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13) If Beta Corp's net income is $210,000 and the tax rate is 30%, then the company's planned operating income is ________. A) $325,000 B) $300,000 C) $273,000 D) $357,000 Answer: B
Explanation: B) Operating income = $210,000 / (0.70) = $300,000
Diff: 2
Objective: 3
AACSB: Application of knowledge
14) The Marietta Company has fixed costs of $60,000 and variable costs are 75% of the selling price. To realize profits of $10,000 from sales of 50,000 units, the selling price per unit ________. A) must be $1.20 B) must be $6.00 C) must be $5.60 D) must be $4.23 Answer: C
Explanation: C) Breakeven sales = ($60,000 + $10,000) / 0.25 = $280,000 Selling price = $280,000 / 50,000 units = $5.60 per unit
Diff: 2
Objective: 3
AACSB: Application of knowledge
15) An increase in the tax rate will increase the breakeven point. Answer: FALSE
Explanation: A change in the tax rate will not change the breakeven point.
Diff: 2
Objective: 3
AACSB: Application of knowledge
16) A firm operating at breakeven point will pay an income tax of 10%. Answer: FALSE
Explanation: A firm operating at breakeven point will not pay income tax as operating income is $0.
Diff: 2
Objective: 3
AACSB: Analytical thinking
17) All else being constant, an increase in operating income will result in an increase in net income. Answer: TRUE
Diff: 1
Objective: 3
AACSB: Application of knowledge
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18) If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $39,000.
Answer: FALSE
Explanation: If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $42,857, *$30,000 / (1.0 ? 0.3) = $42,857+.
Diff: 1
Objective: 3
AACSB: Application of knowledge
19) The Holiday Card Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information: Income tax rate 30% Selling price per unit $6.60 Variable cost per unit $5.28 Total fixed costs $46,200.00
Required:
a. What is the breakeven point in cards?
b. What sales volume is needed to earn an after-tax net income of $13,028.40? c. How many cards must be sold to earn an after-tax net income of $18,480? Answer:
a. Breakeven point in units = $46,200/($6.60 ? $5.28) = 35,000 units
b. Operating income = $13,028.40 / 0.70 = $18,612 $18,612 + $46,200 = $64,812 Contribution per unit = $6.60 ? $5.28 = $1.32 Breakeven sales in units = $64,812 / $1.32 = 49,100 units Breakeven sales = 49,100 units × $6.60 = $324,060
c. Operating income = $18,480/0.70 = $26,400 $26,400 + $46,200 = $72,600 Breakeven sales in units = $72,600 / $1.32 = 55,000 units
Diff: 2
Objective: 3
AACSB: Application of knowledge
30
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20) James Corporation gathered the following information: Variable costs $550,000 Income tax rate 40% Contribution-margin ratio 30%
Required:
a. Compute total fixed costs assuming a breakeven volume in dollars of $2,000,000. b. Compute sales volume in dollars to produce an after-tax net income of $150,000. Answer:
a. Fixed costs = $2,000,000 × 0.30 = $600,000
b. Desired sales = ($600,000 + ($150,000 × (1?0.40)) / 0.30 = $2,833,333.33 or $2,833,334 units rounding up to the next whole unit.
Diff: 3
Objective: 3
AACSB: Application of knowledge
21) Explain net income and what implications can tax have on it that influences a manager's decision? Answer: Net income is operating income plus nonoperating revenues such as interest revenue minus nonoperating costs such as interest cost minus income taxes. Some decisions might not result in a large operating income, but their tax consequences make them attractive because they have a positive effect on net income–the measure that drives shareholders' dividends and returns.
Diff: 2
Objective: 3
AACSB: Analytical thinking
Objective 3.4
1) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $6 per unit, then ________. A) fixed costs increases by $6 per unit
B) operating profits decreases by $6 per unit C) fixed costs decreases by $6 per unit
D) operating profits increases by $6 per unit Answer: D
Diff: 2
Objective: 4
AACSB: Application of knowledge
2) Which of the following forms a part of decision making in CVP analysis? A) selection of inventory method for financial reporting purposes B) decision to form a capital policy C) decision to advertise
D) decision to improve the efficiency of the work force Answer: C
Diff: 1
Objective: 4
AACSB: Analytical thinking
31
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3) All else being equal, a reduction in selling price will ________. A) increase contribution margin B) reduce fixed costs
C) increase variable costs D) reduce operating income Answer: D
Diff: 2
Objective: 4
AACSB: Application of knowledge
4) All else being equal, an increase in advertising expenditures will ________. A) reduce operating income B) reduce contribution margin C) increase variable costs D) increase selling price Answer: A
Diff: 2
Objective: 4
AACSB: Application of knowledge
5) Blistre Company operates on a contribution margin of 20% and currently has fixed costs of $500,000. Next year, sales are projected to be $3,000,000. An advertising campaign is being evaluated that costs an additional $80,000. How much would sales have to increase to justify the additional expenditure? A) $320,000 B) $380,000 C) $400,000 D) $600,000 Answer: C
Explanation: C) Required sales = $80,000 / 0.2 = $400,000
Diff: 2
Objective: 4
AACSB: Application of knowledge
6) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.Suppose management believes that a $75,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure? A) 1,698 units B) 1,500 units C) 1,550 units D) 1,339 units Answer: B
Explanation: B) $80X ? $30X ? $75,000 = 0; X = 1,500 units to cover the expenditures
Diff: 3
Objective: 4
AACSB: Application of knowledge
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