Question 1

South Company sells a single product for $20 per unit.If variable expenses are 60% of sales and fixed expenses total $9,600,the break-even point will be:

Accepted Answer

CM ratio = 1 - Variable expense ratio
CM ratio = 1 - 0.60 = 0.40
Dollar sales to break even = Fixed expenses F1F1F1S1F1F1F10 CM ratio
=$9,600 F1F1F1S1F1F1F10 0.40 = $24,000

Question 2

Pool Company's variable expenses are 36% of sales.Pool is contemplating an advertising campaign that will cost $20,000.If sales increase by $80,000,the company's net operating income should increase by:

Accepted Answer

CM ratio = 1 - Variable expense ratio
= 1 - 0.36
= 0.64
Increase in net operating income = CM ratio F1F1F1S1F1F1F10 Increase in sales - Increase in fixed expenses
= (0.64 F1F1F1S1F1F1F10 $80,000)- $20,000= $51,200 - $20,000 = $31,200

Question 3

The Herald Company manufactures and sells a single product which sells for $50 per unit and has a contribution margin ratio of 30%.The company's monthly fixed expenses are $25,000.If Herald desires a monthly target net operating income equal to 20% of sales dollars,sales in units will have to be (rounded):

Accepted Answer

Selling price = $50 per unit
CM ratio = 0.30
Fixed expenses = $25,000
Target profit = 0.20 F1F1F1S1F1F1F10 Dollar sales
Dollar sales to attain a target profit = (Target profit + Fixed expenses)F1F1F1S1F1F1F10 CM ratio
Dollar sales = [(0.20 F1F1F1S1F1F1F10 Dollar sales)+ $25,000] F1F1F1S1F1F1F10 0.30
0.30 F1F1F1S1F1F1F10 Dollar sales = (0.20 F1F1F1S1F1F1F10 Dollar sales)+ $25,000
0.10 F1F1F1S1F1F1F10 Dollar sales = $25,000
Dollar sales = $25,000 F1F1F1S1F1F1F10 0.10 = $250,000
Unit sales = Dollar sales F1F1F1S1F1F1F10 Selling price = $250,000 F1F1F1S1F1F1F10 $50 per unit = 5,000 units

Question 4

Danneman Corporation's fixed monthly expenses are $13,000 and its contribution margin ratio is 56%.Assuming that the fixed monthly expenses do not change,what is the best estimate of the company's net operating income in a month when sales are $41,000?

Accepted Answer

Profit = CM ratio F1F1F1S1F1F1F10 Sales - Fixed expenses
= (0.56 F1F1F1S1F1F1F10 $41,000)- $13,000
= $22,960 - $13,000
= $9,960

Question 5

Darth Company sells three products.Sales and contribution margin ratios for the three products follow:  Given these data,the contribution margin ratio for the company as a whole would be:

Accepted Answer

The answer of Darth Company sells three products.Sales and contribution...

Question 6

The contribution margin ratio is 25% for Grain Company and the break-even point in sales is $200,000.To obtain a target net operating income of $60,000,sales would have to be:

Accepted Answer

Dollar sales to break even = Fixed expenses F1F1F1S1F1F1F10 CM ratio
$200,000 = Fixed expenses F1F1F1S1F1F1F10 0.25
Fixed expenses = $200,000 F1F1F1S1F1F1F10 0.25 = $50,000
Dollar sales to attain a target profit = (Target profit + Fixed expenses)F1F1F1S1F1F1F10 CM ratio
= ($60,000 + $50,000)F1F1F1S1F1F1F10 0.25 = $440,000

Question 7

Gaudy Inc.produces and sells a single product.The company has provided its contribution format income statement for May.  If the company sells 4,300 units,its net operating income should be closest to:

