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Exam 20: Cost Behavior Analysis

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Question 31

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The point at which the total cost line intersects with the total revenue line provides information on the number of units that must be sold to break even.

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Question 32

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The relevant range of activity is the range in which actual operations are likely to occur.

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Question 33

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Normal capacity is the average annual level of operating capacity needed to meet expected sales demand.

Dick Sports,Inc.'s,income statement data for last year is as follows: $\begin{array} { l r } \text { Sales revenue } & \$ 200,000 \\\text { Variable costs } & 140,000 \\\text { Fixed costs } & 30,000 \\\text { Operating income } & 18,000 \\\end{array}$ What is Dick's breakeven point in dollars?

Contribution margin (CM)is the amount that remains after all fixed costs are subtracted from sales.

The typical relationship between variable costs and volume may be described best as follows:

Ben & Harry Co.sold 100,000 units last year with the following results: $\begin{array} { l r } \text { Sales revenue } & \$ 400,000 \\\text { Variable costs } & 160,000 \\\text { Contribution margin } & \$ 240,000 \\\text { Fixed costs } & 100,000 \\\text { Operating income } & \$ 140,000 \\\end{array}$ a. Management thinks that a 5 percent reduction in the unit sales price and a $31,000 increase in fixed advertising costs will create a 30 percent increase in unit sales. Assess this proposal and make a recommendation on what action should be taken. b. Assume that the marketing manager thinks that the unit sales price should not be changed. Instead, he recommends a $0.40 per unit increase in sales commissions coupled with some increase in advertising to generate the 30 percent increase in unit sales and a 20 percent increase in operating income. Assess this proposal and determine the maximum amount of money that can be spent on advertising if the targeted profit is to be achieved.

Projected cost information for a new product to be produced by Kolier Manufacturing is as follows: $\text { Expected variable unit costs: }$ $\begin{array}{lr}\text { Direct materials } & \$ 10.90 \\\text { Direct labor } & 7.18 \\\text { Overhead } & 1.92 \\\text { Selling costs } & 4.00\end{array}$ $\text { Annual fixed costs: }$ $\begin{array}{lr}\text { Taxes on property used } & \$ 8,870 \\\text { Depreciation on building and equipment } & 18,920 \\\text { Advertising } & 38,840 \\\text { Other } & 2,070\end{array}$ The product is to be sold for $49. a. Compute the number of units that must be sold to earn a profit of $80,000. b. Compute the number of units that must be sold if advertising costs rise by $12,000 and a targeted profit of $120,000 is to be obtained. c. Use the original information and sales of 10,000 units to compute the new selling price that the company must use to obtain a profit of $200,000. d. The most in annual sales that could be projected is 20,000 units. Determine the added amount that could be spent on fixed advertising costs if the highest possible selling price that management believes can be charged is $50 and if there is a targeted profit of $225,000.

Adding a desired profit level to breakeven computations will lower the number of sales units.

Adding the contribution margin as a component to cost-volume-profit computations will not change the resulting amount of breakeven units in a given situation.

Loren,Inc.,sold 30,000 units of its product last year with the following results: $\begin{array}{lr}\text { Sales revenue } & \$ 900,000 \\\text { Variable costs } & 630,000 \\\text { Fixed costs } & \underline{190,000} \\\text { Operating income } &\underline{ \$ 80,000}\end{array}$ The company expects variable costs to increase by $4.00 per unit this year. a. Assuming the unit sale price remains constant, compute the unit contribution margin and the contribution margin ratio for this year. b. Given the expected change in variable costs, how many units will have to be sold this year to earn the same operating income as last year? c. Assuming the company is willing to raise the unit sales price but wants the contribution margin to be the same as last year, determine the unit sales price the company must charge to cover the expected increase in variable costs.

If a company wants to know how many units of a certain product it must sell to make a desired level of profit,it should add the amount of profit to the numerator in the breakeven analysis.

Is breakeven analysis a tool that can be used for a service-oriented business? Explain your answer.

The breakeven formula adjusted for profits may be stated as

A project breaks even when total revenue less all costs is equal to zero.

SHARE is trying to determine how many clients must be serviced in order to cover its monthly service overhead.Using the high-low method,it has determined that the variable cost per client is $800 and that the monthly fixed overhead is $28,000. Assuming an average fee of $1,200 per client,the breakeven point per month is

Using the contribution margin approach,find the breakeven point in units for Consumer Products if the selling price per unit is $12,the variable cost per unit is $6,and the fixed costs are $8,040.

Cost behavior is defined as the manner in which costs respond to changes in volume or activity.

If the contribution margin on a new product line is $15,fixed costs are $165,000,and the total market for the product is 22,000 units,then the breakeven analysis would recommend that the company

Contribution margin is selling price minus unit fixed costs.