Water Department ($96,000 ÷ $160,000) = 60.00%
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4-38
Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition
182.
Iggy’s Ice Pops produces two flavors of ice pops. Information regarding the products is
summarized for the month of April below:
Number of units
Sales revenue
Variable costs
Fixed costs
Profit
a.
b.
c.
Answer
a.
183.
Kiwi
2,000
$3,000
1,500
900
$ 600
Melon
3,000
$3,600
900
2,400
$ 300
Total
5,000
$6,600
2,400
3,300
$ 900
If Iggy’s sells 50 more kiwi pops, by how much will profit increase?
How much is Iggy’s weighted average contribution margin ratio?
What level of sales does Iggy’s need in order to earn a profit of $1,200 assuming the
current sales mix? (Round to the nearest dollar.)
CM per kiwi ice pop: ($3,000 – $1,500) / 2,000 = $0.75 per ice pop
For 50 units: $0.75 × 50 = $37.50. No change in fixed costs.
b.
($6,600 – $2,400) / $6,600 = 0.6364 = 63.64%
c.
0.6364x – $3,300 = $1,200
x = $7,071
Toppers produces two models of hats, fedoras and berets, both made out of cool skin felt fabric.
Information regarding the products is summarized for the month of May in the following table:
Number of hats produced
Sales revenue
Variable costs
Fixed costs
Net Income
Fedoras
1,000
$28,000
12,000
3,200
$12,800
Berets
4,000
$72,000
36,000
7,000
$29,000
Yards of fabric per unit
Profit per unit
0.80 yds.
$12.80
0.40 yds.
$7.25
Due to increased demand of hat felt in the market, Toppers can obtain only 3,800 yards of felt per
month. Toppers can sell as many hats as it can produce, however, it must produce at least 800 of
each to stay competitive. How many of each model of hat should Toppers make to maximize
profit in June?
Answer
Fedoras
CM per unit = $16,000/1,000 =
$16.00
CM per unit = $36,000/4,000 =
CM per yard = $16.00/0.80 yds. =
$20.00/yd.
CM per yard = $9.00/0.40 yds. =
Berets is the most profitable per yard of felt, i.e., the limited resource.
Fedoras: 800 × 0.80 yards = 640 yards
Balance to Berets: Yards remaining: 3,800 – 640 = 3,160 yards
Number of berets to be produced: 3,160 / 0.40 yards each = 7,900
Produce 800 fedoras and 7,900 berets
Berets
$9.00
$22.50/yd.
Chapter 4 Cost-Volume-Profit Analysis
184.
4-39
Kerwin Chocolates prepared the following concerning its two favors of chocolate covered
popcorn sold in 2-pound bags:
Units
Revenue
Variable costs
Fixed costs
Profit
Selling price per unit
Contribution margin per unit
Profit margin per unit
a.
b.
c.
d.
e.
f.
Very Good
4,000
$100,000
56,000
20,000
$ 24,000
Even Better
12,000
$180,000
105,000
40,000
$ 35,000
$25.00
$11.00
$6.00
$15.00
$6.25
$2.92
Totals
16,000
$280,000
161,000
60,000
$ 59,000
What is Kerwin’s weighted average contribution margin per unit?
Calculate Kerwin’s break-even point in units assuming the current mix.
What would be the number of Very Good and Even Better bags at the break-even level of
sales?
What is Kerwin’s weighted average contribution margin ratio?
What level of sales (in dollars) would be needed to earn a profit of $64,950 assuming the
current sales mix?
What would be the sales (in dollars) of Very Good and Even Better bags for Kerwin’s
total sales calculated in Part e?
Answer
a.
($280,000 – $161,000) ÷ 16,000 = $7.44
b.
$60,000 ÷ $7.44 = 8,065 bags
c.
Very Good: 8,065 × (4,000 ÷ 16,000) = 2,016 bags
Even Better: 8,065 × (12,000 ÷ 16,000) = 6,049 bags
d.
($280,000 – $161,000) ÷ 280,000 = 42.50%
e.
($64,950 + $60,000) ÷ 0.4250 = $294,000
f.
Very Good: $294,000 × ($100,000 ÷ $280,000) = $105,000
Even better: $294,000 × ($180,000 ÷ $280,000) = $189,000
4-40
Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition
185.
