Chapter 6 Questions - Spring 2018 PDF

Spring 2018 Chapter 6 Review Questions Multiple Choice 1. CVP Analysis is an important decision making tool for which reason? a) Determining product mix b) Setting selling price...

Spring 2018 Chapter 6 Review Questions Multiple Choice 1. CVP Analysis is an important decision making tool for which reason? a) Determining product mix b) Setting selling price c) Maximizing use of facilities d) All of the above 2. A Company has a contribution margin of 40% and fixed costs of $120,000. What is the break-even point in dollars? a) $48,000 b) $300,000 c) $200,000 d) $72,000 3. P Company has fixed costs of $200,000, sales price of $50, and variable cost of $30 per unit. How many units must be sold to earn profit of $50,000? a) 2,500 b) 10,000 c) 12,500 d) 25,000 4. B Company has fixed costs of $20,000 and a contribution margin ratio of 40%. Currently, sales are $75,000. What is Bowl's margin of safety? a) $20,000 b) $25,000 c) $30,000 d) $50,000 5. Z Company makes two different products, Product A and Product B. They currently sell 2,000 units of product A and 3,000 units of product B. What is the sales mix percentages? a) Product A= 40%, Product B= 60% b) Product A= 60%, Product B= 40% c) Product A= 67%, Product B= 33% d) Product A= 33%, Product B= 67% Page 1 of 8 Spring 2018 Chapter 6 Review Questions 6. Degree of operating leverage is calculated as a) Net income divided by contribution margin b) Break-even sales divided by net income. c) Net income divided by break-even sales. d) Contribution margin divided by net income 7. N Company sells two products. Product A sells for $100 per unit, and has unit variable costs of $60. Product B sells for $70 per unit, and has unit variable costs of $50. Currently, N Company sells three units of product A for every one unit of product B sold. N Company has fixed costs of $750,000. How many units would N Company have to sell to earn a profit of $300,000? a) 7,500 units of A and 22,500 units of B b) 22,500 units of A and 7,500 units of B c) 17,600 units of A and 12,400 units of B d) 12,400 units of A and 17,600 units of B 8. Pear Company sells three products. Pear is having difficulty making all of the required products because it only has limited hours available on the machine that is used to produce all products. Determine the order in which the products should be made to produce the most profit based on the below information. Tablets Phones Computers Sales per unit $1000 $800 $2,500 Variable cost per unit $600 $250 $1,000 Machine Hours per unit 1.5 1.5 a) Tablets, Phones, Computers b) Computer, Phones, Tablet c) Phones, Computer, Tablet d) Computer, Tablet, Phone 9. Goat Company provide the following CVP income statement. What is the degree of operating leverage? Sales $850,000 Variable Costs 325,000 Contribution Margin 525,000 Fixed Costs 300,000 Net Income 225,000 Page 2 of 8 Spring 2018 Chapter 6 Review Questions a) 2.33 b) 1.61 c) 1.08 d) 0.57 10. A high degree of operating leverage means which of the following? a) A company has higher fixed costs relative to variable costs b) A company has higher variable costs relative to fixed costs c) A company has higher net income in comparison to sales d) A company has higher sales in comparison to net income Practice Problems Practice Problem #1 W Company sells only one product with a selling price of $200 and a variable cost of $80 per unit. The company’s monthly fixed expense is $60,000. Required: A) Determine the breakeven point in units sold and sales dollars. B) Determine the breakeven point in units sold and sales dollars if the company wants a net income of $30,000. C) Determine margin of safety if current sales are $175,000. Practice Problem #2 The H Company had wine sales for December as follows: Red White Bottles sold 100 40 Average selling price $80 $45 Average variable cost $40 $15 The only other cost is the wine director’s salary of $36,000 per year. Required: a) Prepare an income statement by type of wine and in total for December. Page 3 of 8 Spring 2018 Chapter 6 Review Questions b) Calculate breakeven in sales dollars by type of wine using the weighted average contribution margin ratio. Calculate breakeven in sales dollars by type of wine using the weighted average