Exercise _ SMC - Ch 1 (MC Theory and Problem)

If a company's variable cost per unit increases, which of the following is true?
 the contribution margin ratio will decrease
 Operating income will increase
 the breakeven point in units will decrease
 the margin of safety will increase
Junior Company has a breakeven point of 34,600 units and is selling 35,000
units. If unit variable costs increase, the margin of safety will

 remain the same

 decrease
 increase
 it is impossible to tell
The term relevant range, as used in cost accounting, means the range
 over which cost relationships are valid
 over which production has occurred in the past ten years.
 over which costs may fluctuate
 of probable production
The excess of revenue over variable costs, including manufacturing, selling
and administrative costs, is called:
 Segment margin.
 Manufacturing margin.
 Contribution margin.
 Gross margin.
At the break-even-point, fixed cost is always
 more than the contribution margin
 equal to the contribution margin
 more than the variable cost
 less than the contribution margin
Break-even sales volume in units is determined by:
 Subtracting the fixed cost from the contribution margin.
 Dividing the fixed cost by the unit selling price.
 Dividing the fixed cost by the difference between the unit selling
price and unit variable costs.
 Subtracting the variable cost per unit from the unit selling price.
Income taxes
 may increase or decrease the break-even point depending upon the
income tax rate.
 have no impact on the break-even point.
 will decrease the break-even point.
 will increase the break-even point
The margin of safety is the amount:
 that sales can decrease before the company will suffer a loss.
 that the contribution margin exceeds fixed cost.
 by which the profit calculated under absorption costing exceeds the profit
calculated under variable costing.
 by which the sales price per unit exceeds the variable cost per unit.
The relative percentage of unit sales among the various products made by a
firm is the:
 sales ratio.
 sales volume.
 sales margin.
 sales mix.
Cost-volume-profit analysis includes some simplifying assumptions. Which of
the following is not one of these assumptions?
 Cost and revenues are linear over the relevant range
 Cost and revenues are predictable
 Changes in the beginning and ending inventory levels are insignificant in
amount.
 Sales mix changes are irrelevant.
Vandenberg, Inc. produces and sell two products: a ceiling fan and a table fan.
Vandenberg plans to sell 30,000 ceiling fans and 70,000 table fans in the
coming year. Product price and cost information includes:

Ceiling Fan Table Fan

Price $60 $15
Unit variable cost $12 $7
Direct fix cost $23,600 $45,000
Common fixed selling and administrative expenses total $85,000.
How many ceiling fans are sold at break-even?
 29,500 units  2,304 units
 192,000 units  5,376 units
 Solution:
SALES MIX
PRODUCT PRICE - VARIABLE = CONTRIBUTION X *SALES =
COST
MARGIN MIX
Ceiling Fan $60 - $12 = $48 X 30% = 14.4
Table Fan $15 - $7 = $8 X 70% = 5.6
TOTAL 20

30,000 ceiling fans and 70,000 table fans= 100,000

CEILING- 30,000/100,000=30%
TABLE-70,000/100,000=70%

BREAKEVEN TOTAL= $23,600+$85,000+$45,000 / 20= 7,680

CEILING FAN= 7,680 X 30%= 2,304 UNITS

Loessing Company produced and sold 12,000 units last year with sales price
of $45 per unit and unit variable cost of $20. Fixed costs totaled $250,000. In
the coming year, Loessing expects price to decrease by ten percent. Neither
unit variable cost nor fixed costs can be changed. If Loessing wants to
maintain the same level of income, what will the new level of production need
to be?
 14,634 units
 12,195 units
 16,000 units
 12,000 units
Solution:
Sales [12,000 x $45] 540,000
Variable cost [12,000 x $20] 240,000
Contribution margin 300,000
Fixed cost 250,000
Operating income 50,000
price to decrease by ten percent 45- [45 x 10%]= 40.5
Target profit in units= 250,000+50,000/ [40.5-20] =14,634 units

If a company has an income tax rate of 40% and fixed costs of $105,000, and
wishes to earn an after-tax profit of $150,000, what must its pre-tax income be?
 $375,000
 $425,000
 $175,000
  $250,000
Solution:
before tax income= 150,000/ [1-40%] = 250,000
Jester Company had unit contribution margin on $3.60 and fixed costs of
$29,664. Income was $2,520. What was the margin of safety in units?
 630 units
 7,540 units
 8,940 units
 700 units
Solution:
Income 2,520
Fixed 29,664
CM 32,184

