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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.



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