Ch06 Cost-Volume-Profit Relationships.docx

Chapter 6 Cost-Volume-Profit Relationships True/False Questions 1. One way to compute the total contribution margin is to add total fixed expenses to net operating income. Ans:  True 2. On a CVP graph for a profitable company, the total revenue line will be steeper than the total cost line. Ans:  True 3. In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure. Ans:  False 4. If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase. Ans:  False 5. The impact on net operating income of any given dollar change in total sales can be estimated by multiplying the CM ratio by the dollar change in total sales. Ans:  True 6. A company with sales of $70,000 and variable expenses of $40,000 should spend $10,000 on increased advertising if the increased advertising will increase sales by $20,000. Ans:  False 7. The formula for the break-even point is the same as the formula to attain a given target profit for the special case where the target profit is zero. Ans:  True LO:  5; 6 8. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged. Ans:  False 9. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise. Ans:  False 10. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit. Ans:  False 11. All other things the same, the margin of safety in dollars at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses. Ans:  True LO:  7 12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales. Ans:  True LO:  7 13. A company with high operating leverage will experience a lower reduction in net operating income in a period of declining sales than will a company with low operating leverage. Ans:  False LO:  8 14. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense per unit, and F is the total fixed expense, then the degree of operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F] Ans:  True LO:  8 15. A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point. Ans:  True LO:  9 Multiple Choice Questions 16. Contribution margin can be defined as: A) the amount of sales revenue necessary to cover variable expenses. B) sales revenue minus fixed expenses. C) the amount of sales revenue necessary to cover fixed and variable expenses. D) sales revenue minus variable expenses. Ans:  D 17. Which of the following statements is correct with regard to a CVP graph? A) A CVP graph shows the maximum possible profit. B) A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line. C) A CVP graph assumes that total expense varies in direct proportion to unit sales. D) A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales. Ans:  B 18. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively? Contribution margin ratio Break-even point A) Decrease Increase B) Increase Decrease C) Decrease Decrease D) Increase Increase Ans:  B LO:  3; 5 19. Which of the following is true regarding the contribution margin ratio of a single product company? A) As fixed expenses decrease, the contribution margin ratio increases. B) The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit. C) The contribution margin ratio will decline as unit sales decline. D) The contribution margin ratio equals the selling price per unit less the variable expense ratio. Ans:  B 20. If a company is operating at the break-even point: A) its contribution margin will be equal to its variable expenses. B) its margin of safety will be equal to zero. C) its fixed expenses will be equal to its variable expenses. D) its selling price will be equal to its variable expense per unit. Ans:  B LO:  5; 7 21. At the break-even point: A) sales would be equal to contribution margin. B) contribution margin would be equal to fixed expenses. C) contribution margin would be equal to net operating income. D) sales would be equal to fixed expenses. Ans:  B 22. The break-even point would be increased by: A) a decrease in total fixed expenses. B) a decrease in the ratio of variable expenses to sales. C) an increase in the contribution margin ratio. D) none of these. Ans:  D 23. Which of the following strategies could be used to reduce the break-even point? Fixed expenses Contribution margin A) Increase Increase B) Decrease Decrease C) Decrease Increase D) Increase Decrease Ans:  C 24. Break-even analysis assumes that: A) Total revenue is constant. B) Unit variable expense is constant. C) Unit fixed expense is constant. D) Selling prices must fall in order to generate more revenue. Ans:  B 25. Target profit analysis is used to answer which of the following questions? A) What sales volume is needed to cover all expenses? B) What sales volume is needed to cover fixed expenses? C) What sales volume is needed to earn a specific amount of net operating income? D) What sales volume is needed to avoid a loss? Ans:  C 26. The margin of safety can be calculated by: A) Sales ? (Fixed expenses/Contribution margin ratio). B) Sales ? (Fixed expenses/Variable expense per unit). C) Sales ? (Fixed expenses + Variable expenses). D) Sales ? Net operating income. Ans:  A LO:  7 27. If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in: A) unit contribution margin. B) revenue. C) variable expense. D) net operating income. Ans:  D LO:  8 28. Which of the following is the correct calculation for the degree of operating leverage? A) net operating income divided by total expenses. B) net operating income divided by total contribution margin. C) total contribution margin divided by net operating income. D) variable expense divided by total contribution margin. Ans:  C LO:  8 29. Which of the following is an assumption underlying standard CVP analysis? A) In multiproduct companies, the sales mix is constant. B) In manufacturing companies, inventories always change. C) The price of a product or service is expected to change as volume changes. D) Fixed expenses will change as volume increases. Ans:  A LO:  9 30. Hopi Corporation expects the following operating results for next year: Sales $400,000 Margin of safety $100,000 Contribution margin ratio 75% Degree of operating leverage 4 What is Hopi expecting total fixed expenses to be next year? A) $75,000 B) $100,000 C) $200,000 D) $225,000 Ans:  D LO:  1; 3; 8 Solution: Current sales - Breakeven sales = Margin of safety Substituting the given information into the above equation, we will have: $400,000 ? Breakeven sales = $100,000 Breakeven sales = $300,000 Breakeven sales = Fixed expenses ÷ Contribution margin ratio Substituting the given information into the above equation, we will have: $300,000 = Fixed expenses ÷ 0.75 Fixed expenses = $225,000 31. Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product. Sales (8,400 units) $764,400 Variable expenses  445,200 Contribution margin 319,200 Fixed expenses  250,900 Net operating income $ 68,300 If the company sells 8,200 units, its total contribution margin should be closest to: A) $301,000 B) $311,600 C) $319,200 D) $66,674 Ans:  B Solution: Current contribution margin ÷ Current sales in units = Contribution margin per unit $319,200 ÷ 8,400 = $38 contribution margin per unit If 8,200 units are sold, the total contribution margin will be 8,200 × $38, or $311,600. 32. Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November. Sales (5,700 units) $319,200 Variable expenses  188,100 Contribution margin 131,100 Fixed expenses  106,500 Net operating income $ 24,600 If the company sells 5,300 units, its net operating income should be closest to: A) $24,600 B) $2,200 C) $22,874 D) $15,400 Ans:  D Solution: Current sales dollars ÷ Current sales in units = Sales price per unit $319,200 ÷ 5,700 = $56 sales price per unit Current variable expenses ÷ Current sales in units = Variable expense per unit $188,100 ÷ 5,700 = $33 variable expense per unit Sales (5,300 units × $56) $296,800 Variable expenses (5,300 units × $33)   174,900 Contribution margin 121,900 Fixed expenses   106,500 Net operating income $ 15,400 33. Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January. Sales (4,200 units) $155,400 Variable expenses  100,800 Contribution margin 54,600 Fixed expenses    42,400 Net operating income $ 12,200 If the company sells 4,600 units, its total contribution margin should be closest to: A) $54,600 B) $59,800 C) $69,400 D) $13,362 Ans:  B Solution: Current contribution margin ÷ Current sales in units = Contribution margin per unit $54,600 ÷ 4,200 = $13 contribution margin per unit If 4,600 units are sold, the total contribution margin will be 4,600 × $13, or $59,800. 34. Decaprio Inc. produces and sells a single product. The company has provided its contribution format income statement for June. Sales (8,800 units) $528,000 Variable expenses  290,400 Contribution margin 237,600 Fixed expenses  211,700 Net operating income $ 25,900 If the company sells 9,200 units, its net operating income should be closest to: A) $27,077 B) $49,900 C) $36,700 D) $25,900 Ans:  C Solution: Current sales dollars ÷ Current sales in units = Sales price per unit $528,000 ÷ 8,800 = $60 sales price per unit Current variable expenses ÷ Current sales in units = Variable expense per unit $290,400 ÷ 8,800 = $33 variable expense per unit Sales (9,200 units × $60 ) $552,000 Variable expenses (9,200 units × $33)  303,600 Contribution margin 248,400 Fixed expenses  211,700 Net operating income $ 36,700 35. The Bronco Birdfeed Company reported the following information: Sales (400 cases) $100,000 Variable expenses 60,000 Contribution margin 40,000 Fixed expenses 35,000 Net operating income $5,000 How much will the sale of one additional case add to Bronco's net operating income? A) $250.00 B) $100.00 C) $150.00 D) $12.50 Ans:  B Solution: Current contribution margin ÷ Current sales in cases = Contribution margin per case $40,000 ÷ 400 = $100 contribution margin per case If one additional case is sold, net operating income will increase by $100. 36. The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be: A) $8,000 B) $32,000 C) $24,000 D) $16,000 Ans:  B LO:  3; 5; 7 Solution: Current sales - Breakeven sales = Margin of safety Substituting the given information into the above equation, we will have: $120,000 - Breakeven sales = $24,000 Breakeven sales = $96,000 Sales - Variable expenses = Contribution margin $120,000 - $80,000 = $40,000 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $ 40,000 ÷ $120,000 Contribution margin ratio = 0.33333 Breakeven sales = Fixed costs ÷ Contribution margin ratio Substituting the given information into the above equation, we will have: $96,000 = Fixed costs ÷ 0.33333 Fixed costs = $32,000 37. Dodero Company produces a single product which sells for $100 per unit. Fixed expenses total $12,000 per month, and variable expenses are $60 per unit. The company's sales average 500 units per month. Which of the following statements is correct? A) The company's break-even point is $12,000 per month. B) The fixed expenses remain constant at $24 per unit for any activity level within the relevant range. C) The company's contribution margin ratio is 40%. D) Responses A, B, and C are all correct. Ans:  C LO:  3; 5 Solution: Answer A is not correct because: Sales = Variable expenses + Fixed expenses + Profit $100Q = $60Q + $12,000 + $0 $40Q = $12,000 Q = $12,000 ÷ $40 per unit = 300 units 300 units × $100 selling price per unit = $30,000 breakeven sales in dollars Answer B is not correct because fixed costs change as activity level changes Answer C is correct because: Contribution margin per unit = Selling price per unit - Variable expenses per unit = $100 - $60 = $40 Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit Contribution margin ratio = $40 ÷ $100 Contribution margin ratio = 40% 38. Holt Company's variable expenses are 70% of sales. At a $300,000 sales level, the degree of operating leverage is 10. If sales increase by $60,000, the degree of operating leverage will be: A) 12 B) 10 C) 6 D) 4 Ans:  D LO:  3; 8 Solution: Sales $300,000 Variable expenses ($300,000 × 70%)  210,000 Contribution margin 90,000 Fixed expenses   ? Net operating income $  ? Current degree of operating leverage = Current contribution margin ÷ Current net operating income 10 = $90,000 ÷ Current net operating income Current net operating income = $90,000 ÷ 10 = $9,000 Contribution margin = Fixed expenses - Net operating income $90,000 = Fixed expenses - $9,000 Fixed expenses = $90,000 - $9,000 = $81,000 Sales ($300,000 + $60,000) $360,000 Variable expenses ($360,000 × 70%)  252,000 Contribution margin 108,000 Fixed expenses 81,000 Net operating income $ 27,000 Degree of operating leverage = Contribution margin ÷ Net operating income = $108,000/$27,000 = 4.0 39. Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84,000. If the company's sales for a month are $738,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change. A) $565,440 B) $654,000 C) $88,560 D) $4,560 Ans:  D Solution: Sales $738,000 Variable expenses ($738,000 × 88%)  649,440 Contribution margin ($738,000 × 12%) 88,560 Fixed expenses   84,000 Net operating income $  4,560 40. Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are $36,000. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $103,000? A) $23,740 B) $59,740 C) $67,000 D) $7,260 Ans:  A Solution: Sales $103,000 Variable expenses ($103,000 × 42%)   43,260 Contribution margin ($103,000 × 58%) 59,740 Fixed expenses   36,000 Net operating income $ 23,740 41. Creswell Corporation's fixed monthly expenses are $29,000 and its contribution margin ratio is 56%. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $95,000? A) $12,800 B) $24,200 C) $53,200 D) $66,000 Ans:  B Solution: Sales $95,000 Variable expenses ($95,000 × 44%)  41,800 Contribution margin ($95,000 × 56%) 53,200 Fixed expenses  29,000 Net operating income $24,200 42. Wilson Company prepared the following preliminary budget assuming no advertising expenditures: Selling price $10 per unit Unit sales 100,000 Variable expenses $600,000 Fixed expenses $300,000 Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted net operating income? A) $175,000 B) $190,000 C) $205,000 D) $365,000 Ans:  C Source:  CPA; adapted Solution: Sales (110,000 units × $11.50) $1,265,000 Variable expenses (110,000 units × $6*) 660,000 Contribution margin 605,000 Fixed expenses ($300,000 + $100,000) 400,000 Net operating income $ 205,000 * Current variable expenses ÷ Current sales in units = Variable expense per unit $600,000 ÷ 100,000 = $6 variable expense per unit 43. Data concerning Kardas Corporation's single product appear below: Per Unit Percent of Sales Selling price $140 100% Variable expenses    28  20% Contribution margin $112  80% The company is currently selling 8,000 units per month. Fixed expenses are $719,000 per month. The marketing manager believes that a $20,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $160 B) increase of $20,160 C) decrease of $20,000 D) increase of $160 Ans:  D Solution: 8,000 units 8,180 units Sales (8,000 units, 8,180 units × $140) $1,120,000 $1,145,200 Variable expenses ($1,120,000, $1,145,200 × 20%) 224,000 229,040 Contribution margin 896,000 916,160 Fixed expenses 719,000 739,000 Net operating income $ 177,000 $ 177,160 Increase in net operating income: $177,160 - $177,000 = $160 44. Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $130 100% Variable expenses    78  60% Contribution margin $ 52  40% The company is currently selling 6,000 units per month. Fixed expenses are $263,000 per month. The marketing manager believes that a $5,000 increase in the monthly advertising budget would result in a 140 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $2,280 B) increase of $7,280 C) decrease of $5,000 D) decrease of $2,280 Ans:  A Solution: 6,000 units 6,140 units Sales (6,000 units, 6,140 units × $130) $780,000 $798,200 Variable expenses ($780,000, $798,200 × 60%) 468,000 478,920 Contribution margin 312,000 319,280 Fixed expenses 263,000 268,000 Net operating income $ 49,000 $ 51,280 Increase in net operating income: $51,280 - $49,000 = $2,280 45. Data concerning Dorazio Corporation's single product appear below: Per Unit Percent of Sales Selling price $160 100% Variable expenses    48  30% Contribution margin $112  70% Fixed expenses are $87,000 per month. The company is currently selling 1,000 units per month. Management is considering using a new component that would increase the unit variable cost by $28. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $5,600 B) increase of $33,600 C) decrease of $5,600 D) decrease of $33,600 Ans:  A Solution: 1,000 units 1,400 units Sales (1,000 units, 1,400 units × $160) $160,000 $224,000 Variable expenses (1,000 units × $48, 1,400 units × $76) 48,000 106,400 Contribution margin 112,000 117,600 Fixed expenses 87,000 87,000 Net operating income $ 25,000 $ 30,600 Increase in net operating income: $30,600 - $25,000 = $5,600 46. 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% 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? A) decrease of $48,000 B) decrease of $6,000 C) increase of $48,000 D) increase of $6,000 Ans:  D Solution: 7,000 units 7,500 units Sales (7,000 units, 7,500 units × $170) $1,190,000 $1,275,000 Variable expenses (7,000 units × $68, 7,500 units × $74) 476,000 555,000 Contribution margin 714,000 720,000 Fixed expenses 521,000 521,000 Net operating income $ 193,000 $ 199,000 Increase in net operating income: $199,000 - $193,000 = $6,000 47. Data concerning Pellegren Corporation's single product appear below: Per Unit Percent of Sales Selling price $200 100% Variable expenses    40  20% Contribution margin $160  80% Fixed expenses are $531,000 per month. The company is currently selling 4,000 units per month. The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $35,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $18,000 B) increase of $38,000 C) decrease of $38,000 D) increase of $58,000 Ans:  A Solution: 4,000 units 4,500 units Sales (4,000 units × $200, 4,500 units × $186) $800,000 $837,000 Variable expenses (4,000 units × $40, 4,500 units × $40) 160,000 180,000 Contribution margin 640,000 657,000 Fixed expenses 531,000 566,000 Net operating income $109,000 $ 91,000 Decrease in net operating income: $109,000 - $91,000 = $18,000 48. Cobble Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $160 100% Variable expenses    48  30% Contribution margin $112  70% Fixed expenses are $499,000 per month. The company is currently selling 5,000 units per month. The marketing manager would like to cut the selling price by $13 and increase the advertising budget by $33,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 900 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $56,100 B) decrease of $8,900 C) increase of $99,300 D) decrease of $56,100 Ans:  B Solution: 5,000 units 5,900 units Sales (5,000 units × $160, 5,900 units × $147) $800,000 $867,300 Variable expenses (5,000 units × $48, 5,900 units × $48) 240,000 283,200 Contribution margin 560,000 584,100 Fixed expenses 499,000 532,000 Net operating income $ 61,000 $ 52,100 Decrease in net operating income: $61,000 - $52,100 = $8,900 49. Data concerning Bazin Corporation's single product appear below: Per Unit Percent of Sales Selling price $100 100% Variable expenses    20  20% Contribution margin $ 80  80% Fixed expenses are $384,000 per month. The company is currently selling 6,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $9 per unit. In exchange, the sales staff would accept a decrease in their salaries of $46,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $27,500 B) decrease of $64,500 C) increase of $41,500 D) increase of $507,500 Ans:  A Solution: 6,000 units 6,500 units Sales (6,000 units × $100, 6,500 units × $100) $600,000 $650,000 Variable expenses (6,000 units × $20, 6,500 units × $29) 120,000 188,500 Contribution margin 480,000 461,500 Fixed expenses 384,000 338,000 Net operating income $ 96,000 $123,500 Increase in net operating income: $123,500 - $96,000 = $27,500 50. Sannella Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $220 100% Variable expenses    66  30% Contribution margin $154  70% Fixed expenses are $991,000 per month. The company is currently selling 8,000 units per month. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $74,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $1,246,600 B) increase of $14,600 C) decrease of $133,400 D) increase of $71,800 Ans:  B Solution: 8,000 units 8,200 units Sales (8,000 units × $220, 8,200 units × $220) $1,760,000 $1,804,000 Variable expenses (8,000 units × $66, 8,200 units × $77) 528,000 631,400 Contribution margin 1,232,000 1,172,600 Fixed expenses 991,000 917,000 Net operating income $ 241,000 $ 255,600 Increase in net operating income: $255,600 - $241,000 = $14,600 51. Cherry Street Market reported the following information for the sales of their only product, cherries sold by the pint: Total Per Unit Sales $31,500 $4.50 Variable expenses     9,450  1.35 Contribution margin 22,050 $3.15 Fixed expenses   13,000 Net operating income $  9,050 Cherry Street would like to increase their selling price by 50 cents per unit, and feel that this will decrease sales volume by 10%. Should Cherry Street increase the price, and what will the effect be on net operating income? A) Yes; $3,500 increase B) Yes; $945 increase C) No; no change D) No; $945 decrease Ans:  B Solution: Current sales (dollars) = Current per unit price × Current sales (units) $31,500 = $4.50 × Current sales (units) 7,000 = Current sales (units) 7,000 units 6,300 units Sales (7,000 units × $4.50, 6,300 units × $5.00) $31,500 $31,500 Variable expenses (7,000 units × $1.35, 6,300 units × $1.35) 9,450 8,505 Contribution margin 22,050 22,995 Fixed expenses 13,000 13,000 Net operating income $ 9,050 $ 9,995 Increase in net operating income: $9,995 - $9,050 = $945 52. A company makes a single product that it sells for $16 per unit. Fixed costs are $76,800 per month and the product has a contribution margin ratio of 40%. If the company's actual sales are $224,000, its margin of safety is: A) $32,000 B) $96,000 C) $128,000 D) $192,000 Ans:  A LO:  5; 7 Source:  CIMA; adapted Solution: Break-even in total sales dollars = Fixed expenses/CM ratio = $76,800/0.400 = $192,000 Margin of safety in dollars = Sales - Break-even sales = $224,000 - $192,000 = $32,000 53. The following data are available for the Phelps Company for a recent month: Product A Product B Product C Total Sales $150,000 $130,000 $90,000 $370,000 Variable expenses    91,000  104,000  27,000  222,000 Contribution margin $ 59,000 $ 26,000 $63,000 148,000 Fixed expenses    55,000 Net operating income $ 93,000 The break-even sales for the month for the company are: A) $91,667 B) $203,000 C) $148,000 D) $137,500 Ans:  D LO:  5; 9 Solution: Product A Product B Product C Total Sales $150,000 $130,000 $90,000 $370,000 Variable expenses    91,000  104,000  27,000  222,000 Contribution margin $ 59,000 $ 26,000 $63,000 148,000 Fixed expenses    55,000 Net operating income $ 93,000 Overall CM ratio = Total contribution margin/Total sales = $148,000/$370,000 = 0.40 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $55,000/0.40 = $137,500 54. Hartl Corporation is a single product firm with the following selling price and cost structure for next year: Selling price per unit $1.80 Contribution margin ratio 40% Total fixed expenses for the year $218,700 How many units will Hartl have to sell next year in order to break-even? A) 121,500 B) 202,500 C) 303,750 D) 546,750 Ans:  C Solution: Variable cost per unit = $1.80 × (1 - 40%) Variable cost per unit = $1.08 Sales = Variable expenses + Fixed expenses + Profit $1.80Q = $1.08Q + $218,700 + $0 $0.72Q = $218,700 Q = $218,700 ÷ $0.72 per unit = 303,750 units 55. Borich Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $150.00 Variable expense per unit $73.50 Fixed expense per month $308,295 The break-even in monthly unit sales is closest to: A) 2,055 B) 4,030 C) 4,194 D) 3,426 Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Profit $150.00Q = $73.50Q + $308,295 + $0 $76.50Q = $308,295 Q = $308,295 ÷ $76.50 per unit = 4,030 units 56. Data concerning Buchenau Corporation's single product appear below: Selling price per unit $150.00 Variable expense per unit $34.50 Fixed expense per month $466,620 The break-even in monthly unit sales is closest to: A) 3,111 B) 6,892 C) 4,040 D) 13,525 Ans:  C Solution: Sales = Variable expenses + Fixed expenses + Profit $150.00Q = $34.50Q + $466,620 + $0 $115.50Q = $466,620 Q = $466,620 ÷ $115.50 per unit = 4,040 units 57. Hevesy Inc. produces and sells a single product. The selling price of the product is $200.00 per unit and its variable cost is $80.00 per unit. The fixed expense is $300,000 per month. The break-even in monthly unit sales is closest to: A) 2,500 B) 1,500 C) 3,750 D) 2,583 Ans:  A Solution: Sales = Variable expenses + Fixed expenses + Profit $200.00Q = $80.00Q + $300,000 + $0 $120.00Q = $300,000 Q = $300,000 ÷ $120.00 per unit = 2,500 units 58. Wenstrom Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $130.00 Variable expense per unit $41.60 Fixed expense per month $109,616 The break-even in monthly dollar sales is closest to: A) $342,550 B) $204,455 C) $109,616 D) $161,200 Ans:  D Solution: Sales = Variable expenses + Fixed expenses + Profit $130.00Q = $41.60Q + $109,616 + $0 $88.40Q = $109,616 Q = $109,616 ÷ $88.40 per unit = 1,240 units 1,240 units × $130.00 selling price = $161,200 59. Data concerning Follick Corporation's single product appear below: Selling price per unit $110.00 Variable expense per unit $30.80 Fixed expense per month $321,552 The break-even in monthly dollar sales is closest to: A) $1,148,400 B) $638,851 C) $321,552 D) $446,600 Ans:  D Solution: Sales = Variable expenses + Fixed expenses + Profit $110.00Q = $30.80Q + $321,552 + $0 $79.20Q = $321,552 Q = $321,552 ÷ $79.20 per unit = 4,060 units 4,060 units × $110.00 selling price = $446,600 60. Wimpy Inc. produces and sells a single product. The selling price of the product is $150.00 per unit and its variable cost is $58.50 per unit. The fixed expense is $366,915 per month. The break-even in monthly dollar sales is closest to: A) $601,500 B) $366,915 C) $636,408 D) $940,808 Ans:  A Solution: Sales = Variable expenses + Fixed expenses + Profit $150.00Q = $58.50Q + $366,915 + $0 $91.50Q = $366,915 Q = $366,915 ÷ $91.50 per unit = 4,010 units 4,010 units × $150.00 selling price = $601,500 61. The Saginaw Ice Company had sales of $400,000, with variable expenses of $162,000 and fixed expenses of $98,000. Which of the following is closest to Saginaw's break-even point? A) $260,000 B) $165,000 C) $140,000 D) $238,000 Ans:  B Solution: Total Percent of Sales Sales $400,000 100.0% Variable expenses    162,000  40.5% Contribution margin and contribution margin ratio $ 238,000  59.5% Break-even in total sales dollars = Fixed expenses/CM ratio = $98,000/0.595 = $164,705.88 62. Product Y sells for $15 per unit, and has related variable expenses of $9 per unit. Fixed expenses total $300,000 per year. How many units of Product Y must be sold each year to yield an annual profit of $90,000: A) 50,000 units B) 65,000 units C) 15,000 units D) 43,333 units Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Target profit $15Q = $9Q + $300,000 + $90,000 $6Q = $390,000 Q = $390,000 ÷ $6 per unit = 65,000 units 63. Caneer Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $240.00 Variable expense per unit $81.60 Fixed expense per month $997,920 The unit sales to attain the company's monthly target profit of $44,000 is closest to: A) 7,896 B) 12,769 C) 6,578 D) 4,341 Ans:  C Solution: Sales = Variable expenses + Fixed expenses + Target profit $240.00Q = $81.60Q + $997,920 + $44,000 $158.40Q = $1,041,920 Q = $1,041,920 ÷ $158.40 per unit = 6,578 units (rounded) 64. Data concerning Bedwell Enterprises Corporation's single product appear below: Selling price per unit $160.00 Variable expense per unit $65.60 Fixed expense per month $387,040 The unit sales to attain the company's monthly target profit of $17,000 is closest to: A) 6,159 B) 4,280 C) 2,525 D) 4,321 Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Target profit $160.00Q = $65.60Q + $387,040 + $17,000 $94.40Q = $404,040 Q = $404,040 ÷ $94.40 per unit = 4,280 units (rounded) 65. Hettrick International Corporation's only product sells for $120.00 per unit and its variable expense is $52.80. The company's monthly fixed expense is $396,480 per month. The unit sales