Managerial accounting, 5th by jiambalvo test bank ch04

CHAPTER Cost-Volume-Profit Analysis Summary of Questions by Objectives and Bloom’s Taxonomy Item SO BT Item SO True-False Statements 1 K 11 K 12 K 13 K 14 K 15 K 16 K 17 K 18 K 19 10 K 20 Multiple Choice Questions 48 K 72 49 K 73 2,A1 50 K 74 51 K 75 52 K 76 53 K 77 54 K 78 55 K 79 56 AP 80 57 K 81 58 AP 82 59 K 83 60 C 84 61 K 85 62 K 86 63 K 87 64 K 88 65 K 89 66 K 90 67 K 91 68 K 92 69 C 93 70 AP 94 71 AP 95 Matching 168 1,2 3,5 K BT Item SO BT Item K K K K K K K K K K AP AP AP AP AP AP AP AP AP K K C K K AP AP AP K C C K K C C SO BT 21 22 23 24 25 26 27 28 29 30 2 2 3 3 3 K K K K K K K K C C 31 32 33 34 35 36 37 38 39 40 3 3 4 4 5 C K K K K K K K K K 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 3 3 3 3 3 3 3 3 3 3 3 K C C K C C K K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 3 3 3 3 3 3 3 3 3 4 4 4 AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP K C AP AP AP AP Item SO BT 41 42 43 44 45 46 47 5 6 6 A1 K C K K K K K 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 6 4 5 5 5 3 5 6 2,A1 2,A1 AP AP AP K AP AP AP AP K K K K K C AP AP K C K K K AP AP AP 4-2 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition Item SO BT Item SO Exercises 169 K 173 170 AP 174 171 AP 175 2,3 172 2,3 AP 176 Challenge Exercises 189 AP 190 Short-Answer Essays 193 K 195 194 K 196 BT Item SO BT Item SO AP AP N AP AP 177 178 179 180 AP C K 3 3 AP AP AP AP 181 182 183 184 4 191 2,3 AP 192 1,2,3 AP 197 198 C C 199 K BT AP AP AP AP Item 185 186 187 188 SO BT 2,A1 2,A1 AP AP AP AP Chapter Cost-Volume-Profit Analysis 4-3 TRUE-FALSE Total variable costs change inversely with changes in volume or activity Variable costs per unit remain the same when the level of activity changes within the relevant range Total fixed costs remain the same when the level of activity changes within the relevant range Total variable costs remain constant across all levels of activity within the relevant range Mixed costs are also referred to as semivariable costs A step cost is similar to a variable cost, except that the relevant range is smaller for a step cost Direct labor and manufacturing overhead costs are examples of fixed costs The variable cost per unit is the same at all activity levels within the relevant range Fixed costs are the same in total amount at any activity level within the relevant range 10 Committed fixed costs are costs that can be changed easily in a relatively brief period of time 11 Total production cost is generally a mixed cost 12 In order to use CVP analysis, costs must be separated into fixed and variable components 13 The account analysis method of estimating fixed and variable costs uses software programs such as Microsoft Excel® to fit a line to multiple data points 14 The high-low method is subjective in that different managers viewing the same set of data may select different data points to use in estimating costs 15 The high-low method is used to estimate a cost equation that can be used to predict costs at estimated activity levels 16 The high-low method fits a straight line to the data points that represent the highest and lowest cost levels of a particular activity 17 When using the high-low method, total fixed cost is found by calculating the intercept point of the sloped line on the vertical axis 18 Total cost equals total fixed costs plus variable cost per unit times the activity level in units 19 Computer software is often used to conduct a regression analysis 20 Total costs and activity are assumed to have a linear relationship within the relevant range 21 Account analysis is a method used to estimate fixed and variable costs 22 A significant weakness of the high-low method is that the two data points chosen may not be representative of the relationship between cost and activity 4-4 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 23 Regression analysis is a method of estimating the slope and y-intercept using all available data points 24 Cost behavior patterns are assumed to be linear at all activity levels when a regression is used to estimate cost behavior 25 Profit is equal to revenue minus total variable costs minus total fixed costs 26 At the break-even point, total revenue equals total fixed costs 27 The margin of safety is the difference between the current level of sales and break-even sales 28 Contribution margin is the difference between revenue and total costs 29 If the contribution margin ratio is 32%, this means that every $1.00 of sales will contribute $0.32 towards covering fixed costs and generating a profit 30 Contribution margin ratio is another name for the gross margin ratio 31 At the break-even point, total fixed costs equal total contribution margin 32 The margin of safety is the difference between the expected level of profit and break-even profit 33 If x = the number of units sold, profit = (contribution margin per unit × x) ‒ total fixed costs 34 The contribution margin ratio is