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Exam 3: Analysis of Cost, volume, and Pricing to Increase Profitability

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Question 21

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Preston Company sells a product whose contribution margin ratio is 20%.Assuming fixed costs don't change,incremental sales of $50,000 will generate $20,000 of additional profit.

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Question 22

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The Varsity Club sells souvenir items at university sporting events for $24 each.The souvenir items cost $16 each.The club is negotiating with the university administration to sell the items in a kiosk in the university student center.Three rental arrangements are under consideration: Option 1: Pay rent of $2,000 Option 2: Pay rent of $1,200 plus 10% of revenue Option 3: Pay the university 25% of revenue The club estimates that it will be able to sell 300 souvenir items during the period. Required: 1)Compute the break-even point in units for each of the three options. 2)Assuming the club reaches its sales target,which option should be chosen?

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1)Break-even points:
Option 1: ($24X − $...

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Question 23

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Bloom Company has variable cost per unit of $20 and a sales price of $35 per unit.Its total fixed costs are $240,000.Which of the following is a correct statement?

On a cost-volume-profit graph,the total revenue line begins at the break-even point and slopes upward to the right.

A company can use target profit analysis to determine the level of sales required to earn a target loss.

The records of Gemini Company show a contribution margin ratio of 40%.The company desires to earn a profit of $35,000 and has fixed costs of $70,000.What sales revenue would have to be generated in order to earn the desired profit?

The following information is for a product manufactured and sold by Drake Company: Sales price per unit: $100 Variable cost per unit: $30 Total annual fixed costs: $350,000 Required: 1)Calculate the contribution margin per unit. 2)How many units must Crane sell to break even? 3)How many units must Crane sell to achieve a profit of $35,000?

A product has a contribution margin of $2.50 per unit and a selling price of $25 per unit.Fixed costs are $20,000.Assuming new technology increases the unit contribution margin by 50 percent but increases total fixed costs by $13,750,what is the new break-even point in units?

An increase in total fixed costs increases the break-even point.

The margin of safety ratio can be defined as the:

Larimore Company sales are $560,000.The company has variable costs equal to 40% of sales and total fixed costs of $150,000. Required: 1)What is the company's break-even point in sales dollars? 2)Compute the company's operating leverage at its current sales level. 3)Compute the percentage change in income that will accompany a 10% increase in sales. 4)Compute the company's net income and operating leverage if sales increase by 10%.(Rounded to one decimal place.) 5)Describe the effect on operating leverage as a company's sales increase and it moves further beyond its break-even point.

Zed Company sells two kinds of mainframe computer power supplies.The company projected the following cost information for the two products: $\begin{array}{lrr}&\text { Standard } & \text { Heavy-Duty } \\&\text { Supply } & \text { Supply }\\ \text { Unit selling price} &\$250&\$120\\ \text { Unit variable cost} &\$110&\$50\\ \text { Number of units produced and sold } &7,000&3,000\end{array}$ Assume that total fixed costs are $428,400.How many units of the standard supply unit would be included in the total number of units required to break even with the projected sales mix? (Round your answer to the nearest whole unit)

Ecco Company has total fixed costs of $5,000,sells a product whose contribution margin is $50 and selling price per unit is $125,and has current sales of $15,000.The company's margin of safety ratio is 20%.

Markham Company has a contribution margin ratio of 25%.The company is considering a proposal that will increase sales by $150,000.What increase in profit can be expected assuming total fixed costs increase by $25,000? (Do not round intermediate calculations.)

When performing sensitivity analysis,which of the following is an example of a variable that management may consider changing to answer "what if" questions?

What is the formula for calculating contribution margin ratio?

Once sales reach the break-even point,each additional unit sold will:

A pricing strategy that sets the price at a premium under the assumption that people will pay more for the product because of the product's brand name,media attention,or some other reason that has piqued the interest of the public is known as:

What is prestige pricing? Under what circumstances should a company consider using prestige pricing?

For a company that sells several products,cost-volume-profit techniques cannot be used to calculate the sales volume required to yield a target level of profit.