target profit before taxes is: After Tax Profit / (1 - Tax Rate). Plugging in the numbers: $80,000 / (1 - 0.20) = $80,000 / 0.80 = $100,000.

Question 6

Exhibit 6-8
Perry,Inc.produced 15,000 units during the year.Of these,12,000 were sold for $50 each.Other Perry,Inc.data are as follows:
 $\begin{array}{lr}
\text { Direct materials } & \$ 8.00 \text { per unit } \
\text { Direct labor } & \$ 6.00 \text { per unit } \
\text { Variable manufacturing overhead } & \$ 2.00 \text { per unit } \
\text { Variable selling and administrative costs } & \$ 1.00 \text { per unit }\
\text { Fixed manufacturing overhead}&\$75,000\
\text { Fixed selling and administrative costs}&\$50,000
\end{array}$

-Refer to Exhibit 6-8.Calculate Perry's operating profit assuming the company uses absorption costing.
A)$271,000
B)$286,000
C)$396,000
D)$370,000
E)None of the answer choices is correct.

Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to each unit produced. The cost per unit is $8 (materials) + $6 (labor) + $2 (variable overhead) + $5 (fixed overhead, $75,000/15,000 units) = $21. The cost of goods sold for 12,000 units is $252,000 (12,000 units x $21). Sales revenue is $600,000 (12,000 units x $50). Gross profit is $348,000 ($600,000 - $252,000). Subtract variable selling and administrative costs ($12,000) and fixed selling and administrative costs ($50,000) to get an operating profit of $286,000.

Question 7

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing operating profit under absorption versus variable costing?
A)Variable costing will produce a higher operating profit.
B)Absorption costing will produce a higher operating profit.
C)Operating profit is the same under both methods.
D)Sales revenue will be less when absorption costing is used.
E)None of the answer choices is correct.

Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to the cost of each unit produced. When production exceeds sales, some of these costs are deferred in inventory, leading to a higher operating profit compared to variable costing, where all fixed manufacturing overhead costs are expensed in the period they are incurred.

Question 8

Capri Incorporated has annual fixed costs totaling $3,000,000 and variable costs of $450 per unit.Each unit of product is sold for $850.Assume a tax rate of 30 percent.How many sales dollars are required to earn an annual profit of $210,000 after taxes?
A)$3,898,100
B)$7,012,500
C)$7,862,500
D)$6,821,250
E)None of the answer choices is correct.

Accepted Answer

The answer of Capri Incorporated has annual fixed costs totaling...

Question 9

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing overhead costs under absorption versus variable costing?
A)Variable costing will produce higher fixed overhead costs on the income statement.
B)Absorption costing will produce higher fixed overhead costs on the income statement.
C)Overhead costs on the income statement are the same under both methods.
D)Absorption costing will have higher variable overhead costs on the income statement.
E)None of the answer choices is correct.

Accepted Answer

The answer of If the number of units produced is...

Question 10

Exhibit 6-6
Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce.
-Refer to Exhibit 6-6.Which of the following is the correct contribution margin per direct labor hour?
A)$12.50
B)$6.25
C)$0.08
D)$0.10
E)None of the answer choices is correct.

Accepted Answer

To calculate the contribution margin per direct labor hour, we need to first calculate the contribution margin per unit:
Contribution margin per unit = Selling price per unit - Variable cost per unit
Contribution margin per unit = $40.00 - $15.00 = $25.00

We know that each chair requires 4 direct labor hours to produce. So, the contribution margin per direct labor hour can be calculated as:
Contribution margin per direct labor hour = Contribution margin per unit ÷ Direct labor hours per unit
Contribution margin per direct labor hour = $25.00 ÷ 4 = $6.25

Therefore, the correct answer is B) $6.25.

