Q 1) Which of the following is true of cost-volume-profit analysis?
The theory assumes that
units manufactured are equal to units sold.
Cost-volume-profit (CVP) analysis is a management accounting technique used to examine the
relationship between costs, volume, and profit. It does not necessarily assume that units
manufactured are equal to units sold. CVP analysis is used to study the impact of changes in
sales volume, selling prices, variable costs, and fixed costs on a company's profit.
Q 2) Sparkle Jewelry sells 800 units resulting in $9,000 in sales revenue, $3,000 in variable
costs, and $1,500 of fixed costs. The contribution margin per unit is $7.50 (Round the final
answer to the nearest cent)
Contribution margin per unit is calculated as follows: Contribution Margin per Unit = (Sales
Revenue per Unit - Variable Costs per Unit) = ($9,000 / 800) - ($3,000 / 800) = ($11.25 - $3.75)
= $7.50.
Q 3) Tally Corp. sells software during the recruiting seasons. During the current year, 10,000
software packages were sold resulting in $470,000 of sales revenue, $130,000 of variable costs,
and $48,000 of fixed costs. If sales increase by $80,000, operating income will increase by
$57,872 (Round interim calculations to two decimal places and the final answer to the nearest
whole dollar)
To find the change in operating income when sales increase by $80,000, you can use the
contribution margin ratio. First, calculate the contribution margin ratio: Contribution Margin
Ratio = [(Sales Revenue - Variable Costs) / Sales Revenue] = [($470,000 - $130,000) /
$470,000] ≈ 0.7234 (rounded to four decimal places).
Now, calculate the increase in operating income: Increase in Operating Income = Change in
Sales × Contribution Margin Ratio = $80,000 × 0.7234 ≈ $57,872.
Q 4) What is the breakeven point in units, assuming a product's selling price is $300, fixed costs
are $18,000, unit variable costs are $20, and operating income is $6,000? 65 units
The breakeven point in units can be calculated using the following formula: Breakeven Point (in
Units) = Fixed Costs / (Selling Price per Unit - Variable Costs per Unit) = $18,000 / ($300 - $20)
= $18,000 / $280 = 65 units.
Q 5) The breakeven point decreases if the total fixed costs decrease.
This statement is true. If the total fixed costs decrease, the breakeven point decreases as well.
This means the company needs to sell fewer units to cover its fixed costs and reach the
breakeven point.
Q 6) Ruben intends to sell his customers a special round-trip airline ticket package. For every
$27,000 of ticket packages sold, operating income will increase by $4,050
This statement indicates that for every $27,000 in sales revenue generated from the ticket
packages, the company will experience an increase in operating income of $4,050. It represents
the contribution margin ratio for the given situation.
Q 7) Sales of Bistre Autos are $380,000, variable cost is $230,000, fixed cost is $90,000, tax rate
is 40. Calculate the operating leverage of the company. 2.50 times
Operating Leverage is calculated as: Operating Leverage = (Sales - Variable Costs) / (Sales -
Variable Costs - Fixed Costs) = ($380,000 - $230,000) / ($380,000 - $230,000 - $90,000) =
$150,000 / $60,000 = 2.50 times.
Q 8) In a company with low operating leverage, less risk is assumed than in a highly leveraged
firm.
This statement is generally true. In a company with low operating leverage, a significant portion
of costs is variable, meaning that costs vary with changes in sales. This provides more flexibility
and less risk in economic downturns compared to a highly leveraged firm with higher fixed
costs.
Q 9) Which of the following statements is true? Managers can lower operating risk by changing
fixed costs to variable costs in the long term.
This statement is true. By converting fixed costs to variable costs, managers can reduce operating
risk. Variable costs are more controllable and adapt to changes in sales volume, making it easier
for a company to adjust to fluctuations in business conditions.
Q 10) If a company has a degree of operating leverage of 5 and sales increase by 30%, then
profit will increase by 150%.
This statement is true. The degree of operating leverage (DOL) measures the sensitivity of a
company's earnings before interest and taxes (EBIT) to changes in sales. If a company has a
DOL of 5, a 30% increase in sales will lead to a 150% increase in profit (EBIT), assuming all
other factors remain constant.
Q 11) Tony Manufacturing produces a single product that sells for $80. If a 14% reduction in the
selling price is implemented, operating income will increase by $23,990.
To find the original operating income, we can use the given information. If a 14% reduction in
the selling price leads to a $23,990 increase in operating income, the original operating income
can be calculated as: Original Operating Income = Increase in Operating Income / (1 - Reduction
in Selling Price) = $23,990 / (1 - 0.14) ≈ $23990
Notes of q12
Correct,decrease per unit.
Current weighted average contribution:
Product A (16-12) * 3 12
Product B (24-16)* 1 8
Total contribution 20
Weighted average = 20/4
= 5 Per unit
Proposed weighted average contribution:
A (4*4) 16
B (8*1) 8
TO
Total contribution 24
Weighted average contribution = 24/ 5
= 4.8 Per unit.
Hence the weighted average contribution is reduced
Notes of q13
Notes of q14
Notes of q15
To calculate the number of units that High Corp must sell to reach a targeted operating income,
we can use the formula for calculating the break-even point in units, which is (Fixed Costs +
Target Operating Income) / Contribution Margin per unit.
The Contribution Margin per unit is calculated as Selling Price per unit - Variable Cost per unit.
Given:
Selling Price per unit = $60
Variable Cost per unit = $40
Fixed Costs = $135,000
Target Operating Income = $25,000
Let’s calculate:
Contribution Margin per unit = Selling Price per unit - Variable Cost per unit = $60 - $40 = $20
Number of units to sell = (Fixed Costs + Target Operating Income) / Contribution Margin per
unit = ($135,000 + $25,000) / $20 = 160,000 / 20 = 8,000 units
So, High Corp must sell 8,000 units to reach a targeted operating income of $25,000. Therefore,
the correct answer is 8,000 units.
Notes of q16
Let’s calculate the change in operating income if a 14% reduction in the selling price results in a
14% increase in sales.
Given:
Selling Price per unit = $80
Variable Cost per unit = $50
Fixed Costs = $82,000
Projected Sales Level = 2,800 units
First, let’s calculate the new selling price and the new sales level:
New Selling Price = Selling Price - (14% of Selling Price) = $80 - (0.14 * $80) = $68.8
New Sales Level = Projected Sales Level + (14% of Projected Sales Level) = 2,800 + (0.14 *
2,800) = 3,192 units
Next, let’s calculate the operating income under the current situation and the proposed situation:
1. Current Situation:
o Total Revenue = Selling Price per unit * Sales Level = $80 * 2,800 = $224,000
o Total Variable Cost = Variable Cost per unit * Sales Level = $50 * 2,800 = $140,000
o Operating Income = Total Revenue - Total Variable Cost - Fixed Costs = $224,000 - $140,000 -
$82,000 = $2,000
2. Proposed Situation:
o Total Revenue = New Selling Price per unit * New Sales Level = $68.8 * 3,192 = $219,705.6
o Total Variable Cost = Variable Cost per unit * New Sales Level = $50 * 3,192 = $159,600
o Operating Income = Total Revenue - Total Variable Cost - Fixed Costs = $219,705.6 - $159,600
- $82,000 = -$21,894.4
The change in operating income is the difference between the operating income of the proposed
situation and the current situation: Change in Operating Income = Operating Income (Proposed)
- Operating Income (Current) = -$21,894.4 - $2,000 = -$23,894.4
So if this proposed reduction in selling price is implemented, the operating income will decrease
by approximately $23,894. Therefore, the closest answer is that the operating income will
decrease by $23,990.