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7) 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 that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented ________.
A) operating income will decrease by $9,500 B) operating income will increase by $10,000 C) operating income will decrease by $6,000 D) operating income will increase by $11,300 Answer: A
Explanation: A) Reduction in revenues = $80 × 10% = $8 × 2,500 units = ($20,000) Increase in contribution = 2,500 units × 10% = 250 units × ($72 ? $30) = 10,500 Change in operating income ($9,500) Diff: 3
Objective: 4
AACSB: Application of knowledge
8) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a $10,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure. A) 123 units B) 134 units C) 243 units D) 143 units Answer: B
Explanation: B) $10,000/($100 ? $25) = 133.33 units to cover the expenditure
Diff: 2
Objective: 4
AACSB: Application of knowledge
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Copyright ? 2015 Pearson Education, Inc.
9) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. What is the effect on operating income with the increase of advertising expenses?
A) Operating income will decrease by $10,000. B) Operating income will increase by $11,000. C) Operating income will decrease by $18,000. D) Operating income will increase by $17,000. Answer: A
Explanation: A) Operating income without advertising expenses = $100 - 25 = $75 × 1,000 = 75,000 - 60,000 = $15,000
Operating income with advertising expenses =75,000 - (60,000 + 10,000) = $5,000
Diff: 3
Objective: 4
AACSB: Application of knowledge
10) If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit. Answer: FALSE
Explanation: If contribution margin decreases by $1 per unit, then operating profits will decrease by $1 per unit.
Diff: 1
Objective: 4
AACSB: Application of knowledge
11) If variable costs per unit increase, then the breakeven point will decrease. Answer: FALSE
Explanation: If variable costs per unit increase, then the breakeven point will also increase.
Diff: 2
Objective: 4
AACSB: Application of knowledge
12) A planned increase in advertising would be considered an increase in variable costs in CVP analysis. Answer: FALSE
Explanation: A planned increase in advertising would be considered an increase in fixed costs in CVP analysis.
Diff: 1
Objective: 4
AACSB: Analytical thinking
13) A planned decrease in selling price would be expected to cause an increase in the quantity sold. Answer: TRUE
Diff: 1
Objective: 4
AACSB: Analytical thinking
34
Copyright ? 2015 Pearson Education, Inc.
14) In 2015, Craylon Company has sales of $1,000,000, variable costs of $250,000, and fixed costs of $200,000. In 2016, the company expects annual property taxes to decrease by $15,000.
Required:
a. Calculate operating income and the breakeven point for 2015. b. Calculate the breakeven point for 2016. Answer:
a. In 2015, operating income is $1,000,000 sales revenue ? $250,000 variable costs ? $200,000 fixed costs = $550,000. The breakeven point for 2015 is $266,667 in total sales dollars. Contribution margin ratio = ($1,000,000 - $250,000) / $1,000,000 = 0.75. Breakeven sales = $200,000 / 0.75 = $266,667.
b. The breakeven point for 2016 is $246,667 in total sales dollars. Estimated fixed costs for 2016 = $200,000 ? $15,000 = $185,000.
Breakeven sales = $185,000 total fixed costs / 75% CM ratio = $246,667.
Diff: 3
Objective: 4
AACSB: Application of knowledge
15) Furniture, Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9,600.
Required:
a. What is the contribution margin per lamp? b. What is the breakeven point in lamps?
c. How many lamps must be sold to earn a pretax income of $8,000? d. What is the margin of safety, assuming 1,500 lamps are sold? Answer:
a. Contribution margin per lamp = $30 - $22 = $8
b. N = Breakeven point in lamps $30N - $22N - $9,600 = 0 $8N - $9,600 = 0 N = $9,600/$8 = 1,200 lamps
c. N = Target sales in lamps $30N - $22N - $9,600 - $8,000 = 0 $8N - $17,600 = 0 N = $17,600/$8 = 2,200 lamps
d. Margin of safety = Sales - Breakeven sales = ($30.00 × 1,500) - $36,000 = $9,000
Diff: 3
Objective: 4
AACSB: Application of knowledge
35
Copyright ? 2015 Pearson Education, Inc.
16) Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs total $475,000.
Required:
a. What is the contribution margin per tire? b. What is the breakeven point in tires?
c. How many tires must be sold to earn a pretax income of $450,000? d. What is the margin of safety, assuming 33,000 tires are sold? Answer:
a. Contribution margin per tire = $110 - $85 = $25
b. N = Breakeven point in tires $110N - $85N - $475,000 = 0 $25N - $475,000 = 0 N = $475,000/$25 = 19,000 tires
c. N = Target sales in tires $110N - $85N - $450,000 -$ 475,000 = 0 $25N - $925,000 = 0 N = $925,000/$25 = 37,000 tires
d. Margin of safety = Sales - Breakeven sales = ($110 × 33,000) - ($110 × 19,000) = $1,540,000
Diff: 3
Objective: 4
AACSB: Application of knowledge
Objective 3.5
1) The margin of safety is the difference between ________. A) budgeted expenses and breakeven expenses B) budgeted revenues and breakeven revenues
C) actual operating income and budgeted operating income D) actual sales margin and budgeted sales margin Answer: B
Diff: 1
Objective: 5
AACSB: Analytical thinking
2) To apply CVP analysis in the hotel industry, which of the following is the most important measure of output?
A) number of room-nights occupied B) number of visitors
C) number of dishes on the menu D) number of employees Answer: A
Diff: 2
Objective: 5
AACSB: Application of knowledge
36
Copyright ? 2015 Pearson Education, Inc.