to attain the company's monthly target profit of $13,000 is closest to: A) 7,755 B) 6,093 C) 5,753 D) 3,412 Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Target profit $120.00Q = $52.80Q + $396,480 + $13,000 $67.20Q = $409,480 Q = $409,480 ÷ $67.20 per unit = 6,093 units (rounded) 66. Logsdon Corporation produces and sells a single product whose contribution margin ratio is 63%. The company's monthly fixed expense is $720,720 and the company's monthly target profit is $28,000. The dollar sales to attain that target profit is closest to: A) $471,694 B) $454,054 C) $1,188,444 D) $1,144,000 Ans:  C Solution: Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($720,720 + $28,000)/0.63 = $1,188,444 (rounded) 67. The contribution margin ratio of Mountain Corporation's only product is 52%. The company's monthly fixed expense is $296,400 and the company's monthly target profit is $7,000. The dollar sales to attain that target profit is closest to: A) $570,000 B) $157,768 C) $583,462 D) $154,128 Ans:  C Solution: Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($296,400 + $7,000)/0.52 = $583,462 (rounded) 68. Majid Corporation sells a product for $240 per unit. The product's current sales are 41,300 units and its break-even sales are 36,757 units. What is the margin of safety in dollars? A) $8,821,680 B) $6,608,000 C) $9,912,000 D) $1,090,320 Ans:  D LO:  7 Solution: Margin of safety in dollars: Break-even sales = $240 per unit × 36,757 = $8,821,680 Current sales = $240 per unit × 41,300 = $9,912,000 Margin of safety in dollars = Sales - Break-even sales = $9,912,000 - $8,821,680 = $1,090,320 69. Mcmurtry Corporation sells a product for $170 per unit. The product's current sales are 10,000 units and its break-even sales are 8,100 units. The margin of safety as a percentage of sales is closest to: A) 23% B) 81% C) 19% D) 77% Ans:  C LO:  7 Solution: Margin of safety in dollars: Break-even sales = $170 per unit × 8,100 = $1,377,000 Current sales = $170 per unit × 10,000 = $1,700,000 Margin of safety in dollars = Sales - Break-even sales = $1,700,000 - $1,377,000 = $323,000 Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $323,000 ÷ $1,700,000 = 19% 70. Cubie Corporation has provided the following data concerning its only product: Selling price $100 per unit Current sales 10,600 units Break-even sales 9,540 units What is the margin of safety in dollars? A) $1,060,000 B) $106,000 C) $954,000 D) $706,667 Ans:  B LO:  7 Solution: Margin of safety in dollars: Break-even sales = $100 per unit × 9,540 = $954,000 Current sales = $100 per unit × 10,600 = $1,060,000 Margin of safety in dollars = Sales - Break-even sales = $1,060,000 - $954,000 = $106,000 71. Ensley Corporation has provided the following data concerning its only product: Selling price $200 per unit Current sales 30,300 units Break-even sales 21,816 units The margin of safety as a percentage of sales is closest to: A) 61% B) 28% C) 72% D) 39% Ans:  B LO:  7 Solution: Margin of safety in dollars: Break-even sales = $200 per unit × 30,300 = $6,060,000 Current sales = $200 per unit × 21,816 = $4,363,200 Margin of safety in dollars = Sales - Break-even sales = $6,060,000 - $4,363,200 = $1,696,800 Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $1,696,800 ÷ $4,363,200 = 39% (rounded) 72. The following is Noble Company's contribution format income statement last month: Sales (12,000 units) $600,000 Variable expenses  375,000 Contribution margin 225,000 Fixed expenses  150,000 Net operating income $ 75,000 What is the company's margin of safety percentage to the nearest whole percent? A) 42% B) 38% C) 33% D) 25% Ans:  C LO:  7 Solution: Sales = Sales price × Units sold $600,000 = 12,000 × Sales price $50 = Sales price Variable expenses = Per-unit cost × Units sold $375,000 = 12,000 × Per-unit cost $31.25 = Per-unit cost Break-even sales: Sales = Variable expenses + Fixed expenses + Profit $50.00Q = $31.25Q + $150,000 + $0 $18.75Q = $150,000 Q = 8,000 units Margin of safety in dollars: Break-even sales = $50 per unit × 8,000 = $400,000 Current sales = $50 per unit × 12,000 = $600,000 Margin of safety in dollars = Sales - Break-even sales = $600,000 - $400,000 = $200,000 Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $200,000 ÷ $600,000 = 33% (rounded) 73. Ostler Company's net operating income last year was $10,000 and its contribution margin was $50,000. Using the operating leverage concept, if the company's sales increase next year by 8 percent, net operating income can be expected to increase by: A) 20% B) 16% C) 160% D) 40% Ans:  D LO:  8 Solution: Degree of operating leverage = Contribution margin ÷ Net operating income Degree of operating leverage = $50,000 ÷ $10,000 = 5 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 8% × 5 = 40% 74. The February contribution format income statement of Mcabier Corporation appears below: Degree of operating leverage = Contribution margin/Net operating income = $251,100/$41,300 = 6.08 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 19% × 6.08 = 115.52% Sales $211,200 Variable expenses    96,000 Contribution margin 115,200 Fixed expenses    84,100 Net operating income $ 31,100 The degree of operating leverage is closest to: A) 0.27 B) 6.79 C) 3.70 D) 0.15 Ans:  C LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $115,200/$31,100 = 3.70 75. Serfass Corporation's contribution format income statement for July appears below: Sales $260,000 Variable expenses  176,000 Contribution margin 84,000 Fixed expenses    71,800 Net operating income $ 12,200 The degree of operating leverage is closest to: A) 0.05 B) 0.15 C) 21.31 D) 6.89 Ans:  D LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $84,000/$12,200 = 6.89 76. Rushenberg Corporation's operating leverage is 10.8. If the company's sales increase by 14%, its net operating income should increase by about: A) 151.2% B) 14.0% C) 77.1% D) 10.8% Ans:  A LO:  8 Solution: Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 14% × 10.8 = 151.2% 77. Bendel Inc. has an operating leverage of 7.3. If the company's sales increase by 3%, its net operating income should increase by about: A) 243.3% B) 7.3% C) 21.9% D) 3.0% Ans:  C LO:  8 Solution: Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 3% × 7.3 = 21.9% 78. E.D. Manufacturing, Inc. produces and sells ice skates. The current net operating income is $40,000, with a degree of operating leverage of 3. If sales increase by 10%, how much total net operating income should be expected? A) $12.000 B) $52,000 C) $44,000 D) None of the above. Ans:  B LO:  8 Solution: Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 10% × 3 = 30% Current net operating income × Percent increase = Increase in net operating income $40,000 × 30% = $12,000 Increase in net operating income Current net operating income + Increase in net operating income = Expected net operating income = $40,000 + $12,000 = $52,000 79. Mcdale Inc. produces and sells two products. Data concerning those products for the most recent month appear below: Product I49V Product Z50U Sales $15,000 $14,000 Variable expenses $3,300 $2,790 The fixed expenses of the entire company were $18,460. The break-even point for the entire company is closest to: A) $23,367 B) $10,540 C) $24,550 D) $18,460 Ans:  A LO:  9 Solution: Multi B/E Solution: Product I49V Product Z50U Total Sales $15,000 $14,000 $29,000 Variable expenses    3,300   2,790   6,090 Contribution margin $11,700 $11,210 22,910 Fixed expenses    18,460 Net operating income $  4,450 Overall CM ratio = Total contribution margin/Total sales = $22,910/$29,000 = 0.79 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $18,460/0.79 = $23,367 (rounded) 80. Roddam Corporation produces and sells two products. Data concerning those products for the most recent month appear below: Product K09E Product G17B Sales $28,000 $38,000 Variable expenses $11,200 $8,600 The fixed expenses of the entire company were $41,970. If the sales mix were to shift toward Product K09E with total sales remaining constant, the overall break-even point for the entire company: A) would increase. B) could increase or decrease. C) would not change. D) would decrease. Ans:  A LO:  9 81. Newham Corporation produces and sells two products. In the most recent month, Product R10L had sales of $28,000 and variable expenses of $6,440. Product X96N had sales of $22,000 and variable expenses of $7,560. And the fixed expenses of the entire company were $32,710. The break-even point for the entire company is closest to: A) $32,710 B) $45,431 C) $46,710 D) $17,290 Ans:  B LO:  9 Solution: Multi B/E Solution: Product R10L Product X96N Total Sales $28,000 $22,000 $50,000 Variable expenses    6,440   7,560  14,000 Contribution margin $21,560 $14,440 36,000 Fixed expenses  32,710 Net operating income $ 3,290 Overall CM ratio = Total contribution margin/Total sales = $36,000/$50,000 = 0.72 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $32,710/0.72 = $45,431 (rounded) 82. Flesch Corporation produces and sells two products. In the most recent month, Product C90B had sales of $24,000 and variable expenses of $6,480. Product Y45E had sales of $29,000 and variable expenses of $11,010. And the fixed expenses of the entire company were $32,280. If the sales mix were to shift toward Product C90B with total sales remaining constant, the overall break-even point for the entire company: A) would decrease. B) would increase. C) could increase or decrease. D) would not change. Ans:  A LO:  9 83. Zachary's Bike Shop sells two products. Sales and contribution margin ratios for the two products follow: Product A Product B Sales in dollars $10,000 $40,000 Contribution margin ratio 25% 75% Given these data, the contribution margin ratio for the company as a whole would be: A) 25% B) 50% C) 65% D) It is impossible to determine from the given data. Ans:  C LO:  9 Solution: Multi B/E Solution: Product A Product B Total Sales $10,000 $40,000 $50,000 Contribution margin (Sales × CM ratio) $2,500 $30,000 $32,500 Overall CM ratio = Total contribution margin/Total sales = $32,500/$50,000 = 0.65 Use the following to answer questions 84-86: A cement manufacturer has supplied the following data: Tons of cement produced and sold 680,000 Sales revenue $2,788,000 Variable manufacturing expense $1,156,000 Fixed manufacturing expense $760,000 Variable selling and administrative expense $272,000 Fixed selling and administrative expense $294,000 Net operating income $306,000 84. What is the company's unit contribution margin? A) $0.45 B) $2.10 C) $2.00 D) $4.10 Ans:  C Solution: Contribution margin = Sales - Variable expenses Contribution margin = $2,788,000 - ($1,156,000 + $272,000) Contribution margin = $1,360,000 Unit contribution margin = Contribution margin ÷ Tons of cement Unit contribution margin = $1,360,000 ÷ 680,000 Unit contribution margin = $2.00 85. The company's contribution margin ratio is closest to: A) 39.0% B) 51.2% C) 11.0% D) 48.8% Ans:  D Solution: Contribution margin = Sales - Variable expenses Contribution margin = $2,788,000 - ($1,156,000 + $272,000) Contribution margin = $1,360,000 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $1,360,000 ÷ $2,788,000 Contribution margin ratio = 48.8% 86. If the company increases its unit sales volume by 4% without increasing its fixed expenses, then total net operating income should be closest to: A) $12,240 B) $318,240 C) $360,400 D) $311,973 Ans:  C Solution: New contribution margin ($1,360,000 × 1.04) $1,414,400 Fixed expenses ($760,000 + $294,000) 1,054,000 Net operating income $ 360,400 Use the following to answer questions 87-89: Righway Corporation has supplied the following data: Sales per period 1,000 units Selling price $50 per unit Variable manufacturing cost $20 per unit Selling expenses $10,000 plus 5% of sales Administration expenses $5,000 plus 15% of sales 87. The total contribution margin per period is: A) $22,500 B) $27,500 C) $30,000 D) $20,000 Ans:  D Solution: Sales (1,000 units × $50) $50,000 Variable expenses* 30,000 Contribution margin $20,000 * Variable manufacturing cost (1,000 units × $20) $20,000 Selling expenses ($50,000 × 5%) 2,500 Administration expenses ($50,000 × 15%) 7,500 Total variable expenses $30,000 88. The break-even point per period is (round to nearest unit): A) 750 units B) 545 units C) 500 units D) 667 units Ans:  A Solution: Sales = Variable expenses + Fixed expenses + Profit $50Q = $30Q* + $15,000 + $0 $20Q = $15,000 Q = $15,000 ÷ $20 per unit = 750 units *Variable expense per unit = $20 + (5% × $50) + (15% × $50) = $30 89. If the selling price is changed to $55 per unit, the break-even point will be (round to nearest unit): A) 667 units B) 545 units C) 625 units D) 500 units Ans:  C LO:  4; 5 Solution: Sales = Variable expenses + Fixed expenses + Profit $55Q = $31Q* + $15,000 + $0 $24Q = $15,000 Q = $15,000 ÷ $24 per unit = 625 units *Variable expense per unit = $20 + (5% × $55) + (15% × $55) = $31 Use the following to answer questions 90-92: Biskra Corporation is a single product firm that expects the following operating results next year: In Total Per Unit Sales $288,000 $0.80 Variable expenses $172,800 $0.48 Fixed expenses $72,000 $0.20 90. Every unit that Biskra sells next year after the break-even point will increase net operating income by: A) $0.12 B) $0.20 C) $0.32 D) $0.60 Ans:  C LO:  1; 5 Solution: Sales per unit - Variable expenses per unit = Contribution margin per unit = $0.80 - $0.48 = $0.32 91. What would Biskra's total sales dollars have to be next year to generate $180,000 of net operating income? A) $450,000 B) $630,000 C) $588,000 D) $787,500 Ans:  B Solution: CM ratio = (Sales - Variable expenses) ÷ Sales = ($288,000 - $172,800) ÷ $288,000 = 40% Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($72,000 + $180,000)/0.40 = $630,000 92. What is Biskra's margin of safety percentage? A) 15% B) 24% C) 37.5% D) 40% Ans:  C LO:  7 Solution: Break-even sales: Sales = Variable expenses + Fixed expenses + Profit $0.80Q = $0.48Q* + $72,000 + $0 $0.32Q = $72,000 Q = $72,000 ÷ $0.32 per unit = 225,000 units Margin of safety in dollars: Break-even sales = $0.80 per unit × 360,000 = $288,000 Current sales = $0.80 per unit × 225,000 = $180,000 Margin of safety in dollars = Sales ? Break-even sales = $288,000 ? $180,000 = $108,000 Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $108,000 ÷ $288,000 = 37.5% Use the following to answer questions 93-95: A manufacturer of premium wire strippers has supplied the following data: Units produced and sold 580,000 Sales revenue $4,176,000 Variable manufacturing expense $2,871,000 Fixed manufacturing expense $778,000 Variable selling and administrative expense $348,000 Fixed selling and administrative expense $104,000 Net operating income $75,000 93. The company's margin of safety in units is closest to: A) 234,222 B) 564,242 C) 45,455 D) 457,500 Ans:  C LO:  7 Solution: Break-even sales in units: Sales = Variable expenses + Fixed expenses + Profit $7.20Q* = $5.55Q** + $882,000 + $0 $1.65Q = $882,000 Q = $882,000 ÷ $1.65 per unit = 534,545 units Margin of safety in units: Margin of safety in units = Sales in units ? Break-even sales in units = 580,000 ? 534,545 = 45,455 units * $4,176,000 ÷ 580,000 units = $7.20 per unit ** Manufacturing expense ($2,871,000 ÷ 580,000 units) $4.95 Selling and administrative expense ($348,000 ÷ 580,000 units) 0.60 Total variable expenses per unit $5.55 94. The company's unit contribution margin is closest to: A) $2.25 B) $5.55 C) $1.65 D) $6.60 Ans:  C Solution: Sales $4,176,000 Variable expenses   3,219,000 Contribution margin $ 957,000 $957,000 ÷ 580,000 units = $1.65 95. The company's degree of operating leverage is closest to: A) 55.68 B) 3.65 C) 7.73 D) 12.76 Ans:  D LO:  8 Solution: Sales $4,176,000 Variable expenses   3,219,000 Contribution margin $ 957,000 Degree of operating leverage = Contribution margin/Net operating income = $957,000/$75,000 = 12.76 Use the following to answer questions 96-97: Keomuangtai Corporation produces and sells a single product. The company has provided its contribution format income statement for October. Sales (4,600 units) $266,800 Variable expenses  179,400 Contribution margin 87,400 Fixed expenses    62,200 Net operating income $ 25,200 96. If the company sells 4,500 units, its total contribution margin should be closest to: A) $85,500 B) $24,652 C) $87,400 D) $81,600 Ans:  A Solution: Sales price per unit = $266,800 ÷ 4,600 units = $58 Variable expense per unit = $179,400 ÷ 4,600 units = $39 Sales (4,500 units) $261,000 Variable expenses  175,500 Contribution margin $ 85,500 97. If the company sells 4,200 units, its net operating income should be closest to: A) $17,600 B) $23,009 C) $25,200 D) $2,000 Ans:  A Solution: Sales price per unit = $266,800 ÷ 4,600 units = $58 Variable expense per unit = $179,400 ÷ 4,600 units = $39 Sales (4,200 units) $243,600 Variable expenses  163,800 Contribution margin 79,800 Fixed expenses    62,200 Net operating income $ 17,600 Use the following to answer questions 98-99: Souza Inc, which produces and sells a single product, has provided its contribution format income statement for October. Sales (4,000 units) $88,000 Variable expenses  40,000 Contribution margin 48,000 Fixed expenses  41,700 Net operating income $ 6,300 98. If the company sells 3,600 units, its total contribution margin should be closest to: A) $39,200 B) $5,670 C) $43,200 D) $48,000 Ans:  C Solution: Sales price per unit = $88,000 ÷ 4,000 units = $22 Variable expense per unit = $40,000 ÷ 4,000 units = $10 Sales (3,600 units) $79,200 Variable expenses  36,000 Contribution margin $43,200 99. If the company sells 3,500 units, its net operating income should be closest to: A) $5,513 B) $6,300 C) $300 D) -$4,700 Ans:  C Solution: Sales price per unit = $88,000 ÷ 4,000 units = $22 Variable expense per unit = $40,000 ÷ 4,000 units = $10 Sales (3,500 units) $77,000 Variable expenses  35,000 Contribution margin 42,000 Fixed expenses  41,700 Net operating income $    300 Use the following to answer questions 100-101: Wight Corporation has provided its contribution format income statement for June. The company produces and sells a single product. Sales (9,600 units) $336,000 Variable expenses  144,000 Contribution margin 192,000 Fixed expenses  137,000 Net operating income $ 55,000 100. If the company sells 9,100 units, its total contribution margin should be closest to: A) $174,500 B) $192,000 C) $52,135 D) $182,000 Ans:  D Solution: Sales price per unit = $336,000 ÷ 9,600 units = $35 Variable expense per unit = $144,000 ÷ 9,600 units = $15 Sales (9,100 units) $318,500 Variable expenses  136,500 Contribution margin $182,000 101. If the company sells 9,700 units, its net operating income should be closest to: A) $57,000 B) $55,000 C) $55,573 D) $58,500 Ans:  A Solution: Sales price per unit = $336,000 ÷ 9,600 units = $35 Variable expense per unit = $144,000 ÷ 9,600 units = $15 Sales (9,700 units) $339,500 Variable expenses 145,500 Contribution margin 194,000 Fixed expenses 137,000 Net operating income $ 57,000 Use the following to answer questions 102-103: The following information relates to Francisca Company: Degree of operating leverage 2.5 Profit margin percentage 24% Margin of safety percentage 40% Contribution margin ratio 60% 102. If Francisca's sales increase by 20%, by what percentage will its net operating income increase? A) 4.8% B) 8% C) 12% D) 50% Ans:  D LO:  8 Solution: Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 20% × 2.5 = 50% 103. Francisca wants to give its sales staff a $60,000 increase in salary but still wants to make the same net operating income. If Francisca gives this increase, by how much would sales at Francisca have to increase in order for the company to maintain its current net operating income level? A) $60,000 B) $100,000 C) $150,000 D) $250,000 Ans:  B LO:  3; 4 Solution: Increase in sales dollars = Additional fixed expenses ÷ Contribution margin ratio = $60,000 ÷ 0.60 = $100,000 Use the following to answer questions 104-108: The following data relate to a company that produces and sells a travel guide that is updated monthly: Fixed costs: Copy editing $6,000 Art work $2,000 Typesetting $72,000 Variable costs: Printing and binding $3.20 per copy Bookstore discounts $4.00 per copy Salespersons’ commissions $0.50 per copy Author’s royalties $2.00 per copy Each book sells for $20.00. The company sold 8,000 books in June and 10,000 books in July. 104. The unit contribution margin per book is: A) $10.30 B) $14.30 C) $10.80 D) $8.30 Ans:  A Solution: Unit contribution margin = Unit sales price - Variable expense per unit = $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30 105. The contribution margin ratio for the book is: A) 71.5% B) 54.0% C) 51.5% D) 51.9% Ans:  C Solution: Unit contribution margin = Unit sales price - Variable expense per unit = $20.00 - ($3.20 + $4.00 + $0.50 + $2.00) = $10.30 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $10.30 ÷ $20.00 Contribution margin ratio = 51.5% 106. The break-even point in units is: A) 8,247 books B) 7,767 books C) 7,407 books D) 6,504 books Ans:  B Solution: Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70 Sales = Variable expenses + Fixed expenses + Profit $20.00Q = $9.70Q + $80,000 + $0 $10.30Q = $80,000 Q = $80,000 ÷ $10.30 per unit = 7,767 units (rounded) 107. The degree of operating leverage for July is: A) the same as that for June B) higher than that for June C) lower than that for June D) not determinable Ans:  C LO:  8 Solution: For June: Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70 Sales (8,000 units) $160,000 Variable expenses 77,600 Contribution margin 82,400 Fixed expenses 80,000 Net operating income $ 2,400 Degree of operating leverage = Contribution margin/Net operating income = $82,400/$2,400 = 34.33 For July: Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70 Sales (10,000 units) $200,000 Variable expenses 97,000 Contribution margin 103,000 Fixed expenses 80,000 Net operating income $ 23,000 Degree of operating leverage = Contribution margin/Net operating income = $103,000/$23,000 = 4.48 As sales increase past the breakeven point, the degree of operating leverage will decrease. 108. The degree of operating leverage for July is closest to: A) 4.48 B) 3.48 C) 4.22 D) 8.70 Ans:  A LO:  8 Solution: Variable expense per unit = $3.20 + $4.00 + $0.50 + $2.00 = $9.70 Sales (10,000 units) $200,000 Variable expenses 97,000 Contribution margin 103,000 Fixed expenses 80,000 Net operating income $ 23,000 Degree of operating leverage = Contribution margin/Net operating income = $103,000/$23,000 = 4.48 Use the following to answer questions 109-111: A manufacturer of cedar shingles has supplied the following data: Bundles of cedar shakes produced and sold 360,000 Sales revenue $2,412,000 Variable manufacturing expense $1,170,000 Fixed manufacturing expense $714,000 Variable selling and administrative expense $414,000 Fixed selling and administrative expense $82,000 Net operating income $32,000 109. The company's break-even in unit sales is closest to: A) 118,806 B) 206,957 C) 346,087 D) 14,775 Ans:  C Solution: Sales price per unit = $2,412,000 ÷ 360,000 units = $6.70 Variable expense per unit = ($1,170,000 + $414,000) ÷ 360,000 units = $4.40 Sales = Variable expenses + Fixed expenses + Profit $6.70Q = $4.40Q + $796,000 + $0 $2.30Q = $796,000 Q = $796,000 ÷ $2.30 per unit = 346,087 units (rounded) 110. The company's contribution margin ratio is closest to: A) 72.6% B) 65.7% C) 34.3% D) 27.4% Ans:  C Solution: Contribution margin = Sales - Variable expenses Contribution margin = $2,412,000 - $1,584,000 = $828,000 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $828,000 ÷ $2,412,000 Contribution margin ratio = 34.3% 111. The company's degree of operating leverage is closest to: A) 11.25 B) 25.88 C) 1.99 D) 75.38 Ans:  B LO:  8 Solution: Sales $2,412,000 Variable expenses 1,584,000 Contribution margin 828,000 Fixed expenses 796,000 Net operating income $ 32,000 Degree of operating leverage = Contribution margin/Net operating income = $828,000/$32,000 = 25.88 Use the following to answer questions 112-113: Carr Inc. produces small motors that sell for $15 each. Cost data on the motors are provided below: Sales in units per year 7,000 Variable production cost $5.00 per unit Variable selling expense $2.00 per unit Variable administrative expense $1.50 per unit Fixed expenses per year: Building rent $10,000 Equipment depreciation 4,000 Selling expense 8,000 Administrative expense 15,000 Total fixed expenses $37,000 112. The contribution margin ratio is (round to nearest tenth of a percent): A) 56.7% B) 43.3% C) 66.7% D) 53.3% Ans:  B Solution: Unit contribution margin = $15.00 - ($5.00 + $2.00 + $1.50) = $6.50 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $6.50 ÷ $15.00 Contribution margin ratio = 43.3% 113. If the selling price is increased by 10 percent, what will be the new break-even point in units (round to the nearest unit)? A) 3,895 units B) 4,625 units C) 3,700 units D) 3,217 units Ans:  B Solution: Variable expense per unit = $5.00 + $2.00 + $1.50 = $8.50 Sales = Variable expenses + Fixed expenses + Profit $16.50Q = $8.50Q + $37,000 + $0 $8.00Q = $37,000 Q = $37,000 ÷ $8.00 per unit = 4,625 units Use the following to answer questions 114-115: (CPA, adapted) The Maxwell Company manufactures and sells a single product. Budgeted data follow: Forecasted annual sales volume 120,000 units Selling price per unit $25.00 Variable expenses per unit: Raw materials $11.00 Direct labor 5.00 Manufacturing overhead 2.50 Selling expenses    1.30 Total variable expenses per unit $19.80 Annual fixed expenses: Manufacturing overhead $192,000 Selling and administrative  276,000 Total fixed expenses $468,000 114. Maxwell's break-even point in units is: A) 76,667 B) 90,000 C) 130,000 D) 72,000 Ans:  B Source:  CPA; adapted Solution: Sales = Variable expenses + Fixed expenses + Profit $25.00Q = $19.80Q + $468,000 + $0 $5.20Q = $468,000 Q = $468,000 ÷ $5.20 per unit = 90,000 units 115. If Maxwell Company's direct labor costs increase 8 percent, what selling price per unit of product must it charge to maintain the same contribution margin ratio? A) $25.51 B) $27.00 C) $25.40 D) $26.64 Ans:  A LO:  3; 5 Source:  CPA; adapted Solution: Current contribution margin per unit = Selling price per unit ? Total variable expenses per unit = $25.00 ? $19.80 = $5.20 Current contribution margin ratio = Contribution margin ÷ Selling price per unit $5.20 ÷ $25.00 = 20.8% Direct labor per unit × 0.08 = Increase in variable expense $5.00 × 0.08 = $0.40 New total variable expenses per unit = $19.80 + $0.40 = $20.20 0.208 = (Selling price ? $20.20) ÷ Selling price 0.208 × Selling price = Selling price ? $20.20 $20.20 = Selling price ? 0.208 × Selling price $20.20 = 0.792 × Selling price Selling price = $25.51 Use the following to answer questions 116-117: The following data was provided by Green Corporation: Product A Product B Product C Sales in dollars $80,000 $120,000 $100,000 Contribution margin ratio 30% 45% 27% 116. The contribution margin ratio for the company as a whole is: A) 34% B) 65% C) 35% D) 66.7% Ans:  C Solution: Product A Product B Product C Total Sales $80,000 $120,000 $100,000 $300,000 Contribution margin (Sales × Contribution margin ratio) $24,000 $54,000 $27,000 105,000 Overall CM ratio = Total contribution margin/Total sales = $105,000/$300,000 = 35% 117. If total units sold remain unchanged, but the sales mix shifts more heavily toward Product B, one would expect the overall contribution margin ratio to: A) increase B) decrease C) remain unchanged D) none of these Ans:  A LO:  9 Use the following to answer questions 118-120: Next year, Mudd Face Cosmetics, a single product company, expects to sell 9,000 jars of miracle glaze. Mudd Face is budgeting the following operating results for next year: Sales $450,000 Variable expenses  135,000 Contribution margin 315,000 Fixed expenses  252,000 Net operating income $ 63,000 118. How many jars of glaze would Mudd Face have to sell next year in order to break-even? A) 2,700 B) 5,040 C) 6,750 D) 7,200 Ans:  D Solution: Total Percent of Sales Sales $450,000 100.0% Variable expenses    135,000  30.0% Contribution margin and contribution margin ratio $ 315,000  70.0% Break-even in total sales dollars = Fixed expenses/CM ratio = $252,000/0.700 = $360,000 Selling price per unit = $450,000 ÷ 9,000 jars = $50 per jar Break-even in units = Break-even sales dollars ÷ Selling price per unit = $360,000 ÷ $50 = 7,200 jars 119. What would Mudd Face's total sales dollars have to be next year in order to increase its projected net operating income by 25%? A) $465,750 B) $472,500 C) $499,500 D) $562,500 Ans:  B LO:  4; 6 Solution: Contribution margin ratio = $315,000 ÷ $450,000 = 70% Desired net operating income = ($63,000 × 1.25) = $78,750 Sales dollars needed to earn $78,750 = (Fixed expenses + Target net operating income) ÷ Contribution margin ratio = ($252,000 + $78,750) ÷ 0.70 = $472,500 120. If sales next year at Mudd Face are 10% higher than expected, its net operating income should be: A) $4,410 higher than expected. B) $6,300 higher than expected. C) $31,500 higher than expected. D) $44,100 higher than expected. Ans:  C Solution: Degree of operating leverage = Contribution margin ÷ Net operating income = $315,000 ÷ $63,000 = 5 Therefore, increase in net operating income will be 5 × 10%, or 50%, higher. Current net operating income × 50% = $63,000 × 50% = $31,500 increase Use the following to answer questions 121-122: Mrs. Rafter has supplied the following data for her small business: Selling price $10 per unit Variable expenses $6 per unit Rent $400 per week Salaries $600 per week Other fixed expenses $200 per week 121. If 500 units are sold in a week, the net operating income (loss) would be: A) $1,800 B) $(2,000) C) $2,000 D) $800 Ans:  D Solution: Sales $5,000 Variable expenses   3,000 Contribution margin 2,000 Fixed expenses   1,200 Net operating income $  800 122. If sales commissions $(1.00 per unit) are discontinued in favor of a $300 increase in salaries, the break-even point in units would: A) increase B) decrease C) remain the same D) none of these Ans:  C LO:  4; 5 Use the following to answer questions 123-126: Next year, Rad Shirt Company expects to sell 32,000 shirts. Rad is budgeting the following operating results for next year: Sales $800,000 Variable expenses  288,000 Contribution margin 512,000 Fixed expenses  192,000 Net operating income $320,000 123. What is Rad's margin of safety for next year? A) $480,000 B) $500,000 C) $512,000 D) $608,000 Ans:  B LO:  7 Solution: Total Percent of Sales Sales $800,000 100.0% Variable expenses    288,000  36% Contribution margin and contribution margin ratio $ 512,000  64% Break-even in total sales dollars = Fixed expenses/CM ratio = $192,000/0.64 = $300,000 Margin of safety in dollars = Sales ? Break-even sales = $800,000 ? $300,000 = $500,000 124. What is Rad's degree of operating leverage for next year? A) 1.50 B) 1.56 C) 1.60 D) 2.50 Ans:  C LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $512,000/$320,000 = 1.60 125. How many shirts would Rad have to sell next year in order to generate $480,000 of net operating income? A) 38,400 B) 48,000 C) 60,000 D) 42,000 Ans:  D Solution: Sales price = $800,000 ÷ 32,000 units = $25 Variable expense per unit = $288,000 ÷ 32,000 units = $9 Sales = Variable expenses + Fixed expenses + Target profit $25Q = $9Q + $192,000 + $480,000 $16Q = $672,000 Q = $672,000 ÷ $16 per unit = 42,000 units 126. Rad is considering increasing its advertising by $48,000 next year. By how much would sales have to increase in order for Rad to still generate a $320,000 net operating income? A) $48,000 B) $75,000 C) $76,800 D) $120,000 Ans:  B Solution: Current Proposed Sales $800,000 Variable expenses  288,000 Contribution margin 512,000 $560,000 * Fixed expenses  192,000 240,000 Net operating income $320,000 $320,000 *Work backwards to obtain the number. Sales price = $800,000 ÷ 32,000 units = $25 Variable expense per unit = $288,000 ÷ 32,000 units = $9 Contribution margin per unit = $25 ? $9 = $16 $560,000 ÷ $16 = 35,000 units 35,000 ? 32,000 = 3,000 unit increase 3,000 × $25 = $75,000 increase in sales Use the following to answer questions 127-130: Houpe Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $140 100% Variable expenses    42  30% Contribution margin $ 98  70% Fixed expenses are $490,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. 127. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question. The marketing manager believes that a $14,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $700 B) increase of $14,700 C) decrease of $14,000 D) decrease of $700 Ans:  A Solution: 6,000 units 6,150 units Sales (6,000 units × $140, 6,150 units × $140) $840,000 $861,000 Variable expenses (6,000 units × $42, 6,150 units × $42) 252,000 258,300 Contribution margin 588,000 602,700 Fixed expenses 490,000 504,000 Net operating income $ 98,000 $ 98,700 Increase in net operating income: $98,700 ? $98,000 = $700 128. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question. Management is considering using a new component that would increase the unit variable cost by $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $2,100 B) decrease of $27,900 C) increase of $2,100 D) increase of $27,900 Ans:  A Solution: 6,000 units 6,300 units Sales (6,000 units × $140, 6,300 units × $140) $840,000 $882,000 Variable expenses (6,000 units × $42, 6,300 units × $47) 252,000 296,100 Contribution margin 588,000 585,900 Fixed expenses 490,000 490,000 Net operating income $ 98,000 $ 95,900 Decrease in net operating income: $98,000 ? $95,900 = $2,100 129. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question. The marketing manager would like to cut the selling price by $7 and increase the advertising budget by $28,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $17,500 B) increase of $17,500 C) decrease of $24,500 D) increase of $38,500 Ans:  C Solution: 6,000 units 6,500 units Sales (6,000 units × $140, 6,500 units × $133) $840,000 $864,500 Variable expenses (6,000 units × $42, 6,500 units × $42) 252,000 273,000 Contribution margin 588,000 591,500 Fixed expenses 490,000 518,000 Net operating income $ 98,000 $ 73,500 Decrease in net operating income: $98,000 ? $73,500 = $24,500 130. This question is to be considered independently of all other questions relating to Houpe Corporation. Refer to the original data when answering this question. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $58,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $700 B) increase of $56,900 C) decrease of $115,300 D) increase of $588,700 Ans:  A Solution: 6,000 units 6,100 units Sales (6,000 units × $140, 6,100 units × $140) $840,000 $854,000 Variable expenses (6,000 units × $42, 6,100 units × $53) 252,000 323,300 Contribution margin 588,000 530,700 Fixed expenses 490,000 432,000 Net operating income $ 98,000 $ 98,700 Increase in net operating income: $98,700 ? $98,000 = $700 Use the following to answer questions 131-134: Data concerning Lemelin Corporation's single product appear below: Per Unit Percent of Sales Selling price $230 100% Variable expenses  115  50% Contribution margin $115  50% The company is currently selling 7,000 units per month. Fixed expenses are $581,000 per month. Consider each of the following questions independently. 131. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question. Management is considering using a new component that would increase the unit variable cost by $3. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $22,400 B) decrease of $1,400 C) increase of $22,400 D) increase of $1,400 Ans:  D Solution: 7,000 units 7,200 units Sales (7,000 units × $230, 7,200 units × $230) $1,610,000 $1,656,000 Variable expenses (7,000 units × $115, 7,200 units × $118) 805,000 849,600 Contribution margin 805,000 806,400 Fixed expenses 581,000 581,000 Net operating income $ 224,000 $ 225,400 Increase in net operating income: $225,400 ? $224,000 = $1,400 132. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question. The marketing manager believes that a $11,000 increase in the monthly advertising budget would result in a 100 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $11,000 B) increase of $11,500 C) decrease of $500 D) increase of $500 Ans:  D Solution: 7,000 units 7,100 units Sales (7,000 units × $230, 7,100 units × $230) $1,610,000 $1,633,000 Variable expenses (7,000 units × $115, 7,100 units × $115) 805,000 816,500 Contribution margin 805,000 816,500 Fixed expenses 581,000 592,000 Net operating income $ 224,000 $ 224,500 Increase in net operating income: $224,500 ? $224,000 = $500 133. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $20 per unit. In exchange, the sales staff would accept a decrease in their salaries of $113,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $224,500 B) increase of $107,000 C) increase of $1,500 D) increase of $806,500 Ans:  C Solution: 7,000 units 7,300 units Sales (7,000 units × $230, 7,300 units × $230) $1,610,000 $1,679,000 Variable expenses (7,000 units × $115, 7,300 units × $135) 805,000 985,500 Contribution margin 805,000 693,500 Fixed expenses 581,000 468,000 Net operating income $ 224,000 $ 225,500 Increase in net operating income: $225,500 ? $224,000 = $1,500 134. This question is to be considered independently of all other questions relating to Lemelin Corporation. Refer to the original data when answering this question. The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $37,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,600 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $118,200 B) increase of $302,200 C) decrease of $118,200 D) decrease of $7,800 Ans:  D Solution: 7,000 units 8,600 units Sales (7,000 units × $230, 8,600 units × $212) $1,610,000 $1,823,200 Variable expenses (7,000 units × $115, 8,600 units × $115) 805,000 989,000 Contribution margin 805,000 834,200 Fixed expenses 581,000 618,000 Net operating income $ 224,000 $ 216,200 Decrease in net operating income: $224,000 ? $216,200 = $7,800 Use the following to answer questions 135-138: Thornbrough Corporation produces and sells a single product with the following characteristics: Per Unit Percent of Sales Selling price $220 100% Variable expenses    44  20% Contribution margin $176  80% The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month. Consider each of the following questions independently. 135. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question. Management is considering using a new component that would increase the unit variable cost by $11. 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? A) increase of $82,500 B) decrease of $5,500 C) decrease of $82,500 D) increase of $5,500 Ans:  D Solution: 7,000 units 7,500 units Sales (7,000 units × $220, 7,500 units × $220) $1,540,000 $1,650,000 Variable expenses (7,000 units × $44, 7,500 units × $55) 308,000 412,500 Contribution margin 1,232,000 1,237,500 Fixed expenses 901,000 901,000 Net operating income $ 331,000 $ 336,500 Increase in net operating income: $336,500 ? $331,000 = $5,500 136. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question. The marketing manager believes that a $28,000 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $28,000 B) increase of $33,440 C) increase of $5,440 D) decrease of $5,440 Ans:  C Solution: 7,000 units 7,190 units Sales (7,000 units × $220, 7,190 units × $220) $1,540,000 $1,581,800 Variable expenses (7,000 units × $44, 7,190 units × $44) 308,000 316,360 Contribution margin 1,232,000 1,265,440 Fixed expenses 901,000 929,000 Net operating income $ 331,000 $ 336,440 Increase in net operating income: $336,440 ? $331,000 = $5,440 137. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question. The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $53,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,000 units. What should be the overall effect on the company's monthly net operating income of this change? A) decrease of $105,000 B) increase of $149,000 C) increase of $105,000 D) decrease of $21,000 Ans:  D Solution: 7,000 units 8,000 units Sales (7,000 units × $220, 8,000 units × $202) $1,540,000 $1,616,000 Variable expenses (7,000 units × $44, 8,000 units × $44) 308,000 352,000 Contribution margin 1,232,000 1,264,000 Fixed expenses 901,000 954,000 Net operating income $ 331,000 $ 310,000 Decrease in net operating income: $331,000 ? $310,000 = $21,000 138. This question is to be considered independently of all other questions relating to Thornbrough Corporation. Refer to the original data when answering this question. The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept a decrease in their salaries of $65,000 per month. (This is the company's savings for the entire sales staff.) The marketing manager predicts that introducing this sales incentive would increase monthly sales by 300 units. What should be the overall effect on the company's monthly net operating income of this change? A) increase of $1,269,500 B) increase of $37,500 C) increase of $61,700 D) decrease of $92,500 Ans:  B Solution: 7,000 units 7,300 units Sales (7,000 units × $220, 7,300 units × $220) $1,540,000 $1,606,000 Variable expenses (7,000 units × $44, 7,300 units × $55) 308,000 401,500 Contribution margin 1,232,000 1,204,500 Fixed expenses 901,000 836,000 Net operating income $ 331,000 $ 368,500 Increase in net operating income: $368,500 ? $331,000 = $37,500 Use the following to answer questions 139-140: Tricia Corporation is a single product firm that sells its product for $2.50 per unit. Variable expense per unit at Tricia is $1.00. Tricia expects fixed expenses to total $18,000 for next year. 139. How many units would Tricia have to sell next year in order to break-even? A) 7,200 B) 12,000 C) 30,000 D) 45,000 Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Profit $2.50Q = $1.00Q + $18,000 + $0 $1.50Q = $18,000 Q = $18,000 ÷ $1.50 per unit = 12,000 units 140. What would Tricia's total sales dollars have to be next year in order to generate $45,000 of net operating income? A) $30,000 B) $42,000 C) $75,000 D) $105,000 Ans:  D Solution: Contribution margin = Sales price - Variable expense per unit Contribution margin = $2.50 - $1.00 = $1.50 CM ratio = $1.50 ÷ $2.50 = 0.60 Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($18,000 + $45,000)/0.60 = $105,000 Use the following to answer questions 141-142: Zanetti Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $110.00 Variable expense per unit $34.10 Fixed expense per month $132,066 141. The break-even in monthly unit sales is closest to: A) 3,873 B) 1,740 C) 1,201 D) 2,271 Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Profit $110.00Q = $34.10Q + $132,066 + $0 $75.90Q = $132,066 Q = $132,066 ÷ $75.90 per unit = 1,740 units 142. The break-even in monthly dollar sales is closest to: A) $191,400 B) $249,810 C) $426,030 D) $132,110 Ans:  A Solution: Per Unit Percent of Sales Sales $110.00 100.0% Variable expenses     34.10  31.0% Contribution margin and contribution margin ratio $ 75.90  69.0% Break-even in total sales dollars = Fixed expenses/CM ratio = $132,066/0.69 = $191,400 Use the following to answer questions 143-144: Data concerning Sinisi Corporation's single product appear below: Selling price per unit $200.00 Variable expense per unit $58.00 Fixed expense per month $407,540 143. The break-even in monthly unit sales is closest to: A) 2,038 B) 7,027 C) 2,870 D) 3,978 Ans:  C Solution: Sales = Variable expenses + Fixed expenses + Profit $200Q = $58Q + $407,540 + $0 $142Q = $407,540 Q = $407,540 ÷ $142 per unit = 2,870 units 144. The break-even in monthly dollar sales is closest to: A) $407,600 B) $1,405,400 C) $574,000 D) $795,600 Ans:  C Solution: Per Unit Percent of Sales Sales $200 100.0% Variable expenses     58  29.0% Contribution margin and contribution margin ratio $142  71.0% Break-even in total sales dollars = Fixed expenses/CM ratio = $407,540/0.71 = $574,000 Use the following to answer questions 145-146: Heathman Inc. produces and sells a single product. The selling price of the product is $230.00 per unit and its variable cost is $89.70 per unit. The fixed expense is $308,660 per month. 145. The break-even in monthly unit sales is closest to: A) 2,328 B) 1,342 C) 3,441 D) 2,200 Ans:  D Solution: Sales = Variable expenses + Fixed expenses + Profit $230.00Q = $89.70Q + $308,660 + $0 $140.30Q = $308,660 Q = $308,660 ÷ $140.30 per unit = 2,200 units 146. The break-even in monthly dollar sales is closest to: A) $791,436 B) $535,365 C) $506,000 D) $308,660 Ans:  C Solution: Per Unit Percent of Sales Sales $230.00 100.0% Variable expenses     89.70  39.0% Contribution margin and contribution margin ratio $140.30  61.0% Break-even in total sales dollars = Fixed expenses/CM ratio = $308,660/0.61 = $506,000 Use the following to answer questions 147-148: Maziarz Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $220.00 Variable expense per unit $72.60 Fixed expense per month $548,328 147. Assume the company's monthly target profit is $14,000. The unit sales to attain that target profit is closest to: A) 7,746 B) 2,556 C) 4,706 D) 3,815 Ans:  D Solution: Sales = Variable expenses + Fixed expenses + Target profit $220.00Q = $72.60Q + $548,328 + $14,000 $147.40Q = $562,328 Q = $562,328 ÷ $147.40 per unit = 3,815 units (rounded) 148. Assume the company's monthly target profit is $16,000. The dollar sales to attain that target profit is closest to: A) $564,328 B) $1,710,085 C) $1,038,898 D) $842,281 Ans:  D Solution: Contribution margin per unit = Sales price - Variable expense per unit Contribution margin per unit = $220.00 - $72.60 = $147.40 CM ratio = $147.40 ÷ $220.00 = 0.67 Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($548,328 + $16,000)/0.67 = $842,281 (rounded) Use the following to answer questions 149-150: Data concerning Strite Corporation's single product appear below: Selling price per unit $150.00 Variable expense per unit $42.00 Fixed expense per month $421,200 149. Assume the company's monthly target profit is $17,000. The unit sales to attain that target profit is closest to: A) 5,804 B) 2,921 C) 4,057 D) 10,433 Ans:  C Solution: Sales = Variable expenses + Fixed expenses + Target profit $150Q = $42Q + $421,200 + $17,000 $108Q = $438,200 Q = $438,200 ÷ $108 per unit = 4,057 units (rounded) 150. Assume the company's monthly target profit is $8,000. The dollar sales to attain that target profit is closest to: A) $596,111 B) $1,532,857 C) $852,723 D) $429,200 Ans:  A Solution: Contribution margin per unit = Sales price - Variable expense per unit Contribution margin per unit = $150.00 - $42.00 = $108.00 CM ratio = $108.00 ÷ $150.00 = 0.72 Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($421,200 + $8,000)/0.72 = $596,111 (rounded) Use the following to answer questions 151-152: Speckman Enterprises, Inc., produces and sells a single product whose selling price is $200.00 per unit and whose variable expense is $68.00 per unit. The company's monthly fixed expense is $514,800. 151. Assume the company's monthly target profit is $11,000. The unit sales to attain that target profit is closest to: A) 2,629 B) 3,983 C) 4,781 D) 7,732 Ans:  B Solution: Sales = Variable expenses + Fixed expenses + Target profit $200.00Q = $68.00Q + $514,800 + $11,000 $132.00Q = $525,800 Q = $525,800 ÷ $132 per unit = 3,983 units (rounded) 152. Assume the company's monthly target profit is $12,000. The dollar sales to attain that target profit is closest to: A) $1,549,412 B) $798,182 C) $526,800 D) $958,131 Ans:  B Solution: Contribution margin per unit = Sales price - Variable expense per unit Contribution margin per unit = $200.00 - $68.00 = $132.00 CM ratio = $132.00 ÷ $200.00 = 0.66 Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($514,800 + $12,000)/0.66 = $798,182 (rounded) Use the following to answer questions 153-154: Jerrel Corporation sells a product for $230 per unit. The product's current sales are 24,000 units and its break-even sales are 17,280 units. 153. What is the margin of safety in dollars? A) $5,520,000 B) $1,545,600 C) $3,974,400 D) $3,680,000 Ans:  B LO:  7 Solution: Margin of safety in dollars: Break-even sales = $230 per unit × 17,280 units = $3,974,400 Current sales = $230 per unit × 24,000 units = $5,520,000 Margin of safety in dollars = Sales ? Break-even sales = $5,520,000 ? $3,974,400 = $1,545,600 154. The margin of safety as a percentage of sales is closest to: A) 61% B) 28% C) 72% D) 39% Ans:  B LO:  7 Solution: Margin of safety in dollars: Break-even sales = $230 per unit × 17,280 units = $3,974,400 Current sales = $230 per unit × 24,000 units = $5,520,000 Margin of safety in dollars = Sales ? Break-even sales = $5,520,000 ? $3,974,400 = $1,545,600 Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $1,545,600 ÷ $5,520,000 = 28% Use the following to answer questions 155-156: Maruska Corporation has provided the following data concerning its only product: Selling price $180 per unit Current sales 29,800 units Break-even sales 25,032 units 155. What is the margin of safety in dollars? A) $4,505,760 B) $858,240 C) $3,576,000 D) $5,364,000 Ans:  B LO:  7 Solution: Margin of safety in dollars: Break-even sales = $180 per unit × 25,032 = $4,505,760 Current sales = $180 per unit × 29,800 = $5,364,000 Margin of safety in dollars = Sales ? Break-even sales = $5,364,000 ? $4,505,760 = $858,240 156. The margin of safety as a percentage of sales is closest to: A) 19% B) 16% C) 84% D) 81% Ans:  B LO:  7 Solution: Margin of safety in dollars: Break-even sales = $180 per unit × 25,032 = $4,505,760 Current sales = $180 per unit × 29,800 = $5,364,000 Margin of safety in dollars = Sales ? Break-even sales = $5,364,000 ? $4,505,760 = $858,240 Margin of safety as a percentage of sales = Margin of safety in dollars ÷ Current sales = $858,240 ÷ $5,364,000 = 16% Use the following to answer questions 157-158: Bois Corporation has provided its contribution format income statement for January. Sales $426,400 Variable expenses  260,000 Contribution margin 166,400 Fixed expenses  120,900 Net operating income $ 45,500 157. The degree of operating leverage is closest to: A) 0.11 B) 9.37 C) 0.27 D) 3.66 Ans:  D LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $166,400/$45,500 = 3.66 158. If the company's sales increase by 7%, its net operating income should increase by about: A) 26% B) 7% C) 66% D) 11% Ans:  A LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $166,400/$45,500 = 3.66 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 7% × 3.66 = 26% Use the following to answer questions 159-160: The July contribution format income statement of Doxtater Corporation appears below: Sales $564,400 Variable expenses  312,800 Contribution margin 251,600 Fixed expenses  193,800 Net operating income $ 57,800 159. The degree of operating leverage is closest to: A) 0.23 B) 0.10 C) 4.35 D) 9.76 Ans:  C LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $251,600/$57,800 = 4.35 160. If the company's sales increase by 19%, its net operating income should increase by about: A) 10% B) 19% C) 83% D) 186% Ans:  C LO:  8 Solution: Degree of operating leverage = Contribution margin/Net operating income = $251,600/$57,800 = 4.35 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 19% × 4.35 = 83% Use the following to answer questions 161-162: Taylor, Inc. produces only two products, Acdom and Belnom. These account for 60% and 40% of the total sales dollars of Taylor, respectively. The unit variable expense as a percentage of the selling price is 60% for Acdom and 85% for Belnom. Total fixed expenses are $150,000. There are no other costs. 161. What is Taylor's break-even point in sales dollars? A) $150,000 B) $214,286 C) $300,000 D) $500,000 Ans:  D LO:  9 Solution: Each product’s contribution margin rate is (1 ? variable expense percentage) Acdom = 1 ? 0.6 = 0.4 Belnom = 1 ? 0.85 = 0.15 To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars: (60% × 0.4%) + (40% × 0.15%) = 0.24% + 0.06% = 0.30% To calculate the break-even point in sales dollars: Fixed expenses ÷ Weighted average contribution margin ratio = $150,000 ÷ 0.30 = $500,000 162. Assuming that the total fixed expenses of Taylor increase by 30% and the sales mix remains constant, what amount of sales dollars would be necessary to generate a net operating income of $9,000? A) $204,000 B) $464,000 C) $659,000 D) $680,000 Ans:  D LO:  9 Solution: Each product’s contribution margin rate is (1 ? variable expense percentage) Acdom = 1 ? 0.6 = 0.4 Belnom = 1 ? 0.85 = 0.15 To calculate the weighted average contribution margin, multiply each product’s contribution margin ratio by its percentage of total sales dollars: (60% × 0.4%) + (40% × 0.15%) = 0.24 + 0.06 = 0.30 New fixed expenses = ($150,000 × 1.30) = $195,000 Sales dollars needed = (Fixed expenses + Target net operating income) ÷ Weighted average contribution margin ratio = ($195,000 + $9,000) ÷ 0.30 = $680,000 Use the following to answer questions 163-164: Dietrick Corporation produces and sells two products. Data concerning those products for the most recent month appear below: Product B32L Product K84B Sales $46,000 $27,000 Variable expenses $13,800 $14,670 Fixed expenses for the entire company were $42,550. 163. The break-even point for the entire company is closest to: A) $42,550 B) $71,020 C) $69,754 D) $30,450 Ans:  C LO:  9 Solution: Product B32L Product K84B Total Sales $46,000 $27,000 $73,000 Variable expenses   13,800   14,670   28,470 Contribution margin $32,200 $12,330 44,530 Fixed expenses    42,550 Net operating income $  1,980 Overall CM ratio = Total contribution margin/Total sales = $44,530/$73,000 = 0.61 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $42,550/0.61 = $69,754 (rounded) 164. If the sales mix were to shift toward Product B32L with total sales remaining constant, the overall break-even point for the entire company: A) could increase or decrease. B) would decrease. C) would not change. D) would increase. Ans:  B LO:  9 Use the following to answer questions 165-166: Ingrum Corporation produces and sells two products. In the most recent month, Product R38T had sales of $20,000 and variable expenses of $7,400. Product X08S had sales of $39,000 and variable expenses of $6,170. And the fixed expenses of the entire company were $41,160. 165. The break-even point for the entire company is closest to: A) $41,160 B) $17,840 C) $53,455 D) $54,730 Ans:  C LO:  9 Solution: Product R38T Product X08S Total Sales $20,000 $39,000 $59,000 Variable expenses     7,400   6,170  13,570 Contribution margin $12,600 $32,830 45,430 Fixed expenses  41,160 Net operating income $ 4,270 Overall CM ratio = Total contribution margin/Total sales = $45,430/$59,000 = 0.77 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $41,160/0.77 = $53,455 (rounded) 166. If the sales mix were to shift toward Product R38T with total sales remaining constant, the overall break-even point for the entire company: A) would not change. B) would increase. C) would decrease. D) could increase or decrease. Ans:  B LO:  9 Essay Questions 167. The following is Arkadia Corporation's contribution format income statement for last month: Sales $1,200,000 Variable expenses     800,000 Contribution margin 400,000 Fixed expenses     300,000 Net operating income $  100,000 The company has no beginning or ending inventories and produced and sold 20,000 units during the month. Required: What is the company's contribution margin ratio? What is the company's break-even in units? If sales increase by 100 units, by how much should net operating income increase? How many units would the company have to sell to attain target profits of $125,000? What is the company's margin of safety in dollars? What is the company's degree of operating leverage? Ans: Contribution margin ratio: CM ratio = Contribution margin ÷ Sales = $400,000 ÷ $1,200,000 = 0.333 Break-even units: Selling price ($1,200,000 ÷ 20,000 units) = $60 per unit Variable expenses ($800,000 ÷ 20,000 units) = $40 per unit Sales = Variable expenses + Fixed expenses + Profit $60Q = $40Q + $300,000 + $0 $20Q = $300,000 Q = $300,000 ÷ $20 per unit = 15,000 units Increase in net operating income from additional sales of 100 units: Selling price $60 per unit Variable expenses $40 per unit Unit contribution margin $20 per unit Additional sales × 100 units Increase in net operating income $2,000 Sales to attain target profit: Sales = Variable expenses + Fixed expenses + Profit $60Q = $40Q + $300,000 + $125,000 $20Q = $425,000 Q = $425,000 ÷ $20 per unit = 21,250 units Margin of safety in dollars: Break-even sales = $60 per unit × 15,000 units = $900,000 Margin of safety in dollars = Sales ? Break-even sales = $1,200,000 ? $900,000 = $300,000 Degree of operating leverage = Contribution margin ÷ Net operating income = $400,000 ÷ $100,000 = 4.0 LO:  1; 3; 5; 6; 7; 8 168. The Garry Corporation's most recent contribution format income statement is shown below: Total Per unit Sales (15,000 units) $225,000 $15 Variable expenses  135,000    9 Contribution margin 90,000 $ 6 Fixed expenses    35,000 Net operating income $ 55,000 Required: Prepare a new contribution format income statement under each of the following conditions (consider each case independently): The sales volume increases by 10% and the price decreases by $0.50 per unit. The selling price decreases $1.00 per unit, fixed expenses increase by $15,000, and the sales volume decreases by 5%. The selling price increases by 25%, variable expense increases by $0.75 per unit, and the sales volume decreases by 15%. The selling price increases by $1.50 per unit, variable cost increases by $1.00 per unit, fixed expenses decrease by $15,000, and sales volume decreases by 12%. Ans: a. Total Per unit Volume 16,500 units Sales $239,250 $14.50 Variable expenses  148,500    9.00 Contribution margin 90,750 $ 5.50 Fixed expenses    35,000 Net operating income $ 55,750 b. Total Per unit Volume 14,250 units Sales $199,500 $14.00 Variable expenses  128,250    9.00 Contribution margin 71,250 $ 5.00 Fixed expenses    50,000 Net operating income $ 21,250 c. Total Per unit Volume 12,750 units Sales $239,063 $18.75 Variable expenses 124,313 9.75 Contribution margin 114,750 $9.00 Fixed expenses 35,000 Net operating income $79,750 d. Total Per unit Volume 13,200 units Sales $217,800 $16.50 Variable expenses  132,000  10.00 Contribution margin 85,800 $ 6.50 Fixed expenses    20,000 Net operating income $ 65,800 AICPA FN:  Measurement LO:  1; 4 169. McConkey Corporation produces and sells a single product. The company's contribution format income statement for July appears below: Sales (5,500 units) $357,500 Variable expenses  236,500 Contribution margin 121,000 Fixed expenses  102,200 Net operating income $ 18,800 Required: Redo the company's contribution format income statement assuming that the company sells 5,800 units. Ans: Sales (5,800 units) $377,000 Variable expenses  249,400 Contribution margin 127,600 Fixed expenses  102,200 Net operating income $ 25,400 AICPA FN:  Measurement 170. Giannini Inc., which produces and sells a single product, has provided the following contribution format income statement for March: Sales (5,900 units) $477,900 Variable expenses  206,500 Contribution margin 271,400 Fixed expenses  190,800 Net operating income $ 80,600 Required: Redo the company's contribution format income statement assuming that the company sells 5,500 units. Ans: Sales (5,500 units) $445,500 Variable expenses  192,500 Contribution margin 253,000 Fixed expenses  190,800 Net operating income $ 62,200 AICPA FN:  Measurement 171. Mechem Corporation produces and sells a single product. In April, the company sold 2,100 units. Its total sales were $205,800, its total variable expenses were $107,100, and its total fixed expenses were $82,400. Required: Construct the company's contribution format income statement for April in good form. Redo the company's contribution format income statement assuming that the company sells 2,200 units. Ans: a. Sales (2,100 units) $205,800 Variable expenses  107,100 Contribution margin 98,700 Fixed expenses    82,400 Net operating income $ 16,300 b. Sales (2,200 units) $215,600 Variable expenses  112,200 Contribution margin 103,400 Fixed expenses    82,400 Net operating income $ 21,000 AICPA FN:  Measurement 172. In July, Meers Corporation sold 3,700 units of its only product. Its total sales were $107,300, its total variable expenses were $66,600, and its total fixed expenses were $34,800. Required: Construct the company's contribution format income statement for July in good form. Redo the company's contribution format income statement assuming that the company sells 3,400 units. Ans: a. Sales (3,700 units) $107,300 Variable expenses    66,600 Contribution margin 40,700 Fixed expenses    34,800 Net operating income $   5,900 b. Sales (3,400 units) $98,600 Variable expenses  61,200 Contribution margin 37,400 Fixed expenses  34,800 Net operating income $ 2,600 AICPA FN:  Measurement 173. Spencer Company's most recent monthly contribution format income statement is given below: Sales $60,000 Variable expenses  45,000 Contribution margin 15,000 Fixed expenses  18,000 Net operating loss ($3,000) The company sells its only product for $10 per unit. There were no beginning or ending inventories. Required: What are total sales in dollars at the break-even point? What are total variable expenses at the break-even point? What is the company's contribution margin ratio? If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the company's expected net operating income? (Prepare a new income statement.) Ans: The contribution margin ratio is $15,000 ÷ $60,000 = 25%. Therefore, the break-even in sales dollars is $18,000 ÷ 25% = $72,000. The variable cost ratio is $45,000 ÷ $60,000 = 75%. Therefore, the variable expenses at the break-even point are $72,000 × 75% = $54,000. 25% See part (a) above. d. Sales ($60,000 × 1.1) $66,000 Variable expenses ($45,000 × 1.1) 49,500 Contribution margin 16,500 Fixed expenses ($18,000 ? $2,000) 16,000 Net operating income $500 LO:  3; 4; 5 174. Sarratt Corporation's contribution margin ratio is 62% and its fixed monthly expenses are $91,000. Assume that the company's sales for May are expected to be $193,000. Required: Estimate the company's net operating income for May. Assume that the fixed monthly expenses do not change. Show your work! Ans: Sales $193,000 Contribution margin ratio 62% Contribution margin (sales × contribution margin ratio) $119,660 Fixed expenses    91,000 Net operating income $  28,660 175. The management of Merklin Corporation expects sales in May to be $105,000. The company's contribution margin ratio is 70% and its fixed monthly expenses are $48,000. Required: Estimate the company's net operating income for May. Assume that the fixed monthly expenses do not change. Show your work! Ans: Sales $105,000 Contribution margin ratio 70% Contribution margin (sales × contribution margin ratio) $73,500 Fixed expenses  48,000 Net operating income $25,500 176. Huitron Inc. expects its sales in September to be $143,000. The company's contribution margin ratio is 65% and its fixed monthly expenses are $62,000. Required: Estimate the company's net operating income for September. Assume that the fixed monthly expenses do not change. Show your work! Ans: Sales $143,000 Contribution margin ratio 65% Contribution margin (sales × contribution margin ratio) $92,950 Fixed expenses 62,000 Net operating income $30,950 177. Belli-Pitt, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows: Sales $540,000 Variable expenses  360,000 Contribution margin 180,000 Fixed expenses  120,000 Net operating income $ 60,000 The company produced and sold 120,000 kilograms of product during the month. There were no beginning or ending inventories. Required: Given the present situation, compute The break-even sales in kilograms. The break-even sales in dollars. The sales in kilograms that would be required to produce net operating income of $90,000. The margin of safety in dollars. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease. Should the company choose the lease or the royalty plan? Under the royalty plan compute break-even point in kilograms. Under the royalty plan compute break-even point in dollars. Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000. Ans: a. Per kg. Sales $4.50 100.0% Variable expense  3.00  66.7% Contribution margin $1.50  33.3% Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.00Q + $120,000 + $0 $1.50Q = $120,000 Q = $120,000 ÷ $1.50 per unit = 80,000 units 80,000 units × $4.50 per unit = $360,000 Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.00Q + $120,000 + $90,000 $1.50Q = $210,000 Q = $210,000 ÷ $1.50 per unit = 140,000 units Margin of safety = Sales ? Sales at breakeven = $540,000 ? $360,000 = $180,000 b. 1. As Is Proposed Per Unit Amount Per Unit Amount Sales $540,000 $4.50 $540,000 $4.50 Variable expense  360,000  3.00  372,000  3.10 Contribution margin 180,000 1.50 168,000 1.40 Fixed expense  120,000  1.00  100,000  0.83 Net operating income $ 60,000 $0.50 $ 68,000 $0.57 Since net operating income increases by $8,000 the royalty is a good plan, provided sales remains at the same level. Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.10Q + $100,000 + $0 $1.40Q = $100,000 Q = $100,000 ÷ $1.40 per unit = 71,429 units 71,429 units × $4.50 unit = $321,429 Sales = Variable expenses + Fixed expenses + Target profit $4.50Q = $3.10Q + $100,000 + $90,000 $1.40Q = $190,000 Q = $190,000 ÷ $1.40 per unit = 135,714 units LO:  4; 5; 6 178. Shelhorse Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $140 100% Variable expenses    56  40% Contribution margin $ 84  60% Fixed expenses are $275,000 per month. The company is currently selling 4,000 units per month. Required: The marketing manager believes that a $13,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work! Ans: Increase in total contribution margin ($84 per unit × 150 units) $12,600 Less incremental fixed expenses  13,000 Change in net operating income ($    400) 179. Data concerning Cavaluzzi Corporation's single product appear below: Per Unit Percent of Sales Selling price $110 100% Variable expenses    44  40% Contribution margin $ 66  60% Fixed expenses are $440,000 per month. The company is currently selling 8,000 units per month. Required: The marketing manager believes that a $8,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? Show your work! Ans: Increase in total contribution margin ($66 per unit × 150 units) $9,900 Less incremental fixed expenses  8,000 Change in net operating income $1,900 180. Naumann Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $100 100% Variable expenses    30  30% Contribution margin $ 70  70% Fixed expenses are $234,000 per month. The company is currently selling 4,000 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $7. Since the new component would improve 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 if fixed expenses are unaffected? Show your work! Ans: New variable cost per unit ($30 + $7) $37 New contribution margin per unit ($100 ? $37) $63 New unit monthly sales (4,000 units + 500 units) 4,500 New total contribution margin: 4,500 units × $63 per unit $283,500 Current total contribution margin: 4,000 units × $70 per unit  280,000 Change in total contribution margin and in net operating income $   3,500 Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin. 181. Data concerning Milian Corporation's single product appear below: Per Unit Percent of Sales Selling price $130 100% Variable expenses    39  30% Contribution margin $ 91  70% Fixed expenses are $66,000 per month. The company is currently selling 1,000 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $15. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work! Ans: New variable cost per unit ($39 + $15) $54 New contribution margin per unit ($130 ? $54) $76 New unit monthly sales (1,000 units + 200 units) 1,200 New total contribution margin: 1,200 units × $76 per unit $91,200 Current total contribution margin: 1,000 units × $91 per unit  91,000 Change in total contribution margin and in net operating income $    200 Since fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin. 182. Bethard Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $120 100% Variable expenses    24  20% Contribution margin $ 96  80% Fixed expenses are $354,000 per month. The company is currently selling 5,000 units per month. Required: The marketing manager would like to cut the selling price by $8 and increase the advertising budget by $23,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work! Ans: New selling price ($120 ? $8) $112 New contribution margin ($112 ? $24) $88 New unit monthly sales (5,000 units + 600 units) 5,600 New total contribution margin: 5,600 units × $88 per unit $492,800 Present total contribution margin: 5,000 units × $96 per unit  480,000 Change in total contribution margin 12,800 Less increase in advertising budget    23,000 Change in net operating income ($10,200) 183. Data concerning Neuner Corporation's single product appear below: Per Unit Percent of Sales Selling price $220 100% Variable expenses    88  40% Contribution margin $132  60% Fixed expenses are $425,000 per month. The company is currently selling 4,000 units per month. Required: The marketing manager would like to cut the selling price by $11 and increase the advertising budget by $23,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 400 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work! Ans: New selling price ($220 ? $11) $209 New contribution margin ($209 ? $88) $121 New unit monthly sales (4,000 units + 400 units) 4,400 New total contribution margin: 4,400 units × $121 per unit $532,400 Present total contribution margin: 4,000 units × $132 per unit  528,000 Change in total contribution margin 4,400 Less increase in advertising budget    23,700 Change in net operating income ($19,300) 184. Hamiel Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $240 100% Variable expenses  168  70% Contribution margin $72  30% Fixed expenses are $301,000 per month. The company is currently selling 5,000 units per month. Required: The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $16 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $68,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 200 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work! Ans: New contribution margin ($72 ? $16) $56 New unit monthly sales (5,000 units + 200 units) 5,200 New total contribution margin: 5,200 units × $56 per unit $291,200 Present total contribution margin: 5,000 units × $72 per unit  360,000 Change in total contribution margin (68,800) Plus savings in salespersons’ salaries   68,000 Change in