Listel Rx and Risen, Inc. are two companies in the pharmaceutical industry. Listel Rx does little
research and development. Instead, the company pays for the right to produce and market drugs
that have been developed by other companies. The amount paid is a percent of sales. Information
for the current year follows:
Sales
Less variable costs
Contribution margin
Less fixed costs
Profit
a.
b.
c.
Listel Rx
$180,000
74,000
106,000
40,000
$ 66,000
Risen, Inc.
$116,000
62,000
54,000
36,000
$ 18,000
Calculate the expected percentage change in profit for a 25 percent decrease in sales for
each company.
Which company has the higher operating leverage?
Which company is more risky? Justify your response.
Answer
Listel Rx
Contribution margin decrease:
25% × $106,000
$26,500
25% × $54,000
Previous profit
$66,000
Percentage decrease
40.15%
186.
Risen, Inc.
$13,500
$18,000
75.00%
b.
Risen, Inc.
c.
Risen, Inc. is more risky. Note that if sales decrease by 25%, its profit will decline by
75% (versus a 40.15% decline for Listel Rx.). When sales decrease, variable costs
decrease, but fixed costs do not change.
Hayden Garden Tools produces two types of rakes with lifetime warranties. The industrial rake
requires 2.4 labor hours and the residential rake requires 1.1 labor hours. The company has only
800 available labor hours per week. The company can sell all it can produce of either product.
Industrial
Residential
Selling price
$360
$210
Variable costs
220
150
Contribution margin
$140
$ 60
a.
b.
Answer
a.
b.
Which rake(s) should the company sell? Justify your answer.
What would be the incremental benefit of obtaining 200 additional labor hours?
Industrial
Residential
Selling price
$360
$210
Variable costs
220
150
Contribution margin
140
60
÷ Hours to produce 1 item
2.4
1.1
Contribution margin per hour
$58.33
$54.55
The company should produce only industrial rakes, which generate $58.33 of profit for
each labor hour used. Residential rakes generate only $54.55 per labor hour used.
200 × $58.33 = $11,666.67 additional profit
Chapter 4 Cost-Volume-Profit Analysis
187.
4-41
Burger Time is interested in estimating fixed and variable costs on its triple treat burger. The
following data are available:
Date
Total Cost
January
$4,140
February
4,220
March
4,200
April
3,680
May
3,730
June
3,970
July
4,090
August
3,850
The data generated the following regression analysis:
Units
1,030
1,020
1,040
900
890
980
1,000
940
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.97955
R Square
0.95953
Adjusted R Square
0.95278
Standard Error
45.9460
Observations
8
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
a.
b.
Answer
a.
b.
1
6
7
SS
300333.75
12666.25
313000
Coefficient
s
535.937
3.54
Standard
Error
289.622032
0.29658063
MS
300333.8
2111.042
F
142.268
Significance
F
2.1E-05
t Stat
1.850472
11.92762
P-value
0.11372
2.1E-05
Lower 95%
-172.742
2.81179
Upper
95%
1244.6
4.2632
Lower
95.0%
-172.74
2.81179
Upper
95.0%
1244.62
4.26321
Use the regression output to estimate fixed cost per month and variable costs per burger
sold, and show the total cost equation.
Burger Time is considering an advertising campaign that is expected to increase monthly
sales by 200 burgers. Assume that each burger sells for $9. What is the expected increase
in profit associated with the advertising campaign?
Fixed cost per month = $535.937
Variable cost per burger = $3.54
Total cost = 3.54x + 535.937
($9 × 200) − ($3.54 × 200) = $1,092
4-42
Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition
188.
Dyna Dog Diet’s regression for bags of organic dog food sold and the related costs appears
below:
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
ANOVA
0.981063
0.962484
0.949978
672.8269
5
Regression
Residual
Total
df
1
3
4
Intercept
Variable 1
Coefficients Std Error
2504.41
9305.639
1.98
0.226296
a.
b.
c.
d.
e.
f.
Answer
a.
b.
c.
d.
e.
f.
SS
34841912
1358088
36200000
MS
34841912
452696.1
t Stat
0.269128
8.77299
F
76.96535
P-value
0.805279
0.003119
Sign F
0.003119
Lower
95%
-27110.3
1.265119
Upper
95%
32119.11
2.70547
Lower
Upper
95%
95%
-27110.3 32119.11
1.265119 2.70547
How much is the variable cost per unit?
How much is total fixed cost?