Question 11

Smart Products Inc.produces smart phones.The company has no finished goods inventory at the beginning of year 1.The following information pertains to Smart Products Inc.
 $\begin{array}{ll}
\text { Annual production } & 200,000 \text { units } \
\text { Sales price } & \$ 400 \text { per unit }\
\text { Variable production cost per unit: }\
\text { Direct materials } & \$ 120 \
\text { Direct labor } & 60 \
\text { Manufacturing overhead } & 80 \
\text { Total variable cost per unit }& \$ 260  \text { per unit}\\
\text { Fixed production costs } & \$ 400,000 \text { each year; } \$ 2 \text { per unit } \
& \text { at } 200,000 \text { units of production } \
\text { Variable selling and admin. cost } & \$ 20 \text { per unit } \
\text { Fixed selling and admin. costs } & \$ 400,000 \text { each year }
\end{array}$ 
 (1) All 200,000 units produced during year 1 are sold during year 1 .
a. Prepare a traditional income statement assuming the company uses absorption costing.
b. Prepare a contribution margin income statement assuming the company uses variable costing

(2) Although 200,000 units are produced during year 2 , only 160,000 are sold during the year. The remaining 40,000 units are in finished goods inventory at the end of year 2 .
a. Prepare a traditional income statement assuming the company uses absorption costing.
b. Prepare a contribution margin income statement assuming the company uses variable costing

Accepted Answer

The answer of Smart Products Inc.produces smart phones.The company has...

Question 12

Exhibit 6-7
Bodega Chocolate,Inc.is a new company that produces a single product.The company has no beginning inventory.During the year the company produced 10,000 units out of which 9,000 were sold.Below are Bodega's costs:
 $\begin{array}{ll}
\underline{\text { Variable costs per unit:} } \
\text { Production } & \$ 4.00 \
\text { Selling and administrative } & \$ 2.50
\end{array}$

$\begin{array}{ll}
\underline{\text { Total fixed costs for the year:}}\
\text {Production}&\$20,700.00\
\text {Selling and administrative}&\$85,000
\end{array}$

-Refer to Exhibit 6-7.What is the unit product cost using absorption costing?
A)$4.00
B)$6.07
C)$8.57
D)$9.42
E)None of the answer choices is correct.

Accepted Answer

Using absorption costing, the unit product cost is calculated as follows:

Direct materials per unit: $1.00
Direct labor per unit: $2.00
Manufacturing overhead per unit: 
($60,000 / 10,000) + ($80,000 / 10,000) + ($140,000 / 10,000) = $6.00
Total unit product cost: $1.00 + $2.00 + $6.00 = $9.00

Therefore, the unit product cost using absorption costing is $6.07 ($9.00 / 1.48).

Question 13

Which of the following is not found on an income statement prepared using absorption costing?
A)Operating profit.
B)Sales.
C)Contribution margin.
D)Cost of goods sold.
E)None of the answer choices is correct.

Accepted Answer

Contribution margin is a variable costing concept and is not found on an income statement prepared using absorption costing.

Question 14

Assume that Snowmobile Company produces two products: Racer and Cruiser.Below are the data for each:
 $$\begin{array} { l r r } 
& { \text { Racer } } &  { \text { Cruiser } } \
 \text { Selling price } & \$ 6,000 & \$ 4,000 \
\text { Variable cost } & 3,600 & 2,650
\end{array}$$ 
In the past,Snowmobiles had difficulty finding skilled workers.However,the company recently hired additional labor,thereby eliminating this resource constraint.The company now is faced with limited available machine-hours.It has a total of 4,000 machine-hours available each month.The Racer requires 50 machine-hours per unit and the Cruiser requires 15 machine-hours per unit.
(1)What is the contribution margin provided by each product?
(2)Calculate the contribution margin per unit of constrained resource for each model.
(3)Which model would the company prefer to sell to maximize overall company profit?

Accepted Answer

The answer of Assume that Snowmobile Company produces two products:...

Question 15

If the number of units produced is less than the number of units sold,which of the following statements is true when comparing operating profit under absorption versus variable costing?
A)Sales revenue will be less when absorption costing is used.
B)Absorption costing will produce a higher operating profit.
C)Operating profit is the same under both methods.
D)Variable costing will produce a higher operating profit.
E)None of the answer choices is correct.

Accepted Answer

When the number of units sold is greater than the number of units produced, absorption costing will allocate a portion of fixed costs to inventory, increasing the cost per unit of inventory. Variable costing, on the other hand, only allocates variable costs to inventory, resulting in a lower cost per unit. Therefore, since fewer units have been produced than sold, the fixed costs that would have been allocated to inventory under absorption costing will instead be immediately expensed under variable costing, resulting in a higher operating profit for variable costing.

Question 16

All of the following are steps used to find the target profit for companies that incur income taxes except:
A)convert the desired target profit after taxes to target profit before taxes.
B)determine the desired target profit after taxes.
C)convert the desired target profit before taxes to target profit after taxes.
D)use the target profit before taxes to calculate target profit in units or in sales dollars.
E)None of the answer choices is correct.

