Part I:
Question 1: What is the basic C-V-P equation? What is a more detailed version of this equation?
Question 2: What is the contribution margin, and why is it important for managers to know the contribution margins of their products?
Question 3: How much will profits increase for every unit sold over the break-even point?
Question 4: What is the major advantage of using C-V-P graphs?
Question 5: When other factors are constant, what is the effect on profits of an increase in fixed costs? Of a decrease in variable costs?
Question 6: What are the limiting assumptions of C-V-P analysis?
Part II:
Question 7: The C-V-P Equation
The company sells lawnmowers for $895 each. The variable cost per lawnmower is $520. The company’s monthly fixed costs are $84,500. Using the C-V-P equation, compute the amount of profit the company will have for a month in which the company sells 375 lawnmowers.
Question 8: Break-Even Units
The company sells shovels for $27.75 each. The variable cost per shovel is $14.25. The company’s monthly fixed costs are $2,538. Compute the number of shovels the company must sell to break even.
Question 9: Break-Even Sales Revenue
The company has a variable cost ratio of 65% and monthly fixed costs of $91,000. What is the company’s break-even point in terms of sales dollars?
Part III:
Question 10: C-V-P Analysis
The Last Outpost is a tourist stop in a western resort community. Kerry Yost, the owner of the shop, sells hand-woven blankets for an average price of $30 per blanket. Kerry buys the blankets from weavers at an average cost of $21. In addition, he has selling expenses of $3 per blanket. Kerry rents the building for $300 per month and pays one employee a fixed salary of $500 per month.
1. Determine the number of blankets Kerry must sell to break even.
2. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.
3. Assume that Kerry can produce and sell his own blankets at a total variable cost of $16 per blanket, but that he would need to hire one additional employee at a monthly salary of $600.
a. Determine the number of blankets Kerry must sell to break even.
b. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.
Part IV:
Question 11: Importance of Manufacturing Overhead Allocation
The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows:
Company A Company B Compnay C
Direct materials 7% 21% 42%
Direct labor 13 42 49
Manufacturing overhead 80 37 9
100% 100% 100%
Based on this information, which of these three companies would probably improve its product costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.
For the following list of costs, indicate by the appropriate letter which category of activities each cost applies to: unit level (U), batch level (B), product line (P), or facility support (F):
a. Machine fine-tuning adjustment cost (required after the production of each unit)
b. Salary of vice president of finance
c. Machine inspection cost (required after the completion of each day’s production)
d. Cost of the external audit firm
e. Direct labor
f. Product testing cost (performed at the start of each day’s production)
g. Direct materials
h. Factory security cost
i. Machine straight-line depreciation cost (Generally, machines are dedicated to producing a particular type of product.)
j. Warehousing cost (Each type of product has its own warehouse.)
k. Employee training cost (Training is generally specific to different types of products.)