What is the amount of the slope?
At what point does the total cost line cross the y-axis if the data points used to construct
the regression are graphed?
Write the total cost equation in good form.
If 2,500 bags of dog food are sold, how much is total cost?
$1.98
$2,504.41
$1.98
$2,504.41
Total cost = 1.98x + 2,504.41
(2,500 × 1.98) + 2,504 = $7,454.41
Chapter 4 Cost-Volume-Profit Analysis
4-43
CHALLENGE EXERCISES
189.
Sharply Knives produces two models of titanium knives, Ginsu and Deluxe. Information
regarding the products is summarized for the month of May in the following table:
Number of knives
Sales revenue
Variable costs
Fixed costs
Operating income
Contribution margin per unit
Contribution margin ratio
Profit per knife
Ounces of titanium per knife
Deluxe
2,500
$ 88,000
30,800
22,900
$34,300
$22.88
65.00%
$13.72
7.5
Ginsu
1,500
$66,000
29,700
11,400
$24,900
$24.20
55.00%
$16.60
9
Total
4,000
$154,000
60,500
34,300
$ 59,200
$23.38
60.71%
Due to a strike, only 24,750 ounces of titanium will be available during each of the next few months.
Each ounce of titanium costs $0.70.
a.
b.
Given the limited resource, of which product should Sharply produce more? Support with
calculations and provide sufficient conceptual justification why this product should be chosen.
Assume Sharply needs to produce at least 750 of each model per month to stay competitive and it
can sell all it produces. Assume that you chose Deluxe knives as your answer to part a. Show the
calculation of how many deluxe knives that Sharply should produce to maximize profits.
a.
Deluxe
Choose the product with the higher contribution margin per limited resource, in this case
per ounce of titanium.
CM/ounce for Deluxe = $22.88/7.5 ounces = $3.05 per ounce
CM/ounce for Ginsu = $24.20/9 ounces = $2.69 per ounce
Deluxe should be chosen because for every ounce of titanium used to make Deluxe
knives, profit increases by $3.05, while it increases only by $2.69 per ounce for titanium
used to make Ginsu knives, resulting in $0.36 or $3.06 – $2.69 per ounce more profit.
b.
Ginsu
Ounces of titanium needed:
750 × 9 ounces
Ounces remaining: 24,750 – 6,750 = 18,000 ounces
Deluxe
6,750 ounces
18,000 ounces
Ounces to be used for Deluxe:
Number of Deluxe to be made with 18,000 ounces:
18,000 / 7.5 = 2,400
Number of knives
750 knives
2,400 knives
4-44
Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition
190.
MusicRx produces two MP3 players, standard and mini. Information regarding the products is
summarized for the month of April in the following table:
Sales revenue
Variable costs
Fixed costs
Operating income
Contribution margin ratio
Contribution margin per unit
Standard
$126,000
30,800
36,400
$ 58,800
75.56%
$31.73
Mini
$84,000
29,700
28,000
$26,300
64.64%
$10.86
Total
$210,000
60,500
64,400
$ 85,100
MusicRx sells 3 standard MP3 players for every 5 mini players sold. It generates $3 of sales for
standard players for every $2 of mini players. The sales mix is expected to stay stable.
a.
b.
c.
How much will total revenue be for MusicRx at break-even? (Round intermediate
calculations to four decimal places.)
What would be the sales (in dollars) of mini players for total sales calculated in Part a?
Suppose that 60 additional standard MP3 players and 100 additional mini MP3 players
are sold. By how much will profit increase?
Answer
a.
WACM ratio = ($210,000 – $60,500) / $210,000 = 71.19%
0.7119x − 64,400 = 0
x = $90,462.14 = $90,462
b. 2/5 × $90,462 = $36,185
c. (60 × $31.73) + (100 × $10.86) = $2,989.80
191.
The RiverTown Shuttle provides a water taxi across the St. Johns River for $4 per ride. It has
provided the following data concerning its costs of operating its water taxi:
# of riders
Operating costs
a.
b.
Answer
a.
b.
January
2,500
$7,475
February
2,800
$8,120
March
4,200
$11,130
April
4,100
$11,225
May
2,600
$7,390
Use the high-low method to answer the following:
1. Variable cost per rider
2. Fixed costs per month
3. Write the cost equation in good form.
How many water taxi customers does RiverTown need to generate a profit of $4,190 per
month?