Accepted Answer

Variable expenses per unit = Variable expenses F1F1F1S1F1F1F10 Quantity sold
= $265,500 F1F1F1S1F1F1F10 4,500 units = $59 per unit
Selling price per unit = Sales F1F1F1S1F1F1F10 Quantity sold
= $427,500 F1F1F1S1F1F1F10 4,500 units = $95 per unit
Unit CM = Selling price per unit - Variable expenses per unit
= $95 per unit - $59 per unit = $36 per unit
Profit = Unit CM F1F1F1S1F1F1F10 Q - Fixed expenses
= ($36 per unit F1F1F1S1F1F1F10 4,300 units)- $135,300 = $154,800 - $135,300 = $19,500

Question 8

Patterson Company's variable expenses are 55% of sales.At a $400,000 sales level,the degree of operating leverage is 5.If sales increase by $30,000,the new degree of operating leverage will be (rounded):

Accepted Answer

CM ratio = 1 - Variable expense ratio
CM ratio = 1 - 0.55 = 0.45
CM ratio = Contribution margin F1F1F1S1F1F1F10 Sales
Contribution margin = CM ratio F1F1F1S1F1F1F10 Sales
= 0.45 F1F1F1S1F1F1F10 $400,000 = $180,000
At sales of $400,000:
Degree of operating leverage = Contribution margin F1F1F1S1F1F1F10 Net operating income
5 = $180,000 F1F1F1S1F1F1F10 Net operating income
Net operating income = $180,000 F1F1F1S1F1F1F10 5 = $36,000
Net operating income = Contribution margin - Fixed expenses
$36,000 = $180,000 - Fixed expenses
Fixed expenses = $180,000 - $36,000 = $144,000
At sales of $430,000:
Contribution margin = CM ratio F1F1F1S1F1F1F10 Sales = 0.45F1F1F1S1F1F1F10 $430,000 = $193,500
Net operating income = Contribution margin - Fixed expenses
= $193,500 - $144,000 = $49,500
Degree of operating leverage = Contribution margin F1F1F1S1F1F1F10 Net operating income
= $193,500 F1F1F1S1F1F1F10 $49,500 = 3.91

Question 9

Street Company's fixed expenses total $150,000,its variable expense ratio is 60% and its variable expenses are $4.50 per unit.Based on this information,the break-even point in units is:

Accepted Answer

CM ratio = 1 - Variable expense ratio = 1 - 0.60 = 0.40
Dollar sales to break even = Fixed expenses F1F1F1S1F1F1F10 CM ratio
= $150,000 F1F1F1S1F1F1F10 0.40 = $375,000
Variable expense ratio = Total variable expenses F1F1F1S1F1F1F10 Total dollar sales
0.60 = Total variable expenses F1F1F1S1F1F1F10 Total dollar sales
0.60 = $4.50 per unit F1F1F1S1F1F1F10 Unit sales F1F1F1S1F1F1F10 Selling price per unit F1F1F1S1F1F1F10 Unit sales
0.60 = $4.50 per unit F1F1F1S1F1F1F10 Selling price per unit
Selling price = $4.50 per unit F1F1F1S1F1F1F10 0.60 = $7.50 per unit
Dollar sales = Unit selling price F1F1F1S1F1F1F10 Unit sales
$375,000 = $7.50 per unit F1F1F1S1F1F1F10 Unit sales
Unit sales = $375,000 F1F1F1S1F1F1F10 $7.50 per unit = 50,000 units

Question 10

Cindy,Inc.sells a product for $10 per unit.The variable expenses are $6 per unit,and the fixed expenses total $35,000 per period.By how much will net operating income change if sales are expected to increase by $40,000?

Accepted Answer

CM ratio = Unit contribution margin F1F1F1S1F1F1F10 Unit selling price
= ($10 per unit - $6 per unit)F1F1F1S1F1F1F10 $10 per unit
= $4 per unit F1F1F1S1F1F1F10 $10 per unit
= 0.40
Increase in net operating income = CM ratio F1F1F1S1F1F1F10 Increase in sales
= 0.40 F1F1F1S1F1F1F10 $40,000 = $16,000

Question 11

Data concerning Lancaster Corporation's single product appear below:  Fixed expenses are $105,000 per month.The company is currently selling 1,000 units per month.Management is considering using a new component that would increase the unit variable cost by $44.Since the new component would increase the features of the company's product,the marketing manager predicts that monthly sales would increase by 400 units.What should be the overall effect on the company's monthly net operating income of this change?

