Short Answer/Multiple Choice Questions 1. If the variable cost per unit decreased and all other costs remained the same, what would be the effect on the breakeven point? Explain. 2. Costs that remain constant (unchanged) in TOTAL dollar amount as the level of activity increases or decreases are called 3. Which of the following describes the behavior of the variable cost per unit? a varies (changes) in increasing proportion with changes in the activity level. b. Varies (changes) in decreasing proportion with changes in the activity level. c. Remains constant (unchanged) with changes in the activity level. d. Varies in direct proportion with changes in the activity level. 4. Contribution Margin is: a. the excess of sales revenue over the variable cost b. another term for cost-volume-profit analysis c. the same as gross profit d the same as sales revenue 5. Contribution Margin ratio is: a. the same as the variable cost ratio b. the same as the gross profit percentage c. Contribution margin expressed as a percentage of sales revenue or selling price. d. The same as the profit-volume ratio 6. Able Company has fixed manufacturing costs are S561,000 and the unit contribution margin is $8.00. Compute the breakeven point if the unit variable cost was decreased by 5.50 per unit 7. Which of the following situations would cause the breakeven point to decrease? a. Total fixed costs increased b. Decrease in selling price per unit c. Decrease in variable cost per unit d. Increase in variable cost per unit ACCT&203 Unit 4 Review - Cost-Volume-Profit Analysis, Absorption and Variable Costing Try to complete all problems without using your class notes or textbook. 8. The relative distribution of sales among various products sold by a business in known as: a business basket of goods b. contribution margin mix c. sales mix d. brownie mix 9. The excess of the current sales level and the sales at the breakeven point is called the 10. (CMA Adapted) Cineplex Entertainment Company owns and operates a nationwide chain of movie theatres. The 50 properties in the Cineplex Entertainment chain vary from low-volume, single town,single-screen theatres to high-volume, big city, multi-screen theatres. The management is considering installing machines that will make popcorn on the premises. These machines would allow the theatres to sell popcorn that would be freshly popped daily, rather than pre-popped corn that is currently purchased in 50-gallon bags. This proposed change is intended to increase the attendance at each theatre. The machines can be leased in several different sizes. The annual rental cost and operating costs vary with the size of the machine. The machine capacities and cost information are as follows: Small Regular Large Annual Capacity 50.000 boxes 95.000 boxes 174,000 boxes Costs: Annual Rental $9.000 $12.000 $21.000 Popcorn cost per box 5.22 5.19 Other costs per box .15 Cost of each box .10 Selling Price per box $1.20 $1.20 $1.20 Required: (use a separate sheet of paper.) ROUND ALL UNIT COMPUTATIONS UP TO THE NEXT WHOLE UNIT a. Compute the point of indifference in units between the Small and Regular machines? b. Compute the point of indifference in units between the Regular and Large machines 6. Compare the Small and Regular Machines. In order to maximize profits, which machine should they purchase if they plan to sell 41,000 boxes? d. Compute the net income from popcorn sales assuming that Cineplex plans to sell 92,000 boxes. 10 10 S.IS .08 10 11. If fixed costs are $500,000 and the unit contribution margin is $20.00, what is the breakeven point in units if fixed costs are reduced by 8%? 12. If fixed costs are $561,000 and the unit contribution margin is $8.00, compute the breakeven point if the unit variable cost was decreased by 5.50 per unit ACCT&203 Unit 4 Review - Cost-Volume-Profit Analysis, Absorption and Variable Costing Try to complete all problems without using your class notes or textbook. 13. Ingram Company manufactures office furniture. During the most productive month of the year, 3,500 desks were produced at a total cost of $84,400. In its slowest month, the company made 1,100 desks at a total cost of $46,000. Based on this information, compute the total fixed costs: 14. The Lemon company has current sales of $500,000. Variable costs are 65% of sales and fixed costs are $150,000. If sales increased by $80,000, compute the change in operating income. Specifically show whether income will increase or decrease. 15. Salter Inc. has a unit selling price of $40. The variable cost per unit is $25 and fixed costs are $135,000. The current sales level is 10,000 units. If the number of units sold increased by 5,000, how much will operating income change? Increase or Decrease? 16. The staff accountant for Greyline Company has compiled the following cost information for the months of January through June, of the current year. Month Total Costs Units January $342,000 2,500 February 332,000 2.800 March 288,000 1,600 April 385,000 3,200 May 396,000 3,600 305,000 2,200 June Compute the required sales in both units and sales dollars in order for the company to eam a profit of $50,000. Assume the selling price per unit is $71.00. ACCT&203 Unit 4 Review - Cost-Volume-Profit Analysis, Absorption and Variable Costing Try to complete all problems without using your class notes or textbook 17. Joe's Cat Food Co., located in Renton, Washington, has the following selected information relating to its operations: Selling price per unit $ 7.25 Variable Cost per unit $ 3.80 Total Fixed Costs 5517,500 Number of units sold 275,000 The company is considering a move to Mexico, where direct labor costs can be reduced, thereby reducing variable costs by 30%. The City of Renton has offered to reduce property taxes (fixed cost) in order to encourage the company to remain in Washington and save local jobs. Joe's Cat Food has agreed not to move the company if they can earn the same profit that they would have earned in Mexico. How much must the City of Renton reduce the company's property taxes to encourage the company to stay? Assume that there are no other changes. 18. Phipps Co, sells two products, Arks and Bins. Last year, the company sold 12,000 Arks and 28,000 Bins. This sales mix is expected to continue. Additional information relating to these products is as follows: Product Unit Selling Price Unit Variable Cost Unit Contribution Margin Arks Bins S80 $20 Total Fixed costs were 8910,000. SI20 $40 S80 $60 What was the breakeven point in units. Specifically show the number of Arks and Bins sold at the breakeven point. ACCT&203 Unit 4 Review - Cost-Volume-Profit Analysis, Absorption and Variable Costing Try to complete all problems without using your class notes or textbook. 19. The Starclucks Corporation reported the following information for the year ended December 31, 2012. Amounts in thousands Net Sales $100,900 Cost of Production $70,000 70% variable, 30% fixed Marketing and distribution $10,900 60% variable, 40% fixed Other expenses $6,000 100% fixed Total Expenses $86,900 Operating Income $14,000 The company sold 9,000 pounds of coffee during 2012. For 2013, the company expects other expenses to increase by 20% and unit sales to increase by 10%. The company also expects to sell all of the coffee that they produce. There will be no ending inventories of coffee. Round ALL cost per unit computations to the nearest cent. (Example: $8.645 should be $8.65 per unit and $7.343 should be $7.34 per unit) Show supporting computations in good form. Required: Compute the break even point in units for the year 2012. (Round to the nearest whole unit) Compute the breakeven point in units for the year 2013. (Round to the nearest whole unit) Prepare a Contribution Margin Income Statement for 2013