1. Variable cost per rider = ($11,130 – $7,475) / (4,200 – 2,500) = $2.15 per rider
2. Fixed costs per month = $11,130 = ($2.25 × 4,200) + FC
FC = $2,100
3. TC = 2.15x + 2,100
4.00x – 2.15x – 2,100 = 4,190
x = 3,400 riders per month
Chapter 4 Cost-Volume-Profit Analysis
192.
4-45
Duplicator Shipping, Inc. provides 11 inch by 17 inch color copying as an added service at its
shipping store for $1.20 cents per copy. Information for two months of operations appears below:
Month
June
July
Cost
$6,500
$7,800
Number of copies
11,000
15,000
a.
Indicate the type of cost behavior of this cost and justify your choice. Include
computations.
b. Write the cost equation in good form.
c. Determine the break-even point in units for Duplicator Shipping. (Round to the nearest
d. whole number.)
Answer
a.
VC per unit = $6,500/11,000 = $0.59
VC per unit = $7,800/15,000 = $0.52
This is not a fixed cost because the total cost differs at the two activity levels.
It is not a variable cost because the cost per unit differs at both activity levels. At 11,000
copies, the cost per unit is $0.59 per copy, while at 15,000 copies, it is $0.52 per copy.
Therefore, it must be a mixed cost.
b.
($7,800 – $6,500) / (15,000 – 11,000) = $0.325
$7,800 = 0.325 × 15,000 + FC
FC = $2,925
TC = 0.325x + 2,925
c.
1.20x – 0.325 – 2,925 = 0
x = 3,343 copies
SHORT-ANSWER ESSAYS
193.
What is a mixed cost? How are mixed costs handled in a CVP analysis?
Answer
A mixed cost is a cost that contains both a variable cost element and a fixed cost element. Mixed
costs must be separated into their variable and fixed components before any CVP analysis can be
performed.
194.
Fixed and variable costs can be estimated using account analysis or regression analysis. Briefly
explain each of these techniques and any advantages or disadvantages associated with each of
them.
Answer
Account analysis requires the manager to use professional judgment to classify costs as either
fixed or variable. An advantage of this technique is that it can be used without any historical data.
Disadvantages are that the method is subjective and that the manager must have a good
understanding of the costs in order to make reliable classifications.
Regression analysis is a statistical technique that uses all the available historical data points to
estimate the slope and intercept of a cost equation. It is difficult to do without a computer and
requires historical data. However, when used appropriately, it provides accurate predictions of
future cost behavior.
4-46
Test Bank to accompany Jiambalvo Managerial Accounting, 5th Edition
195.
Identify the strengths and weaknesses of the high-low method of separating mixed costs? Do you
believe it would be widely selected over the regression method in practice today? Why or why
not?
Answer
The high-low method is easy to apply, but it ignores all of the data points except the two that are
most extreme. This can lead to somewhat poor results. While the regression method is
mathematically much more demanding, it can be easily run on most personal computers, and is
widely used.
196.
What is the relevant range? Why is it important in CVP analysis?
Answer
The relevant range is the range of activity for which estimates and predictions are likely to be
accurate. CVP estimates and predictions for operating levels which are outside the relevant range
are not likely to be valid.
197.
How would each of the following events affect a company’s break-even point? Each item is
independent of the others. Use I for increase, D for decrease, and N for no effect.
______ a.
decrease in fixed manufacturing cost
______ b.
increase in variable cost per unit
______ c.
increase in the number of units sold
______ d.
increase in the selling price
______ e.
decrease in fixed selling and administrative costs
Answer
a.
b.
c.
198.
D
I
N
d.
e.
D
D
When is the contribution margin ratio approach to CVP analysis most useful? Why?
Answer
The contribution margin ratio approach to CVP analysis is most useful in a company that sells a
variety of substantially different products. In these cases, it makes more sense to calculate the
number of sales dollars that must be generated in order for the company to break-even rather than
the number of units needed to break-even.
Chapter 4 Cost-Volume-Profit Analysis
199.
What is operating leverage? What effect does operating leverage have on a company’s profit?
Answer
Operating leverage relates to the level of fixed costs versus variable costs in a firm’s cost
structure. Firms with high operating leverage will experience greater increases in net income
when sales increase. However, when these firms have a decrease in sales, net income will
decrease more dramatically than it would for firms with less leverage.
4-47