determined by subtracting total costs from total sales revenue, and then dividing by total sales revenue 35 When performing cost-volume-profit analysis with multiple products, it is assumed that the sales mix remains constant, even when a different number of total units is are expected to be sold 36 CVP analysis for companies that sell more than one product assumes that the contribution margin ratio for all products is the same 37 Total fixed costs divided by the contribution margin ratio equals the break-even point in sales revenue 38 When performing multiple product CVP analysis, a necessary assumption is that sales mix, variable cost per unit, and fixed cost per unit remain constant 39 Companies that have higher operating leverage find that their profit level is more responsive to changes in sales volume than if operating leverage was low 40 Firms that have relatively high levels of variable costs have high operating leverage 41 Firms have no control over their level of operating leverage 42 If a company has only variable costs and its sales revenue increases by 20%, its profit will increase by an amount larger than 20% 43 When dealing with a constrained resource situation, a company should generally produce only the product with the highest contribution margin per unit in order to maximize profit Chapter Cost-Volume-Profit Analysis 4-5 44 When dealing with a constrained resource situation, a company should generally produce only the product with the highest contribution margin ratio, as this will insure the highest profit level 45 When there is a constraint on how many units can be produced, the focus shifts from contribution margin per unit to contribution margin per unit of the constraint 46 Common constraints found in business that impact production include hours of labor, hours of machine time, quantities of materials, and the cost of a product 47 The R Square is the slope of the regression line Answers 10 11 12 F T T F T F F T T F T T 13 14 15 16 17 18 19 20 21 22 23 24 F F T F T T T T T T T T 25 26 27 28 29 30 31 32 33 34 35 36 T F T F T F T F T F T F 37 38 39 40 41 42 43 44 45 46 47 T F T F F F F F T F F 4-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition MULTIPLE CHOICE 48 Which of the following is most likely to be a variable cost? A Depreciation of a factory building B Direct labor C Factory janitor salaries D Total costs of producing products 49 Variable cost per unit A can be estimated by performing break-even calculations B increases on a per unit basis when the level of activity increases C is represented by the slope of the total cost line D All of these answer choices are correct 50 Which of the following costs is least likely to be a variable cost? A Sales commissions B Direct labor C Indirect materials D Supervisory salaries 51 When the level of activity decreases, total variable costs A increase B remain the same C decrease in direct proportion to the decrease in activity D decrease, but at a slower rate than the level of activity 52 When the level of activity increases, the variable cost per unit A decreases B remains constant within the relevant range C increases D fluctuates, depending on the amount of the increase in activity 53 When the level of activity increases, total fixed costs A decrease B remain the same within the relevant range C decrease inversely with the change in activity D increase within the relevant range 54 When the level of activity increases, the fixed cost per unit A decreases B remains the same C increases D fluctuates, depending on the amount of the increase in activity 55 Which of the following components are included in a mixed cost? A A sunk cost and an opportunity cost B A fixed cost and a variable cost C A step cost and a semivariable cost D A product cost and a period cost Chapter Cost-Volume-Profit Analysis 56 4-7 Three costs incurred by Randall Rockers are summarized below at two different activity levels, 600 and 700 units: 600 Units 700 Units Cost A $2,700 $3,150 Cost B 2,940 3,360 Cost C 4,800 5,600 Which of these costs is variable? A A, B, and C B A and C C A only D C only 57 Within the relevant range, variable costs A per unit change when the activity level changes B are the same in total at different activity levels C are the same amount per unit at any activity level D None of these answer choices are correct 58 A cost is $4,900 at 800 units, $5,600 at 900 units, and $6,200 at 980 units This cost is a A variable cost B fixed cost C mixed cost D step cost 59 Step costs A per unit are the same for each range of volume B are classified as step variable or step fixed depending on the range of activity for which the cost remains fixed C change in total at every level of activity D are considered to be step fixed costs within a relatively small range 60 A company has a cost that is $7.00 per unit at a volume of 10,000 units and $5.00 per unit at a volume of 14,000 units What type of cost is this? A Fixed costs B Variable costs C Mixed