Accepted Answer

The answer of Data concerning Lancaster Corporation's single product appear...

Question 12

Knoke Corporation's contribution margin ratio is 29% and its fixed monthly expenses are $17,000.If the company's sales for a month are $98,000,what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

Accepted Answer

Profit = CM ratio F1F1F1S1F1F1F10 Sales - Fixed expenses
= (0.29 F1F1F1S1F1F1F10 $98,000)- $17,000
= $28,420 - $17,000
= $11,420

Question 13

Rothe Company manufactures and sells a single product that it sells for $90 per unit and has a contribution margin ratio of 35%.The company's fixed expenses are $46,800.If Rothe desires a monthly target net operating income equal to 15% of sales,the amount of sales in units will have to be (rounded):

Accepted Answer

Selling price = $90 per unit
CM ratio = 0.35
Fixed expenses = $46,800
Target profit = 0.15 F1F1F1S1F1F1F10 Dollar sales
Dollar sales to attain a target profit = (Target profit + Fixed expenses)F1F1F1S1F1F1F10 CM ratio
Dollar sales = (0.15 F1F1F1S1F1F1F10 Dollar sales + $46,800)F1F1F1S1F1F1F10 0.35
0.35 F1F1F1S1F1F1F10 Dollar sales = 0.15 F1F1F1S1F1F1F10 Dollar sales + $46,800
0.20 F1F1F1S1F1F1F10 Dollar sales = $46,800
Dollar sales = $46,800 F1F1F1S1F1F1F10 0.20 = $234,000
Unit sales = Dollar sales F1F1F1S1F1F1F10 Selling price = $234,000 F1F1F1S1F1F1F10 $90 per unit = 2,600 units

Question 14

Balonek Inc.'s contribution margin ratio is 57% and its fixed monthly expenses are $41,000.Assuming that the fixed monthly expenses do not change,what is the best estimate of the company's net operating income in a month when sales are $112,000?

Accepted Answer

Profit = CM ratio F1F1F1S1F1F1F10 Sales - Fixed expenses
= (0.57 F1F1F1S1F1F1F10 $112,000)- $41,000
= $63,840 - $41,000
= $22,840

Question 15

Sinclair Company's single product has a selling price of $25 per unit.Last year the company reported a profit of $20,000 and variable expenses totaling $180,000.The product has a 40% contribution margin ratio.Because of competition,Sinclair Company will be forced in the current year to reduce its selling price by $2 per unit.How many units must be sold in the current year to earn the same profit as was earned last year?

Accepted Answer

CM ratio = 1 - Variable expense ratio
CM ratio = 1 - Variable expenses F1F1F1S1F1F1F10 Sales
0.40 = 1 - ($180,000 F1F1F1S1F1F1F10 Sales)
$180,000 F1F1F1S1F1F1F10 Sales = 1 - 0.40
Sales = $180,000 F1F1F1S1F1F1F10 (1 - 0.40)= $180,000 F1F1F1S1F1F1F10 0.60 = $300,000
Sales = Selling price per unit F1F1F1S1F1F1F10 Quantity sold
$300,000 = $25 per unit F1F1F1S1F1F1F10 Quantity sold
Quantity sold = $300,000 F1F1F1S1F1F1F10 $25 per unit = 12,000 units
Variable expense per unit = Variable expenses F1F1F1S1F1F1F10 Quantity sold
= $180,000 F1F1F1S1F1F1F10 12,000 units = $15 per unit
Profit = (Sales - Variable expenses)- Fixed expenses
$20,000 = ($300,000 - $180,000)- Fixed expenses
Fixed expenses = ($300,000 - $180,000)- $20,000 = $120,000 - $20,000 = $100,000
New unit selling price = $25 per unit - $2 per unit = $23 per unit
New unit contribution margin = $23 per unit - $15 per unit = $8 per unit
Unit sales to attain a target profit = (Target profit + Fixed expenses)F1F1F1S1F1F1F10 Unit CM
= ($20,000 + $100,000)F1F1F1S1F1F1F10 $8 per unit = 15,000 units

Question 16

Weinreich Corporation produces and sells a single product.Data concerning that product appear below:  The company is currently selling 2,000 units per month.Fixed expenses are $131,000 per month.The marketing manager believes that an $18,000 increase in the monthly advertising budget would result in a 170 unit increase in monthly sales.What should be the overall effect on the company's monthly net operating income of this change?