unit contribution margin. Practice Problem #3 F Company is debating whether to purchase new equipment that would increase fixed costs from $96,000 to $196,000, and decrease variable costs from $14 per unit to $8 per unit. If it were to implement the change at its current production level of 100,000, profit would not change. Selling price is $20 per unit. Required: a) Prepare an income statement showing the changes to fixed and variable costs b) Calculate the degree of operating leverage for each situation and explain the change. Practice Problem #4 K Company produces three picnic products: koolers, baskets and grills. Each product requires a limited resource of materials. In which order should the products be produced to maximize profits? A product line income statement for the year is shown below: Koolers Baskets Grills Total Units Sold 2,000 2,500 1,500 Sales $360,000 $600,000 $240,000 $1,200,000 Variable expenses 198,000 420,000 120,000 738,000 CM 162,000 180,000 120,000 462,000 Fixed expenses 240,000 Operating income $262,000 Materials 8lbs 6lbs 4lbs Page 4 of 8 Spring 2018 Chapter 6 Review Questions Solutions 1. D 2. B 3. C 4. B 5. A 6. D 7. B 8. C 9. A 10. A Solution #1 A) CM ratio = Sales – variable expenses = $200–80=120 Sales $200 = 60% Breakeven sales = Fixed expenses + operating income = $60,000 + $0 Contribution margin ratio 60% = $100,000 Breakeven units = Fixed expenses + operating income = $60,000 + $0 Contribution margin $ per unit $120 = 500 units Page 5 of 8 Spring 2018 Chapter 6 Review Questions B) Sales – variable expenses $200–80=120 CM ratio 60% Sales $200 Fixed expenses + operating $60,000 + Sales income $30,000 $150,000 Contribution margin ratio 60% Fixed expenses + operating $60,000 + Units income $30,000 750 units Contribution margin $ per unit $120 OR Units Sales $150,000 750 units Selling price per unit $200 C) Actual Sales- Breakeven Sales= Margin of Safety $175,000 – 100,000 = $75,000 Solution #2 a) Current income statement: Red White Total Bottles sold 100 40 Average selling price $80 $45 Total sales $8,000 $1,800 $9,800 Average cost $40 $15 Total Cost $4,000 $600 4,600 Contribution margin $4,000 $1,200 5,200 Fixed expenses 3,000 Operating income $2,200 Break-even in Sales Dollars Red White Sales Dollars 8,000 1,800 Total Sales 9,800 9,800 Sales Mix 82% 18% Page 6 of 8 Spring 2018 Chapter 6 Review Questions Contribution Margin 4,000 1,200 Sales 8,000 1,800 Contribution Margin Ratio 50% 67% Sales Mix 82% 18% Total Weighted Average Contribution Margin Ratio 41% 12% 53% Fixed Cost 3,000 / Weighted Average Contribution Margin Ratio 53% = Break-even in $ Sales Dollars 5,653.85 Break-even in Sales Dollars Per Sales Mix * Break-even Product $ Red 82% $ 5,653.85 4,615.38 $ White 18% $ 5,653.85 1,038.46 Break-even in units Red White Units Sold 100 40 Total Units 140 140 Sales Mix 71% 29% Contribution Margin per unit 40 30 Sales Mix 71% 29% Total Weighted Average Unit Contribution $ $ $ Margin 28.57 8.57 37.14 Fixed Cost 3,000 / Weighted Average Unit Contribution Margin 37.14 = Break-even in Units 80.77 Page 7 of 8 Spring 2018 Chapter 6 Review Questions Break- even in * Break- unit Per Verify with Breakeven Sales Mix even Product in sales dollars 4615.38 Red 71% 80.77 57.69 80 5 1038.46 White 29% 80.77 23.08 45 2 Solution #3 Units Sold 20,000 20,000 Sales $20.00 $400,000 $20.00 $400,000 Variable $14.00 280,000 $8.00 160,000 CM $6.00 140,000 $12.00 240,000 Fixed 96,000 196,000 Net $44,000 $44,000 Income Degree of 3.18 5.45 Operating Leverage A higher degree of operating leverage exposes a company to greater earnings volatility risk. They will earn more as sales increase, but have potential to lose more if there is a decrease in sales. Solution #4 K Company produces three picnic products: koolers, baskets and grills. Each product requires a limited resource of materials. In which order should the products be produced to maximize profits? A product line income statement for the year is shown below: Koolers Baskets Grills Units Sold 2,000 2,500 1,500 Sales $360,000 $600,000 $240,000 Variable expenses 198,000 420,000 120,000 CM 162,000 180,000 120,000 CM per unit 81 72 80 Materials 8lbs 6lbs 4lbs CM per Material 10.13 12 20 Production order: Grills, Baskets, Koolers Page 8 of 8