costs D Incremental costs 61 Which of the following is not a method that is used to estimate variable and fixed costs? A Account analysis B High-low method C CVP analysis D Regression analysis 62 Which of the following is a cost estimation approach that is not based on fitting historical data points to a line? A Account analysis B High-low method C Regression analysis D Margin of safety analysis 4-8 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 63 The account analysis approach to estimating fixed and variable costs A requires at least five years of historical data B is based on the professional judgment of the manager C is not useful for general and selling expenses D is only used if the data for the high-low method or regression analysis is not available 64 Walsh Company graphed its units produced and total production costs for the past eight months What is this called? A Incremental analysis B Regression analysis C Contribution margin D Scattergraph 65 The high-low method calculates the total fixed cost as the A difference between total variable costs and total costs at a particular activity level B difference between the unit variable cost and the unit total cost C change in cost divided by the change in activity level for two points D change in activity level divided by the change in cost for two points 66 A significant weakness of the high-low method is that A a significant amount of management expertise is necessary to break out the variable and fixed costs B the two data points that are used may not be representative of the general relationship between cost and activity C the calculations are so complex that a computer is usually necessary in order to get accurate results D monthly data must be collected for at least three years before the method can be used 67 Regression analysis A uses all the available data points to estimate a cost equation B is less accurate than other methods of estimating costs C estimates a cost equation that indicates the variable and fixed costs per unit D is a method of determining the break-even point 68 The range of activity for which estimates and predictions are likely to be accurate is the A incremental range B margin of safety C relevant range D range of opportunity 69 A cost is $34,500 at an activity level of 23,000 units, and $42,000 at an activity level of 28,000 units What type of cost is this? A Fixed costs B Variable costs C Mixed costs D Sunk costs Chapter Cost-Volume-Profit Analysis 4-9 70 Duradyne, Inc has total costs of $18,000 when 2,000 units are produced and $26,000 when 5,200 units are produced During March, 4,000 units were produced and sold for $8 each If the highlow method is used, how much is the variable cost per unit? A $2.50 B $0.40 C $2.00 D $4.00 71 Ranger Pressure Cleaners has total monthly costs of $5,800 when 3,200 units are produced and $6,425 when 3,700 units are produced If the high-low method is used, how much is the estimated total monthly fixed cost? A $625 B $6,113 C $7,250 D $1,800 72 C-Drive Components has collected the following production data for the past four months: Units produced Total cost 7,000 $16,500 10,000 22,500 8,500 17,750 9,000 21,000 If the high-low method is used, what is the monthly total cost equation? A Total cost = $2,500 + ($2.00 × units produced) B Total cost = $3,750 + ($2.75 × units produced) C Total cost = $1,500 + ($2.00 × units produced) D Total cost = $500 + ($2.25 × units produced) 73 Management of MRC Enterprises has provided the following output from Excel ®: SUMMARY OUTPUT Statistics Multiple R 0.8939072 R Square 0.7990702 Adjusted R2 0.7488377 Standard Error 10744.516 Observations ANOVA df SS MS Regression 1836429 1836429 Residual 46177852 11544463 Total 2298208 Coefficients Intercept X Variable Std Error t Stat F 15.90745 P-value Significance F 0.0162864 Lower 95% Upper 95% Lower 95% Upper 95% 47757.05 34958.30 1.36611 0.24366 -49302.764 144816.88 49302 144816.8 6.364 1.595798 3.98841 0.01628 1.9340590 10.795352 1.9340 10.79535 What is the estimated cost for a production level of 1,200 units? A $1,730 4-10 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition B C D $55,394 $7,636 There is not enough information provided to determine the answer Chapter Cost-Volume-Profit Analysis 171 Winston Company has collected the following sales data for recent months: Month June July August September a b Answer a b 172 4-33 Units Sold 20,500 22,300 18,750 21,200 Total Cost $20,960 21,428 20,505 21,395 Using the high-low method, find variable cost per unit, total fixed costs, and the total cost equation What is the estimated cost for a month in which 22,40021,600 units sold? Variable cost per unit = ($21,428 – $20,505) / (22,300 – 18,750) = $0.26 per unit Total fixed costs = $20,505 – (18,750 × 0.26) = $15,630 Total cost = 15,630 + (0.26 × number of units sold) Total cost = $15,630 + ($0.26 × 22,40021,600) = $21,45421,246 The Ritz Theater is interested in estimating fixed and variable