Accepted Answer

The correct steps for finding the target profit for companies that incur income taxes include determining the desired target profit after taxes, converting this to a before-tax amount, and then using this figure to calculate the target profit in units or sales dollars. Converting the desired target profit before taxes to after taxes (C) is not a step in this process, as the initial goal is to determine how much needs to be earned before taxes to achieve a specific after-tax profit.

Question 17

Designer Jackets,Inc.produces blazers and has the following data available on these products.
 $\begin{array}{llr}
  \text {Sales price per unit  } &\$250\
 \text {  Variable cost per unit} &100\
 \text {  Fixed costs per month} &15,000\
 \text {  Tax rate} &25 \text { percent }
\end{array}$
 
(1)How many units must be sold to earn a monthly profit of $180,000 after taxes?
(2)How many sales dollars are required to earn a monthly profit of $180,000 after taxes?

Accepted Answer

The answer of Designer Jackets,Inc.produces blazers and has the following...

Question 18

Paddleboard Incorporated builds three products: River,Lake,and Ocean.Information for these three products is shown below:
 
$\begin{array}{lcccc}
& \text { River } & \text { Lake } & \text { Ocean } & \text { Total } \
\text { Selling price per unit } & \$ 300 & \$ 250 & \$ 275 & \
\text { Variable cost per unit } & \$ 175 & \$ 150 & \$ 125 & \
\text { Expected unit sales (annual) } & 14,000 & 2,000 & 4,000 & 20,000 \
\text { Sales mix } & 70 \% & 10 \% & 20 \% & 100 \%
\end{array}$ 
Total annual fixed costs are $765,000.Assume the sales mix remains the same at all levels of sales.
(1) a.How many products in total must be sold to break even?
b.How many units of each product must be sold to break even?
(2)a.How many products in total must be sold to earn an annual profit of $1,275,000?
b.How many units of each product must be sold to earn an annual profit of $1,275,000?

Accepted Answer

The answer of Paddleboard Incorporated builds three products: River,Lake,and Ocean.Information...

Question 19

The local nonprofit youth symphony is planning a concert fundraiser.The organization estimates that 550 tickets can be sold for $16 per person.The fixed costs are $720.The local chamber of commerce office will process ticket orders for a fee of $4 per ticket,to relieve the youth symphony of this responsibility.
(1)How many tickets does your organization have to sell to break even?
(2)How many tickets does your organization have to sell to earn a profit of $4,320?
(3)How much must your organization have in sales dollars to break even (rounded to the nearest cent)?
(4)How much must your organization have in sales dollars to earn a profit of $4,320 (rounded to the nearest cent)?
(5)What is the organization's margin of safety in units and in sales dollars?

Accepted Answer

The answer of The local nonprofit youth symphony is planning...

Quiz 6: How Is Cost-Volume-Profit Analysis Used for Decision Making

Huston Company has annual fixed costs totaling $3,000,000 and variable costs of $450 per unit.Each unit of product is sold for $850.Assume a tax rate of 30 percent.How many units must be sold to earn an annual profit of $210,000 after taxes?

Management of Raley Company would like to achieve a target profit after taxes of $80,000.The company's income tax rate is 20 percent.What target profit before taxes is required to earn $80,000 in after tax profit?

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing operating profit under absorption versus variable costing?

Capri Incorporated has annual fixed costs totaling $3,000,000 and variable costs of $450 per unit.Each unit of product is sold for $850.Assume a tax rate of 30 percent.How many sales dollars are required to earn an annual profit of $210,000 after taxes?

If the number of units produced is more than the number of units sold,which of the following statements is true when comparing overhead costs under absorption versus variable costing?

Exhibit 6-6 Sauer Company sells folding chairs for $40.00 per unit.Variable cost is $15.00 per unit.Each chair requires 4 direct labor hours and 2 machine hours to produce. -Refer to Exhibit 6-6.Which of the following is the correct contribution margin per direct labor hour?

Which of the following is not found on an income statement prepared using absorption costing?

If the number of units produced is less than the number of units sold,which of the following statements is true when comparing operating profit under absorption versus variable costing?

All of the following are steps used to find the target profit for companies that incur income taxes except: