activity based questions

61. The following information relates to Day Company:

Sales revenue	$12,000,000
Contribution margin	4,800,000
Net income	800,000

Day's operating leverage factor is:

A. 0.067.

B. 0.167.

C. 0.400.

D. 2.500.

E. 6.000.

62. The following information relates to Paterno Company:

Sales revenue	$10,000,000
Contribution margin	4,000,000
Net income	1,000,000

If a manager at Paterno desired to determine the percentage impact on net income of a given percentage change in sales, the manager would multiply the percentage increase/decrease in sales revenue by:

A. 0.25.

B. 0.40.

C. 2.50.

D. 4.00.

E. 10.00.

Use the following to answer questions 63-64:

Edco Company produced and sold 45,000 units of a single product last year, with the following results:

Sales revenue	$1,350,000
Manufacturing costs:
Variable	585,000
Fixed	270,000
Selling costs:
Variable	40,500
Fixed	54,000
Administrative costs:
Variable	184,500
Fixed	108,000

63. Edco's operating leverage factor was:

A. 4.

B. 5.

C. 6.

D. 7.

E. 8.

64. If Edco's sales revenues increase 15%, what will be the percentage increase in income before income taxes?

A. 15%.

B. 45%.

C. 60%.

D. 75%.

E. An amount other than those above.

65. When advanced manufacturing systems are installed, what effect does such installation usually have on fixed costs and the break-even point?

	Fixed Costs	Break-even Point
A.	Increase	Increase
B.	Increase	Decrease
C.	Decrease	Increase
D.	Decrease	Decrease
E.	Do not change	Does not change

66. Which of the following statements is (are) true regarding a company that has implemented flexible manufacturing systems and activity-based costing?

I. The company has erred, as these two practices used in conjunction with one another will severely limit the firm's ability to analyze costs over the relevant range.

II. Costs formerly viewed as fixed under traditional-costing systems may now be considered variable with respect to changes in cost drivers such as number of setups, number of material moves, and so forth.

III. As compared with the results obtained under a traditional-costing system, the concept of break-even analysis loses meaning.

A. I only.

B. II only.

C. III only.

D. I and II.

E. II and III.

67. A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income. How much should the firm add to fixed costs when figuring the sales revenues necessary to produce this income level?

A. $200,000.

B. $300,000.

C. $500,000.

D. $833,333.

E. $1,250,000.

68. Barney, Inc., is subject to a 40% income tax rate. The following data pertain to the period just ended when the company produced and sold 45,000 units:

Sales revenue	$1,350,000
Variable costs	810,000
Fixed costs	432,000

How many units must Barney sell to earn an after-tax profit of $180,000?

A. 42,000.

B. 45,000.

C. 51,000.

D. 61,000.

E. An amount other than those above.

EXERCISES

Basic CVP Relationships

69. Vince's Pizza delivers pizzas to dormitories and apartments near a major state university. The company's annual fixed costs are $48,000. The sales price averages $9, and it costs the company $3 to make and deliver each pizza.

Required:

A. How many pizzas must Vince's sell to break even?

B. How many pizzas must the company sell to earn a target net profit of $54,000?

C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin?

D. Vince's assistant manager, an accounting major, has suggested that the firm should try to increase the contribution margin per pizza. Explain the meaning of "contribution margin" in layman's terms.

Basic CVP Relationships

70. Seventh Heaven takes tourists on helicopter tours of Hawaii. Each tourist buys a $150 ticket; the variable costs average $60 per person. Seventh Heaven has annual fixed costs of $702,000.

Required:

A. How many tours must the company conduct in a month to break even?

B. Compute the sales revenue needed to produce a target net profit of $36,000 per month.

C. Calculate the contribution margin ratio.

D. Determine whether the actions that follow will increase, decrease, or not affect the company's break-even point.

1. A decrease in tour prices.

2. The termination of a salaried clerk (no replacement is planned).

3. A decrease in the number of tours sold.

CVP: Analysis of Operations

71. Thompson Company is considering the development of two products: no. 65 or no. 66. Manufacturing cost information follows.

	No. 65	No. 66
Annual fixed costs	$220,000	$340,000
Variable cost per unit	33	25

Regardless of which product is introduced, the anticipated selling price will be $50 and the company will pay a 10% sales commission on gross dollar sales. Thompson will not carry an inventory of these items.

Required:

A. What is the break-even sales volume (in dollars) on product no. 66?

B. Which of the two products will be more profitable at a sales level of 25,000 units?

C. At what unit-volume level will the profit/loss on product no. 65 equal the profit/loss on product no. 66?

Break-Even Analysis, Decision Making

72. The Bruggs & Strutton Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of 40,000 units.

Sales	$1,600,000
Less: Cost of goods sold	1,120,000
Gross margin	$ 480,000
Less: Operating expenses	100,000
Net income	$ 380,000

Cost of goods sold consists of $800,000 of variable costs and $320,000 of fixed costs. Operating expenses consist of $40,000 of variable costs and $60,000 of fixed costs.

Required:

A. Calculate the break-even point in units and sales dollars.

B. Calculate the safety margin.

C. Bruggs & Strutton received an order for 6,000 units at a price of $25.00. There will be no increase in fixed costs, but variable costs will be reduced by $0.54 per unit because of cheaper packaging. Determine the projected increase or decrease in profit from the order.

Impact of Operating Changes

73. Oakmark recently sold 70,000 units, generating sales revenue of $4,900,000. The company's variable cost per unit and total fixed cost amounted to $20 and $2,800,000, respectively. Management is in the process of studying the dollar impact of various transactions and events, and desires answers to the following independent cases:

Case no. 1: Management wants to lower the firm's break-even point to 52,000 units. All other things being equal, what must happen to fixed costs to achieve this objective?

Case no. 2: The company anticipates a $2 hike in the variable cost per unit. All other things being equal, if management desires to keep the firm's current break-even point, what must happen to Oakmark's selling price? If selling price remains constant, what must happen to the firm's total fixed costs?

Required:

A. Answer the two cases raised by management.

B. Determine the impact (increase, decrease, or no effect) of the following operating changes on the items cited:

1. An increase in variable selling costs on net income.

2. A decrease in direct material cost on the unit contribution margin.

3. A decrease in the number of units sold on the break-even point.

Impact of Operating Changes

74. Wilcox Company is studying the impact of the following:

1. An increase in sales price.

2. An increase in the variable cost per unit.

3. An increase in the number of units sold (note: each unit produces a $6 contribution margin).

4. A decrease in fixed costs.

5. A proposed change in the method of compensation for salespeople, away from commissions based on gross sales dollars and toward higher monthly salaries.

Required:

Determine the impact of each of these operating changes on Wilcox's per-unit contribution margin and break-even point by completing the chart that follows. Your responses should be Increase (INC), Decrease (DEC), No Effect (NE), or Insufficient Information to Judge (II).

	Per-Unit Contribution Margin		Break-Even Point
1.	______		______
2.	______		______
3.	______		______
4.	______		______
5.	______		______

Impact of Operating Changes

75. Gladstone Company is studying the impact of the following:

1. An increase in sales price on the break-even point.

2. A decrease in fixed costs on the contribution margin.

3. An increase in the contribution margin on the break-even point.

4. A decrease in the variable cost per unit on the sales volume needed to achieve Gladstone's $68,000 target net profit.

5. An increase in sales commissions on the break-even point and the contribution margin.

6. A decrease in anticipated advertising outlays on fixed cost and the break-even point.

Required:

Determine the impact of these operating changes (increase, decrease, no effect) on the item(s) noted.