costs The following data are available: Month January February March April May June a b Answer a b Total Cost $172,000 $174,000 $180,500 $170,500 $190,000 $188,000 No of Tickets Sold 20,000 19,500 25,500 21,500 25,000 26,500 Use the high-low method to estimate fixed cost per month and variable costs per ticket sold The Ritz Theater is considering an advertising campaign that is expected to increase annual sales by 82,000 tickets Tickets are sold for $11 each Ignoring the cost of the advertising campaign, what is the expected increase in profit associated with the advertising campaign? ($188,000 − $174,000) ÷ (26,500 − 19,500) = $2.00 variable cost per ticket sold $188,000 – ($2 × 26,500) = $135,000 per month of fixed cost Total cost = $135,000 + $2.00x ($11 × 28,000) − ($2 × 28,000) = $7218,000 4-34 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 173 Safe Ridge Foods is interested in estimating the cost involved in hiring new employees for its retail stores The following information is available regarding the additional costs of operating the company’s Human Resource Department in May when there were new hires Human Resource Department Manager salaries $ 3,400 Staff hourly wages 21,600 Supplies 600 Equipment depreciation 1,100 Office rental space 1,800 Total $28,500 a b c Answer a 174 Use account analysis to determine total fixed cost per month and the variable cost per new hire The company is planning to hire employees in June Estimate the total cost of the Human Resources Department for June What is the expected incremental cost associated with hiring more employee in June than were hired in May? Variable costs = ($21,600 + $600) ÷ hires = $3,700 per new hire Fixed costs = $3,400 + $1,100 + $1,800 = $6,300 per month b $6,300 + ($3,700 × 4) = $21,100 c $3,700 × = $11,100 The following monthly data are available for Beach Nail Salon which provides manicures for nursing home patients who are charged $22 per manicure Its unit variable costs are $16 and its total fixed expenses are $5,400 Revenue during April totaled 1,600 units a b c Answer a How much is the break-even point in sales dollars for Beach Nail Salon? How many manicures must the company provide in order to earn a profit of $3,180? A new employee suggests that Beach Nail Salon sponsor a company softball team as a form of advertising The cost to sponsor the team is $1,320 How many more manicures must be provided to cover this cost? 22x – 16x – 5,400 = x = 900 manicures Break-even sales = 900 × $22 = $19,800 b ($5,400 + $3,180) / ($22 − $16) = 1,430 manicures c $1,320 / ($22 − $16) = 220 manicures Chapter Cost-Volume-Profit Analysis 175 4-35 Dave’s Dogs sells steamed hot dogs for $2.50 each The company provided the following units and total cost data concerning its hotdog sales for the last six months of 2014: July August September October November December Cost $3,020 2,795 3,040 2,700 2,750 3,085 Units 2,400 2,150 2,300 2,250 2,160 2,340 a Use the high-low method to estimate fixed and variable costs b Estimate total profit in a month when 2,2500 hotdogs are sold c Based on these estimates, calculate the number of hotdogs that must be sold to breakeven d How does linear regression differ from the high-low method in estimating fixed and variable costs? Answer a July and August: Variable cost per unit = ($3,020 – $2,795) ÷ (2,400 – 2,150) = $0.90 Total cost = Fixed cost + (Variable cost × Number of units) $3,020 = Fixed cost + ($0.90 × 2,400) Fixed cost = $860 Total cost = $860 + $0.90x b ($2.50 × 2,2500) – ($0.90 × 2,2500) – $860 = $3,1402,660 c BEP = 2.50x – 0.90x – 860 = x = 537.5 = 538 hotdogs d Linear regression uses all data points while the high-low method uses only the highest and lowest activity points The high and low data points could be data points (sales levels) which not reflect the normal activity levels Regression is more accurate 176 Mango Enterprises produces mango-flavored tea bags March’s budget indicated that sales of 500 boxes of tea bags would incur fixed costs of $2,380 The company's contribution margin ratio is 35%, and its contribution margin per box of tea bags is $4 How much sales revenue must Mango Enterprises generate to break-even? Answer 0.35x – 2,380 = x = $6,800 4-36 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 177 Resin Products has estimated that fixed costs per month are $79,200 and variable cost per dollar of sales is $0.52 a What is the break-even point per month in sales? b What level of sales is needed for a monthly profit of $24,000? c For the month of July, the company anticipates sales of $240,000 What is the expected level of profit? Answer a 178 b ($79,200 + $24,000) ữ 0.48 = $215,000 c ($240,000 ì 0.48) $79,200 = $36,000 Disc Buddy, Inc produces flash drives The selling price is $8 per drive The variable cost of production is $2.40 per unit and the fixed cost per month is $3,600 a Calculate the contribution margin associated with each flash drive b In August, the company sold 