Question
QUESTIONS 1&2 XYZ Manufacturing produces a single product that sells for $130. Variable costs per unit equal $68. The company expects total fixed costs to
QUESTIONS 1&2
XYZ Manufacturing produces a single product that sells for $130. Variable costs per unit equal $68. The company expects total fixed costs to be $62,000 for next year at the current sales level of 1,000 units. In an attempt to improve performance, management is considering 2 alternative actions. Each alternative action is to be evaluated separately.
1. Suppose management believes that a $40,000 increase in advertising (a fixed cost) will result in a considerable increase in sales. If sales increase by 700 units, what will be the increase in net income?
a. $2,400
b. $3,400
c. $4,400
d. $5,400
2. Suppose management believes that a 10% reduction in the selling price will result in a 45% increase in sales. If this proposed reduction in selling price is implemented, HINT: Compute the original total CM and compare it to the new total CM.
a. net income will decrease by $8,600.
b. net income will increase by $9,050.
c. net income will decrease by $9,050.
d. net income will increase by $8,600.
3. Which of the following statements is TRUE concerning operating leverage?
| a. | The greater the degree of operating leverage, the more that changes in fixed costs will affect variable costs. |
| b. | Firms with higher degrees of operating leverage are less risky than firms with lower degrees of operating leverage. |
| c. | Firms with lower degrees of operating leverage have a high level of fixed costs in their cost structure. |
| d. | The greater the degree of operating leverage, the more that changes in sales activity will affect profits. |
4. Which of the following statements is TRUE if both fixed expenses and the sale price per unit increase while variable costs per unit are unchanged?
A. Breakeven point in units could increase, decrease, or remain the same
B. Breakeven point in units increases
C Breakeven point in units decreases
E. Breakeven point in units remains unchanged
5. Which of the following statements is TRUE when making decisions using cost-volume-profit (CVP) analysis?
| a. | As long as the total contribution margin is a positive number, net income will be positive. |
| b. | As long as total variable costs are more than total fixed costs, net income will be negative. |
| c. | As long as the total contribution margin is greater than total fixed costs, net income will be positive. |
| d. | As long as the sales price per unit is greater than fixed costs per unit, net income will be positive. |
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