net operating income ($     800) 185. Data concerning Wislocki Corporation's single product appear below: Per Unit Percent of Sales Selling price $130 100% Variable expenses    26  20% Contribution margin $104  80% Fixed expenses are $466,000 per month. The company is currently selling 6,000 units per month. Required: The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales staff would accept an overall decrease in their salaries of $55,000 per month. The marketing manager predicts that introducing this sales incentive would increase monthly sales by 100 units. What should be the overall effect on the company's monthly net operating income of this change? Show your work! Ans: New contribution margin ($104 ? $11) $93 New unit monthly sales (6,000 units + 100 units) 6,100 New total contribution margin: 6,100 units × $93 per unit $567,300 Present total contribution margin: 6,000 units × $104 per unit  624,000 Change in total contribution margin (56,700) Plus savings in salespersons’ salaries    55,000 Change in net operating income ($   1,700) 186. Merlin Enterprises manufactures a cellular telephone. The company's partial contribution format income statement for the most recent year is below. Total Per Unit Ratio Sales $300,000 $60 Variable expenses 55% Contribution margin Fixed expenses 108,000 Net operating income Required: Complete the contribution income statement above. Determine the breakeven sales and units using either the equation or the contribution approach. Determine the sales necessary to earn a profit of $54,000. Determine the margin of safety percentage for the year above. Ans: Variable expenses = 0.55 × $300,000 = $165,000 Variable expenses per unit = 0.55 × $60 = $33 Total Per Unit Ratio Sales $300,000 $60 100% Variable expenses  165,000 33  55% Contribution margin 135,000 $27  45% Fixed expenses  108,000 Net operating income $ 27,000 Break-even in unit sales = $108,000/$27 per unit = 4,000 units Break-even in dollar sales = $108,000/0.45 = $240,000 Dollar sales to attain target profit = ($108,000 + $54,000)/0.45 = $360,000 Margin of safety = $300,000 ? $240,000 = $60,000 Margin of safety percentage = $60,000/$300,000 = 20% LO:  5; 6; 7 187. Frisch Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $170.00 Variable expense per unit $83.30 Fixed expense per month $138,720 Required: Determine the monthly break-even in either unit or total dollar sales. Show your work! Ans: Per Unit Percent of Sales Selling price per unit $170.00 100% Variable expense per unit    83.30  49% Contribution margin per unit and contribution margin ratio $ 86.70  51% Break-even in unit sales = Fixed expenses/Unit contribution margin = $138,720/$86.70 = 1,600 Break-even in total sales dollars = Fixed expenses/CM ratio = $138,720/0.51 = $272,000 188. Hamernik, Inc., produces and sells a single product whose selling price is $240.00 per unit and whose variable expense is $72.00 per unit. The company's fixed expense is $372,960 per month. Required: Determine the monthly break-even in either unit or total dollar sales. Show your work! Ans: Per Unit Percent of Sales Selling price per unit $240.00 100% Variable expense per unit    72.00  30% Contribution margin per unit and contribution margin ratio $168.00  70% Break-even in unit sales = Fixed expenses/Unit contribution margin = $372,960/$168 = 2,220 Break-even in total sales dollars = Fixed expenses/CM ratio = $372,960/0.70 = $532,800 189. Yamakawa Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $200.00 Variable expense per unit $64.00 Fixed expense per month $670,480 Required: Determine the monthly break-even in unit sales. Show your work! Ans: Selling price per unit $200.00 Variable expense per unit    64.00 Contribution margin per unit $136.00 Break-even in unit sales = Fixed expenses/Unit contribution margin = $670,480/$136 = 4,930 190. Liz, Inc., produces and sells a single product. The product sells for $130.00 per unit and its variable expense is $48.10 per unit. The company's monthly fixed expense is $223,587. Required: Determine the monthly break-even in unit sales. Show your work! Ans: Selling price per unit $130.00 Variable expense per unit    48.10 Contribution margin per unit $ 81.90 Break-even in unit sales = Fixed expenses/Unit contribution margin = $223,587/$81.90 = 2,730 191. Cleghorn Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $160.00 Variable expense per unit $70.40 Fixed expense per month $153,216 Required: Determine the monthly break-even in total dollar sales. Show your work! Ans: Per Unit Percent of Sales Selling price per unit $160.00 100% Variable expense per unit    70.40  44% Contribution margin per unit and contribution margin ratio $ 89.60  56% Break-even in total sales dollars = Fixed expenses/CM ratio = $153,216/0.56 = $273,600 192. Malensek International, Inc., produces and sells a single product. The product sells for $240.00 per unit and its variable expense is $55.20 per unit. The company's monthly fixed expense is $249,480. Required: Determine the monthly break-even in total dollar sales. Show your work! Ans: Per Unit Percent of Sales Selling price per unit $240.00 100% Variable expense per unit    55.20  23% Contribution margin per unit and contribution margin ratio $184.80 77% Break-even in total sales dollars = Fixed expenses/CM ratio = $249,480/0.77 = $324,000 193. Brihon Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $230.00 Variable expense per unit $103.50 Fixed expense per month $518,650 Required: Assume the company's monthly target profit is $12,650. Determine the unit sales to attain that target profit. Show your work! Assume the company's monthly target profit is $63,250. Determine the dollar sales to attain that target profit. Show your work! Ans: Per Unit Percent of Sales Selling price per unit $230.00 100% Variable expense per unit  103.50  45% Contribution margin per unit and CM ratio $126.50  55% Unit sales to attain target profit = (Fixed expenses + Target profit)/Unit contribution margin = ($518,650 + $12,650)/$126.50 = 4,200 Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($518,650 + $63,250)/0.55 = $1,058,000 194. Rachal Corporation produces and sells a single product whose selling price is $150.00 per unit and whose variable expense is $57.00 per unit. The company's monthly fixed expense is $381,300. Required: Assume the company's monthly target profit is $9,300. Determine the unit sales to attain that target profit. Show your work! Assume the company's monthly target profit is $18,600. Determine the dollar sales to attain that target profit. Show your work! Ans: Per Unit Percent of Sales Selling price per unit $150.00 100% Variable expense per unit    57.00  38% Contribution margin per unit and CM ratio $ 93.00  62% Unit sales to attain target profit = (Fixed expenses + Target profit)/Unit contribution margin = ($381,300 + $9,300)/$93.00 = 4,200 Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($381,300 + $18,600)/0.62 = $645,000 195. Hawver Corporation produces and sells a single product. Data concerning that product appear below: Selling price per unit $180.00 Variable expense per unit $81.00 Fixed expense per month $594,000 Required: Assume the company's monthly target profit is $19,800. Determine the unit sales to attain that target profit. Show your work! Ans: Selling price per unit $180.00 Variable expense per unit    81.00 Contribution margin per unit $ 99.00 Unit sales to attain target profit = (Fixed expenses + Target profit)/Unit contribution margin = ($594,000 + $19,800)/$99.00 = 6,200 196. The selling price of Old Corporation's only product is $180.00 per unit and its variable expense is $37.80 per unit. The company's monthly fixed expense is $483,480. Required: Assume the company's monthly target profit is $56,880. Determine the unit sales to attain that target profit. Show your work! Ans: Selling price per unit $180.00 Variable expense per unit     37.80 Contribution margin per unit $142.20 Unit sales to attain target profit = (Fixed expenses + Target profit)/Unit contribution margin = ($483,480 + $56,880)/$142.20 = 3,800 197. Bussy Corporation produces and sells a single product whose contribution margin ratio is 54%. The company's monthly fixed expense is $561,600 and the company's monthly target profit is $34,560. Required: Determine the dollar sales to attain the company's target profit. Show your work! Ans: Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($561,600 + $34,560)/0.54 = $1,104,000 198. The contribution margin ratio of Kuck Corporation's only product is 75%. The company's monthly fixed expense is $585,000 and the company's monthly target profit is $11,250. Required: Determine the dollar sales to attain the company's target profit. Show your work! Ans: Total sales dollars to attain target profit = (Fixed expenses + Target profit)/CM ratio = ($585,000 + $11,250)/0.75 = $795,000 199. Knezevich Corporation makes a product that sells for $230 per unit. The product's current sales are 36,900 units and its break-even sales are 32,103 units. Required: Compute the margin of safety in both dollars and as a percentage of sales. Ans: Sales (at the current volume of 36,900 units) (a) $8,487,000 Break-even sales (at 32,103 units)  7,383,690 Margin of safety (in dollars) (b) $1,103,310 Margin of safety as a percentage of sales, (b) ÷ (a) 13% LO:  7 200. Dickus Corporation's only product sells for $100 per unit. Its current sales are 35,600 units and its break-even sales are 29,192 units. Required: Compute the margin of safety in both dollars and as a percentage of sales. Ans: Sales (at the current volume of 35,600 units) (a) $3,560,000 Break-even sales (at 29,192 units)  2,919,200 Margin of safety (in dollars) (b) $  640,800 Margin of safety as a percentage of sales, (b) ÷ (a) 18% LO:  7 201. Haslem Inc. has provided the following data concerning its only product: Selling price $100 per unit Current sales 37,300 units Break-even sales 26,483 units Required: Compute the margin of safety in both dollars and as a percentage of sales. Ans: Sales (at the current volume of 37,300 units) (a) $3,730,000 Break-even sales (at 26,483 units) 2,648,300 Margin of safety (in dollars) (b) $1,081,700 Margin of safety as a percentage of sales, (b) ÷ (a) 29% LO:  7 202. Mcquage Corporation has provided its contribution format income statement for July. Sales $558,000 Variable expenses  306,900 Contribution margin 251,100 Fixed expenses  209,800 Net operating income $ 41,300 Required: Compute the degree of operating leverage to two decimal places. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 19% increase in sales. Ans: Degree of operating leverage = Contribution margin/Net operating income = $251,100/$41,300 = 6.08 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 19% × 6.08 = 115.52% LO:  8 203. Lubke Corporation's contribution format income statement for the most recent month follows: Sales $506,000 Variable expenses  236,500 Contribution margin 269,500 Fixed expenses  241,700 Net operating income $ 27,800 Required: Compute the degree of operating leverage to two decimal places. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 3% increase in sales. Ans: Degree of operating leverage = Contribution margin/Net operating income = $269,500/$27,800 = 9.69 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 3% × 9.69 = 29.07% LO:  8 204. In the most recent month, Sardella Corporation's total contribution margin was $46,200 and its net operating income $13,200. Required: Compute the degree of operating leverage to two decimal places. Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 10% increase in sales. Ans: Degree of operating leverage = Contribution margin/Net operating income = $46,200/$13,200 = 3.50 Percent increase in net operating income = Percent increase in sales × Degree of operating leverage = 10% × 3.50 = 35.00% LO:  8 205. Brancati Inc. produces and sells two products. Data concerning those products for the most recent month appear below: Product W07C Product B29Z Sales $25,000 $27,000 Variable expenses $7,000 $8,600 Fixed expenses for the entire company were $32,860. Required: Determine the overall break-even point for the company. Show your work! If the sales mix shifts toward Product W07C with no change in total sales, what will happen to the break-even point for the company? Explain. Ans: a. Product W07C Product B29Z Total Sales $25,000 $27,000 $52,000 Variable expenses    7,000    8,600  15,600 Contribution margin $18,000 $18,400 36,400 Fixed expenses  32,860 Net operating income $ 3,540 Overall CM ratio = Total contribution margin/Total sales = $36,400/$52,000 = 0.70 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $32,860/0.70 = $46,943 b. Product W07C Product B29Z Sales (a) $25,000 $27,000 Contribution margin (b) $18,000 $18,400 CM ratio (b)÷(a) 0.720 0.681 Since Product W07C’s CM ratio is greater than Product B29Z’s, a shift in the sales mix toward Product W07C will result in a decrease in the company’s overall break-even point. LO:  9 206. Veren Inc. produces and sells two products. During the most recent month, Product F73A's sales were $27,000 and its variable expenses were $9,450. Product L75P's sales were $14,000 and its variable expenses were $5,310. The company's fixed expenses were $21,060. Required: Determine the overall break-even point for the company. Show your work! If the sales mix shifts toward Product F73A with no change in total sales, what will happen to the break-even point for the company? Explain. Ans: a. Product F73A Product L75P Total Sales $27,000 $14,000 $41,000 Variable expenses    9,450    5,310  14,760 Contribution margin $17,550 $ 8,690 26,240 Fixed expenses  21,060 Net operating income $ 5,180 Overall CM ratio = Total contribution margin/Total sales = $26,240/$41,000 = 0.64 Break-even point in total sales dollars = Fixed expenses/Overall CM ratio = $21,060/0.64 = $32,906 b. Product F73A Product L75P Sales (a) $27,000 $14,000 Contribution margin (b) $17,550 $8,690 CM ratio (b)÷(a) 0.650 0.621 Since Product F73A’s CM ratio is greater than Product L75P’s, a shift in the sales mix toward Product F73A will result in a decrease in the company’s overall break-even point. LO:  9