200 more flash drives than planned What is the expected effect on profit of selling the additional drives? c Calculate the contribution margin ratio associated with one flash drive d In October, the company had sales that were $2,400 higher than planned What is the expected effect on profit related to the additional sales? Answer a 179 Contribution margin ratio = 1.00 – 0.52 = 0.48 $79,200 ÷ 0.48 = $165,000 $8.00 – $2.40 = $5.60 b Profits will increase by $1,120 ($5.60 ì 200) c [$8.00 $2.40] ữ $8.00 = 70.00% d Profits will increase by $1,680 (70.00% × $2,400) Savane Enterprises sells a single product at a price of $57 per unit Variable costs per unit are $35 and total fixed costs are $719,400 Savane is considering the purchase of new equipment that would increase fixed costs to $1,023,700, but decrease the variable cost per unit to $28 a If Savane expects to sell 40,000 units next year, should the company purchase this new equipment? b What would Savane’s volume have to be to change your recommendation in part a above? Answer a b Under the current system, Savane’s profit when 40,000 units are sold is (($57 – $35) × 40,000) – $719,400 = $160,600 If the new equipment is purchased, Savane’s profit when 40,000 units are sold is (($57 – $28) × 40,000) – $1,023,700 = $136,300 Savane is better off not buying the new equipment 57x – 35x – 719,400 = 57x – 28x – 1,023,700 x = 43,472 units (rounded) Chapter Cost-Volume-Profit Analysis 4-37 180 Conviser Tools, Inc produces tape dispensers The selling price is $12 per dispenser The variable cost of production is $4.80 per dispenser and the fixed cost per month is $20,448 For November, the company expects to sell 3,100 tape dispensers a Calculate expected profit b Calculate the margin of safety in dollars Answer a 3,100 ($12) – 3,100 ($4.80) − $20,448 = $1,872 b Break-even sales: 12x – 4.80x – 20,448 = x = 2,840 dispensers Sales = 2,840 × $12 = $34,080 Margin of safety = Expected sales − Break-even sales = ($12 × 3,100) − $34,080 = $3,120 181 Sports To Go is organized into three departments The following sales and cost data are available for the prior year: Sales Less variable costs Contribution margin Less fixed costs Profit a b c Answer a Water $160,000 64,000 96,000 40,000 $ 56,000 Foot $96,000 42,000 54,000 16,000 $ 38,000 Field $150,000 84,000 66,000 32,000 $ 34,000 Total $406,000 190,000 216,000 88,000 $128,000 What is Sports To Go’s weighted average contribution margin ratio? Round your percentage value to two decimal places What level of sales is needed for Sports to Go to earn a profit of $156,720 assuming the same ratio of units sold and same selling price per unit? Sports To Go places an advertisement in the local paper each week All else equal, which department would you emphasize in the advertisement? $216,000 ÷ $406,000 = 53.20% b ($88,000 + $156,720) ÷ 0.5320 = $460,000 c Contribution margin ratios of the three departments: Water Department ($96,000 ÷ $160,000) = 60.00% Foot Department ($54,000 ÷ $96,000) = 56.25% Field Department ($66,000 ÷ $150,000) = 44.00% Water Department; because its weekly advertisement earns $0.60 on each incremental dollar of sales 4-38 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 182 Iggy’s Ice Pops produces two flavors of ice pops Information regarding the products is summarized for the month of April below: Number of units Sales revenue Variable costs Fixed costs Profit a b c Answer a 183 Kiwi 2,000 $3,000 1,500 900 $ 600 Melon 3,000 $3,600 900 2,400 $ 300 Total 5,000 $6,600 2,400 3,300 $ 900 If Iggy’s sells 50 more kiwi pops, by how much will profit increase? How much is Iggy’s weighted average contribution margin ratio? What level of sales does Iggy’s need in order to earn a profit of $1,200 assuming the current sales mix? (Round to the nearest dollar.) CM per kiwi ice pop: ($3,000 – $1,500) / 2,000 = $0.75 per ice pop For 50 units: $0.75 × 50 = $37.50 No change in fixed costs b ($6,600 – $2,400) / $6,600 = 0.6364 = 63.64% c 0.6364x – $3,300 = $1,200 x = $7,071 Toppers produces two models of hats, fedoras and berets, both made out of cool skin felt fabric Information regarding the products is summarized for the month of May in the following table: Number of hats produced Sales revenue Variable costs Fixed costs Net Income Fedoras 1,000 $28,000 12,000 3,200 $12,800 Berets 4,000 $72,000 36,000 7,000 $29,000 Yards of fabric per unit Profit per unit 0.80 yds $12.80 0.40 yds $7.25 Due to increased demand of hat felt in the market, Toppers can obtain only 3,800 yards of felt per month Toppers can sell as many hats as it can produce, however, it must produce at least 800 of each to stay competitive How many of each model of hat should Toppers make to maximize profit in June? Answer Fedoras CM per unit = $16,000/1,000 = $16.00 CM per unit = $36,000/4,000 = CM per yard = $16.00/0.80 yds = $20.00/yd CM per yard = $9.00/0.40 yds = Berets is the most profitable per yard of felt, i.e., the limited resource Fedoras: 800 × 0.80 yards = 640 yards Balance to Berets: Yards remaining: 3,800 – 640 = 3,160 yards Number of berets to be produced: 3,160 / 0.40 yards each = 7,900 Produce 800 fedoras and 7,900 berets Berets $9.00 $22.50/yd Chapter Cost-Volume-Profit Analysis 184 4-39 Kerwin Chocolates prepared the following concerning its two favors of chocolate covered popcorn sold in 2-pound bags: Units Revenue Variable costs Fixed costs Profit Selling price per unit Contribution margin per unit Profit margin per unit a b c d e f Very Good 4,000 $100,000 56,000 20,000 $ 24,000 Even Better 12,000 $180,000 105,000 40,000 $ 35,000 $25.00 $11.00 $6.00 $15.00 $6.25 $2.92 Totals 16,000 $280,000 161,000 60,000 $ 59,000 What is Kerwin’s weighted average contribution margin per unit? Calculate Kerwin’s break-even point in units assuming the current mix What would be the number of Very Good and Even Better bags at the break-even level of sales? What is Kerwin’s weighted average contribution margin ratio? What level of sales (in dollars) would be needed to earn a profit of $64,950 assuming the current sales mix? What would be the sales (in dollars) of Very Good and Even Better bags for Kerwin’s total sales calculated in Part e? Answer a ($280,000 – $161,000) ÷ 16,000 = $7.44 b $60,000 ÷ $7.44 = 8,065 bags c Very Good: 8,065 ì (4,000 ữ 16,000) = 2,016 bags Even Better: 8,065 ì (12,000 ữ 16,000) = 6,049 bags d ($280,000 – $161,000) ÷ 280,000 = 42.50% e ($64,950 + $60,000) ÷ 0.4250 = $294,000 f Very Good: $294,000 × ($100,000 ÷ $280,000) = $105,000 Even better: $294,000 × ($180,000 ÷ $280,000) = $189,000 4-40 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 185 Listel Rx and Risen, Inc are two companies in the pharmaceutical industry Listel Rx does little research and development Instead, the company pays for the right to produce and market drugs that have been developed by other companies The amount paid is a percent of sales Information for the current year follows: Sales Less variable costs Contribution margin Less fixed costs Profit a b c Listel Rx $180,000 74,000 106,000 40,000 $ 66,000 Risen, Inc $116,000 62,000 54,000 36,000 $ 18,000 Calculate the expected percentage change in profit for a 25 percent decrease in sales for each company Which company has the higher operating leverage? Which company is more risky? Justify your response Answer Listel Rx Contribution margin decrease: 25% × $106,000 $26,500 25% × $54,000 Previous profit $66,000 Percentage decrease 40.15% 186 Risen, Inc $13,500 $18,000 75.00% b Risen, Inc c Risen, Inc is more risky Note that if sales decrease by 25%, its profit will decline by 75% (versus a 40.15% decline for Listel Rx.) When sales decrease, variable costs decrease, but fixed costs not change Hayden Garden Tools produces two types of rakes with lifetime warranties The industrial rake requires 2.4 labor hours and the residential rake requires 1.1 labor hours The company has only 800 available labor hours per week The company can sell all it can produce of either product Industrial Residential Selling price $360 $210 Variable costs 220 150 Contribution margin $140 $ 60 a b Answer a b Which rake(s) should the company sell? Justify your answer What would be the incremental benefit of obtaining 200 additional labor hours? Industrial Residential Selling price $360 $210 Variable costs 220 150 Contribution margin 140 60 ÷ Hours to produce item 2.4 1.1 Contribution margin per hour $58.33 $54.55 The company should produce only industrial rakes, which generate $58.33 of profit for each labor hour used Residential rakes generate only $54.55 per labor hour used 200 × $58.33 = $11,666.67 additional profit Chapter Cost-Volume-Profit Analysis 187 4-41 Burger Time is interested in estimating fixed and variable costs on its triple treat burger The following data are available: Date Total Cost January $4,140 February 4,220 March 4,200 April 3,680 May 3,730 June 3,970 July 4,090 August 3,850 The data generated the following regression analysis: Units 1,030 1,020 1,040 900 890 980 1,000 940 SUMMARY OUTPUT Regression Statistics Multiple R 0.97955 R Square 0.95953 Adjusted R Square 0.95278 Standard Error 45.9460 Observations ANOVA df Regression Residual Total Intercept X Variable a b Answer a b SS 300333.75 12666.25 313000 Coefficient s 535.937 3.54 Standard Error 289.622032 0.29658063 MS 300333.8 2111.042 F 142.268 Significance F 2.1E-05 t Stat 1.850472 11.92762 P-value 0.11372 2.1E-05 Lower 95% -172.742 2.81179 Upper 95% 1244.6 4.2632 Lower 95.0% -172.74 2.81179 Upper 95.0% 1244.62 4.26321 Use the regression output to estimate fixed cost per month and variable costs per burger sold, and show the total cost equation Burger Time is considering an advertising campaign that is expected to increase monthly sales by 200 burgers Assume that each burger sells for $9 What is the expected increase in profit associated with the advertising campaign? Fixed cost per month = $535.937 Variable cost per burger = $3.54 Total cost = 3.54x + 535.937 ($9 × 200) − ($3.54 × 200) = $1,092 4-42 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 188 Dyna Dog Diet’s regression for bags of organic dog food sold and the related costs appears below: Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA 0.981063 0.962484 0.949978 672.8269 Regression Residual Total df Intercept Variable Coefficients Std Error 2504.41 9305.639 1.98 0.226296 a b c d e f Answer a b c d e f SS 34841912 1358088 36200000 MS 34841912 452696.1 t Stat 0.269128 8.77299 F 76.96535 P-value 0.805279 0.003119 Sign F 0.003119 Lower 95% -27110.3 1.265119 Upper 95% 32119.11 2.70547 Lower Upper 95% 95% -27110.3 32119.11 1.265119 2.70547 How much is the variable cost per unit? How much is total fixed cost? What is the amount of the slope? At what point does the total cost line cross the y-axis if the data points used to construct the regression are graphed? Write the total cost equation in good form If 2,500 bags of dog food are sold, how much is total cost? $1.98 $2,504.41 $1.98 $2,504.41 Total cost = 1.98x + 2,504.41 (2,500 × 1.98) + 2,504 = $7,454.41 Chapter Cost-Volume-Profit Analysis 4-43 CHALLENGE EXERCISES 189 Sharply Knives produces two models of titanium knives, Ginsu and Deluxe Information regarding the products is summarized for the month of May in the following table: Number of knives Sales revenue Variable costs Fixed costs Operating income Contribution margin per unit Contribution margin ratio Profit per knife Ounces of titanium per knife Deluxe 2,500 $ 88,000 30,800 22,900 $34,300 $22.88 65.00% $13.72 7.5 Ginsu 1,500 $66,000 29,700 11,400 $24,900 $24.20 55.00% $16.60 Total 4,000 $154,000 60,500 34,300 $ 59,200 $23.38 60.71% Due to a strike, only 24,750 ounces of titanium will be available during each of the next few months Each ounce of titanium costs $0.70 a b Given the limited resource, of which product should Sharply produce more? Support with calculations and provide sufficient conceptual justification why this product should be chosen Assume Sharply needs to produce at least 750 of each model per month to stay competitive and it can sell all it produces Assume that you chose Deluxe knives as your answer to part a Show the calculation of how many deluxe knives that Sharply should produce to maximize profits a Deluxe Choose the product with the higher contribution margin per limited resource, in this case per ounce of titanium CM/ounce for Deluxe = $22.88/7.5 ounces = $3.05 per ounce CM/ounce for Ginsu = $24.20/9 ounces = $2.69 per ounce Deluxe should be chosen because for every ounce of titanium used to make Deluxe knives, profit increases by $3.05, while it increases only by $2.69 per ounce for titanium used to make Ginsu knives, resulting in $0.36 or $3.06 – $2.69 per ounce more profit b Ginsu Ounces of titanium needed: 750 × ounces Ounces remaining: 24,750 – 6,750 = 18,000 ounces Deluxe 6,750 ounces 18,000 ounces Ounces to be used for Deluxe: Number of Deluxe to be made with 18,000 ounces: 18,000 / 7.5 = 2,400 Number of knives 750 knives 2,400 knives 4-44 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 190 MusicRx produces two MP3 players, standard and mini Information regarding the products is summarized for the month of April in the following table: Sales revenue Variable costs Fixed costs Operating income Contribution margin ratio Contribution margin per unit Standard $126,000 30,800 36,400 $ 58,800 75.56% $31.73 Mini $84,000 29,700 28,000 $26,300 64.64% $10.86 Total $210,000 60,500 64,400 $ 85,100 MusicRx sells standard MP3 players for every mini players sold It generates $3 of sales for standard players for every $2 of mini players The sales mix is expected to stay stable a b c How much will total revenue be for MusicRx at break-even? (Round intermediate calculations to four decimal places.) What would be the sales (in dollars) of mini players for total sales calculated in Part a? Suppose that 60 additional standard MP3 players and 100 additional mini MP3 players are sold By how much will profit increase? Answer a WACM ratio = ($210,000 – $60,500) / $210,000 = 71.19% 0.7119x − 64,400 = x = $90,462.14 = $90,462 b 2/5 × $90,462 = $36,185 c (60 × $31.73) + (100 × $10.86) = $2,989.80 191 The RiverTown Shuttle provides a water taxi across the St Johns River for $4 per ride It has provided the following data concerning its costs of operating its water taxi: # of riders Operating costs a b Answer a b January 2,500 $7,475 February 2,800 $8,120 March 4,200 $11,130 April 4,100 $11,225 May 2,600 $7,390 Use the high-low method to answer the following: Variable cost per rider Fixed costs per month Write the cost equation in good form How many water taxi customers does RiverTown need to generate a profit of $4,190 per month? Variable cost per rider = ($11,130 – $7,475) / (4,200 – 2,500) = $2.15 per rider Fixed costs per month = $11,130 = ($2.25 × 4,200) + FC FC = $2,100 TC = 2.15x + 2,100 4.00x – 2.15x – 2,100 = 4,190 x = 3,400 riders per month