Cost-Volume-Profit

Questions 1-5

208 5 Cost-Volume-Profit Instructions (a) Compute break-even point in units using the mathematical equation. (b) Compute break-even point in dollars using the contribution margin (CM) ratio. (c) Compute the margin of safety percentage assuming actual sales are $500,000 (d) Compute the sales required in dollars to earn net income of $165,000 Solution (a) Required sales - Variable costs - Fixed costs - Net income $200 - 590 - $220,000 - $0 $110 - $220.000 0 - 20.000 units (b) Unit contribution margin-Unit selling price - Unit variable costs Contributie margin ratio - Unit contribution margin+Unit selling price Bercak-even point in dollars - Fixed costs + Contribution margin ratio - $220,000.39 - $400.000 (c) Margin of safety Actual sales - Break even sales Actual sales $500,000 - $400,000 $500.000 (d) Required sales - Variable costs - Med costs - Net Income $200 - $90 - $220,000 - $165.000 5110 - $385.000 0 - 35,000 units 35,000 units X $20 = $700,000 required sales Brief Exercises, Exercises.com Exercises, and Problems and many additional resources are available for practice in WileyPLUS WileyPLUS QUESTIONS 1. (a) What is cost behavior analysis? (b) Why is cost behavior analysis important to man agement? 2. (a) Scott Winter asks your help in understanding the term 'activity index." Explain the meaning and importance of this term for Scott (b) State the two ways that variable costs may be defined 3. Contrast the effects of changes in the activity level on total fixed costs and on unit fixed costs. 4. J. P. Alexander claims that the relevant range concept is important only for variable costs. (a) Explain the relevant range concept. (b) Do you agree with J. P's claim? Explain. 5. "The relevant range is indispensable in cost behavior analysis. Is this true? Why or why not? 6. Adam Antal is confused. He does not understand why rent on his apartment is a fixed cost and rent on a Hertz rental truck is a mixed cost. Explain the differ ence to Adam. 7. How should mixed costs be classified in CVP analysis? What approach is used to effect the appropriate classification? 8. At the high and low levels of activity during the month direct labor hours are 90,000 and 40,000, respectively The related costs are $165,000 and $100,000. What are the fixed and variable costs at any level of activity? 9. "Cost-volume-profit (CVP) analysis is based entirely on unit costs. Do you agree? Explain. 10. Faye Dunn defines contribution margin as the amount of profit available to cover operating expenses. Is there any truth in this definition? Discuss