Chapter 6 (Part 1) - High-Low method & Applications of CVP Concepts

1. Using the following data, apply the high-low method of cost analysis to the three cost data groups: Volume Adams Brown Crawford 4,000 $8,500 $5,000 $14,000 6,000 $13,000 $11,000 $14,000 13,000 $20,000 $19,000 $14,000 30,000 $28,000 $37,500 $14,000

What cost behavior patterns are apparent for each group (Is it a variable, fixed or mixed pattern)? What is the cost formula for each group? Cost Formula: Adams: Brown: Crawford:

2. Use the following information to answer the following 2 questions Chovanec Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 170 100 % Variable expenses 68 40 % Contribution margin $ 102 60 % (1) Fixed expenses are $521,000 per month. The company is currently selling 7,000 units per month. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change? [hint : prepare contribution margin format income statement for before the change and after the change] A) decrease of $48,000 B) decrease of $6,000 C) increase of $48,000 D) increase of $6,000 (2) How much will a company's net operating income change if it undertakes an advertising campaign given the following data: [hint : Use the CM ratio] Cost of advertising campaign $ 25,000 Variable expense as a percentage of sales 42 % Increase in sales $ 60,000 A) $200 increase B) $25,200 increase C) $15,000 increase D) $9,800 increase

Chapter 6 - The Basics of Cost-Volume-Profit (CVP) Analysis; Additional Applications of CVP Concepts; Break-Even Analysis; Target Profit Analysis; The Margin of Safety; Operating Leverage Laraia Corporation has provided the following contribution format income statement. All questions concern situations that are within the relevant range. Sales (3,000 units) $150,000 Variable expenses 90,000 Contribution margin 60,000 Fixed expenses 48,000 Net operating income $12,000 Required: a. What is the contribution margin per unit? b. What is the contribution margin ratio? c. If sales increase to 3,050 units, what would be the estimated increase in net operating income? d. If the selling price increases by $4 per unit and the sales volume decreases by 200 units, what would be the estimated net operating income? (hint : Prepare CM income statement) e. If the variable cost per unit increases by $5, spending on advertising increases by $3,000, and unit sales increase by 450 units, what would be the estimated net operating income? (hint : Prepare CM income statement) f. What is the break-even point in unit sales? g. What is the break-even point in dollar sales? h. Estimate how many units must be sold to achieve a pre-tax target profit of $54,000. i. What is the margin of safety in dollars? j. What is the margin of safety percentage? k. What is the degree of operating leverage? l. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 15% increase in sales?