CM TOTAL 32,184/ $3.60 PER UNIT = 8,940 UNITS SOLD

BREAK EVEN UNITS = 29,664/ 3.6 = 8,240

MARGIN OF SAFETY= 8,940 UNITS SOLD -8,240= 700 UNITS
Bryan Company's break-even point is 8,500 units. Variable cost per unit is
$140, and total fixed costs are $297,500 per year. What price does Bryan
charge?
 cannot be determined from the given data.
 $35
 $175
 $160
BEP UNITS= FIXED COSTS / [PRICE-VAR. COST]
8,500= $297,500 / [PRICE-$140]
8,500 [PRICE-$140] = $297,500
8,500PRICE - $1,190,000= $297,500
8,500PRICE= $297,500 + $1,190,000
8,500PRICE/ 8,500= $1,487,000 / 8,500
PRICE= $175

First Class Corp. has sales of $200,000, a contribution margin of 20% and a
margin of safety of $80,000. What is First-class Corp's fixed cost?
 $16,000
 $96,000
  $24,000
 $80,000
SOLUTION:
MARGIN OF SAFETYDOLLAR= SALES- [FIXED/ CM RATIO]
$80,000= $200,000- [FIXED/ 20%]
-$200,000+ $80,000 = - FIXED/ 20%
-120,000 = - FIXED/ 20%
FIXED= 120,000 X 20%
FIXED= $24,000

Information concerning Korian Corporation's product is as follows:

Sales $300,000
Variable cost 240,000
Fixed costs 40,000

Assuming that Korian increased sales of the product by 20%, what should the
operating income be?
 $20,000
 $80,000
 $32,000
 $24,000
SOLUTION:
Sales $300,000
Variable cost 240,000
CM 60,000
Fixed costs 40,000
OPERATING INCOME 20,000

DEGREE OF OPERATING LEVERAGE = CM/ PROFIT

60,000/20,000 = 3
*INCREASE BY 20%= 20% X 3 =0.6 OR
INCREASE PROFIT BY 60%= 20,000 X 60%= 12,000
NEW PROFIT= 20,000 + 12,000 = $32,000
Bialy Company had the following information:

Total Sales $120,000

Total variable costs 48,000
Operating income 12,000

What is the break-even sales revenue?

 $60,000
 $108,000
 $100,000
 $72,000
SOLUTION:
Total Sales $120,000
Total variable costs 48,000
CM 72,000
Operating income - 12,000
FIXED 60,000

break-even sales revenue= FIXED / CM RATIO

=60,000 / 60%
= $100,000
CM RATIO= 72,000/ 120,000 = 60%

The following data apply to McNally Company for last year:

Total variable cost per unit $3.50
Contribution margin/sales 30%
Break-even sales (present volume) $1,000,000
Mc Nally wants to sell an additional 50,000 units at the same selling price and
contribution margin. By how much can fixed costs increase to generate
additional profit equal to 10% of the sales value of the additional 50,000 units
to be sold?
 $50,000  $125,000
 $67,500
 $57,500
Explanation:
Variable Percentage = 70% (100% Sales - 30% Contribution Margin)

Selling Price per Unit = $ 5 (Variable Cost per Unit $ 3.50 / 70%)
Sales for the Additional Units= $250,000 (50,000 units x Selling Price Per Unit
$ 5)

Targeted Profit From the Additional Units Sold = $ 25,000 (Sales $250,000 x
10%)

Contribution Margin From Additional Sales = $75,000 (Sales $ 250,000 x 30%

percentage of Variable Cost)

Additional Fixed Cost to earn at least 10% of Sales on additional Sales =

$ 50,000 (Contribution Margin From Additional Sales $75,000 - Targeted Profit
From the Additional Units Sold $ 25,000 )
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Consider the income statement for Pickbury Farm:

Sales $500,000

Variable costs 350,000

Contribution margin 150,000

Fixed costs 80,000

Net income $ 70,000

What is the margin of safety ratio (to the nearest percentage point)?
 88%
 47%
 30%
 70%
SOLUTION MARGIN OF SAFETY RATIO= SALES- BREAKEVEN /
SALES
= 500,000- 266,667 / 500,000
=47%

BREAKEVEN= 80,000/ 30%=266,667

CM RATIO= 150,000/ 500,000= 0.3 OR 30%