Chapter Cost-Volume-Profit Analysis 192 4-45 Duplicator Shipping, Inc provides 11 inch by 17 inch color copying as an added service at its shipping store for $1.20 cents per copy Information for two months of operations appears below: Month June July Cost $6,500 $7,800 Number of copies 11,000 15,000 a Indicate the type of cost behavior of this cost and justify your choice Include computations b Write the cost equation in good form c Determine the break-even point in units for Duplicator Shipping (Round to the nearest d whole number.) Answer a VC per unit = $6,500/11,000 = $0.59 VC per unit = $7,800/15,000 = $0.52 This is not a fixed cost because the total cost differs at the two activity levels It is not a variable cost because the cost per unit differs at both activity levels At 11,000 copies, the cost per unit is $0.59 per copy, while at 15,000 copies, it is $0.52 per copy Therefore, it must be a mixed cost b ($7,800 – $6,500) / (15,000 – 11,000) = $0.325 $7,800 = 0.325 × 15,000 + FC FC = $2,925 TC = 0.325x + 2,925 c 1.20x – 0.325 – 2,925 = x = 3,343 copies SHORT-ANSWER ESSAYS 193 What is a mixed cost? How are mixed costs handled in a CVP analysis? Answer A mixed cost is a cost that contains both a variable cost element and a fixed cost element Mixed costs must be separated into their variable and fixed components before any CVP analysis can be performed 194 Fixed and variable costs can be estimated using account analysis or regression analysis Briefly explain each of these techniques and any advantages or disadvantages associated with each of them Answer Account analysis requires the manager to use professional judgment to classify costs as either fixed or variable An advantage of this technique is that it can be used without any historical data Disadvantages are that the method is subjective and that the manager must have a good understanding of the costs in order to make reliable classifications Regression analysis is a statistical technique that uses all the available historical data points to estimate the slope and intercept of a cost equation It is difficult to without a computer and requires historical data However, when used appropriately, it provides accurate predictions of future cost behavior 4-46 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition 195 Identify the strengths and weaknesses of the high-low method of separating mixed costs? Do you believe it would be widely selected over the regression method in practice today? Why or why not? Answer The high-low method is easy to apply, but it ignores all of the data points except the two that are most extreme This can lead to somewhat poor results While the regression method is mathematically much more demanding, it can be easily run on most personal computers, and is widely used 196 What is the relevant range? Why is it important in CVP analysis? Answer The relevant range is the range of activity for which estimates and predictions are likely to be accurate CVP estimates and predictions for operating levels which are outside the relevant range are not likely to be valid 197 How would each of the following events affect a company’s break-even point? Each item is independent of the others Use I for increase, D for decrease, and N for no effect a decrease in fixed manufacturing cost b increase in variable cost per unit c increase in the number of units sold d increase in the selling price e decrease in fixed selling and administrative costs Answer a b c 198 D I N d e D D When is the contribution margin ratio approach to CVP analysis most useful? Why? Answer The contribution margin ratio approach to CVP analysis is most useful in a company that sells a variety of substantially different products In these cases, it makes more sense to calculate the number of sales dollars that must be generated in order for the company to break-even rather than the number of units needed to break-even Chapter Cost-Volume-Profit Analysis 199 What is operating leverage? What effect does operating leverage have on a company’s profit? Answer Operating leverage relates to the level of fixed costs versus variable costs in a firm’s cost structure Firms with high operating leverage will experience greater increases in net income when sales increase However, when these firms have a decrease in sales, net income will decrease more dramatically than it would for firms with less leverage 4-47 ... would increase by 22% B Profit would increase by 100% C Profit would increase by $20,592 D Profit would increase by $14,414 4-22 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition... increase by 20%? A Profits will increase by less than 20% B Profits will increase by 20% C Profits will increase by more than 20% D Profits will decrease by less than 20% 4-28 Test Bank to accompany... T F T F 37 38 39 40 41 42 43 44 45 46 47 T F T F F F F F T F F 4-6 Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition MULTIPLE CHOICE 48 Which of the following is most likely