Accepted Answer

The answer of Weinreich Corporation produces and sells a single...

Question 17

Data concerning Runnells Corporation's single product appear below:  The company is currently selling 6,000 units per month.Fixed expenses are $424,000 per month.The marketing manager believes that a $7,000 increase in the monthly advertising budget would result in a 100 unit increase in monthly sales.What should be the overall effect on the company's monthly net operating income of this change?

Accepted Answer

The answer of Data concerning Runnells Corporation's single product appear...

Question 18

Turner Company's contribution margin ratio is 15%.If the degree of operating leverage is 12 at the $150,000 sales level,net operating income at the $150,000 sales level must equal:

Accepted Answer

CM ratio = 0.15
Degree of operating leverage = 12
Sales = $150,000
CM ratio = Contribution margin F1F1F1S1F1F1F10 Sales
Contribution margin = CM ratio F1F1F1S1F1F1F10 Sales = 0.15 F1F1F1S1F1F1F10 $150,000 = $22,500
Degree of operating leverage = Contribution margin F1F1F1S1F1F1F10 Net operating income
12 = $22,500 F1F1F1S1F1F1F10 Net operating income
Net operating income = $22,500 F1F1F1S1F1F1F10 12 = $1,875

Question 19

Loren Company's single product has a selling price of $15 per unit.Last year the company reported total variable expenses of $180,000,fixed expenses of $90,000,and a net operating income of $30,000.A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%.If her proposal is adopted,net operating income would:

Accepted Answer

Profit = (Sales - Variable expenses)- Fixed expenses
$30,000 = ($15 per unit F1F1F1S1F1F1F10 Unit sales - $180,000)- $90,000
($15 per unit F1F1F1S1F1F1F10 Unit sales - $180,000)= $30,000 + $90,000
$15 per unit F1F1F1S1F1F1F10 Unit sales = $30,000 + $90,000 + $180,000
$15 per unit F1F1F1S1F1F1F10 Unit sales = $300,000
Unit sales = $300,000 F1F1F1S1F1F1F10 $15 per unit = 20,000 units
Variable expense per unit = Variable expenses F1F1F1S1F1F1F10 Unit sales
= $180,000 F1F1F1S1F1F1F10 20,000 units = $9 per unit
New selling price = (1.00 + 0.15)F1F1F1S1F1F1F10 $15 per unit = $17.25 per unit
New unit sales = (1.00 - 0.10)F1F1F1S1F1F1F10 20,000 units = 18,000 units
Profit = (P - V)F1F1F1S1F1F1F10 Q - Fixed expenses
New profit = ($17.25 per unit - $9.00 per unit)F1F1F1S1F1F1F10 18,000 units - $90,000
= ($8.25 per unit F1F1F1S1F1F1F10 18,000 units)- $90,000
= $148,500 - $90,000
= $58,500
Increase in profit = $58,500 - $30,000 = $28,500

Question 20

The contribution margin ratio is 30% for the Honeyville Company and the break-even point in sales is $150,000.If the company's target net operating income is $60,000,sales would have to be:

Accepted Answer

Dollar sales to break even = Fixed expenses F1F1F1S1F1F1F10 CM ratio
$150,000 = Fixed expenses F1F1F1S1F1F1F10 0.30
Fixed expenses = $150,000 F1F1F1S1F1F1F10 0.30 = $45,000
Dollar sales to attain a target profit = (Target profit + Fixed expenses)F1F1F1S1F1F1F10 CM ratio
= ($60,000 + $45,000)F1F1F1S1F1F1F10 0.30 = $350,000

Quiz 4: Cost-Volume-Profit Relationships