MGA 202 Study Guide - Quiz Guide: Earnings Before Interest And Taxes, Fixed Cost, Variable Cost

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aquamarineminnow977

25 Feb 2015

School

University at Buffalo

Department

Management Accounting

Course

MGA 202

Professor

Jianping Xu

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Document Summary

Cost-volume-profit (cvp) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per unit variable costs, and total fixed costs. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire. The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The contribution margin is defined as the amount remaining from sales revenue after variable expenses have been deducted. Contribution margin is used first to cover fixed expenses. Any remaining contribution margin contributes to net operating income. Contribution margin can also be expressed on a per unit basis sales price for one unit less variable cost for one unit.

Related Questions

Case 9-6: Profit PlanningâChoice of CostStructure

The owner of a package delivery business is currently evaluatingthe choice between two different cost structures, based on how thedelivery personnel are paid. One option (hereafter, âAlternative#1â) has relatively higher short-term fixed costs, while the otheroption (hereafter, âAlternative #2â) has the reverseâthat is,relatively higher variable costs in its cost structure. (Forsimplicity in this example we hold the delivery cost per package,that is, the selling price per unit is constant. Selling price isindependent of the cost-structure choice.) The following tablecontains pertinent information for creating the CVP model for eachdecision alternative:

Decision Inputs (Data)	Cost Structure Alternative #1	Cost Structure Alternative #2
Delivery price (i.e., revenue) per package	$60	$60
Variable cost per package delivered	$48	$30
Contribution margin per unit	$12	$30
Fixed costs (per year)	$600,000	$3,000,000

Requirements

1. What is meant by the term âshort-term profit-planningâ model,and how can such a model be used by management? (That is, in whatsense can this model be used to facilitate planning, control, ordecision-making by managers of an organization?)

2. What are the definitions of fixed costs, variable costs,contribution margin ratio, contribution margin per unit, andrelevant range?

3. What is the break-even point, in terms of number ofdeliveries per year (or per month), for Alternative #1? ForAlternative #2?

4. How many deliveries would have to be made under Alternative#1 to generate a pre-tax profit, Ï_B, of $25,000per year?

5. How many deliveries (per month or per year) would have to bemade under Alternative #1 to generate a pre-tax profit,Ï_B, equal to 15% of sales revenue?

6. How many deliveries would have to be made under Alternative#2 to generate an after-tax profit, Ï_A, of$100,0000 per year, assuming a tax rate of, say, 45%?

7. Assume that for the coming year total fixed costs areexpected to increase by 10% for each of the two alternatives. Whatis the new break-even point, in terms of number of deliveries, foreach decision alternative? By what percentage did the break-evenpoint change for each case? How do these figures compare to thepercentage increase in budgeted fixed costs?

8. Assume an average income-tax rate of 40%. What volume (numberof deliveries) would be needed to generate an after-taxprofit, Ï_A, of 5% of sales for each alternative?

erinelk327

1 An increase in fixed costs will cause the break-even point to decrease True False

2 Rental of equipment at $5,000 per month plus $6 for each machine hour used over 9,000 hours is a type of mixed cost. True False

3 Conversion costs are made up of direct labor and factory overhead True False

4 Which of the following would be classified as a variable cost?

Straight-line depreciation on production equipment

Copy lease payment of $500 per month plus $0.01 per copy

Fabric for use in quilts to be produced.

None of the above

5.Mixed costs:

have both the characteristics of fixed costs and variable costs.

change in relation to the passage of time.

cannot be accurately plotted on a graph.

None of the above

6 What is the correct formula to calculate the contribution margin ratio?

Fixed Costs / Unit Contribution Margin

(Sales - Variable Costs) / Sales

(Fixed Costs + Target Profit) / Unit Contribution Margin

None of the above

7 The budget process begins with which of the following?

Production budget

Sales budget

Cash Budget

Budgeted Income Statement

8 If the cost of materials purchased in the period is $200,000, and $185,000 is used in the manufacturing process, then:

the unused $15,000 is a period cost.

the unused $15,000 is part of work-in-process inventory in the period.

the unused $15,000 is classified as materials inventory

the unused $15,000 is part of finished goods inventory on the balance sheet.

9 Which statement(s) is True about the uses of managerial accounting?

Managerial accounting is used to support long-term planning decisions.

Managerial accounting helps a company evaluate the performance of company decisions.

Managerial accounting helps users run the day-to-day operations of the business.

All of the above

10 A budgeting system that requires managers to estimate sales and other operating expenses as though operations are being started for the first time is:

static budgeting.

flexible budgeting

zero based budgeting

None of the above

Fixed costs for Flag Stamp Co. are $250,000. The selling price per unit is $20.00, and variable costs are $15.00.

The contribution margin ratio is ? (state whole number only - no decimals).

Fixed costs for Flag Stamp Co. are $300,000. The selling price per unit is $20.00, and variable costs are $15.00. The break-even sales (in units) are ?

Assume sales are $750,000, variable costs are 70% of sales, and income from operations is $100,000. What is the contribution margin ratio and fixed cost, respectively?

The following costs were incurred in August:

Direct Materials $25,000

Direct Labor $20,000

Manufacturing (Factory) Overhead $25,000

Selling and Administrative Expenses $40,000

(1) What is the amount of the prime costs?

(2) What is the amount of the period costs?

(3) What is the amount of the conversion costs?

(4) What is the amount of the product costs?

If Ragged Edge Arts sells quilts and paintings, and it has estimated selling 50 quilts at $250 each and 42 paintings at $500 each, what are the estimated sales for next year?

crimsonelephant756

	#1	Which of the following correctly describes fixed and variable cost behavior as total volume increases?
	A.	Unit fixed costs stay the same and unit variable costs increase.
	B.	Total fixed costs stay the same and total variable costs increase.
	C.	Unit fixed costs decrease and total variable costs decrease.
	D.	Unit fixed costs decrease and unit variable costs decrease.

	#2	The incremental profit generated by the sale of one additional unit is equal to the
	A.	contribution margin per unit.
	B.	selling price.
	C.	margin of safety.
	D.	incremental cost.

	#3	Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?
	A.	$15.25
	B.	$21.35
	C.	$19.60
	D.	$27.44

	#4	ABC company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus 20% for pricing, which of the following should the company use to determine the price?
	A.	The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units.
	B.	The company should use a unit cost of $8.70 at any volume level.
	C.	The company should use a unit price of $10.44 at any volume level.
	D.	The company should ignore fixed costs for cost-plus pricing.

	#5	Which of the following is a grouping of overhead costs whose total is allocated using one allocation base?
	A.	Cost objective
	B.	Cost pool
	C.	Direct cost
	D.	Cost driver

	#6	Which one of the following is the preferred alternative when deciding between two options?
	A.	Incremental profit is greater than under the other alternatives.
	B.	Revenues are greater than under the other alternatives.
	C.	Expenses are less than under the other alternatives.
	D.	No opportunity or sunk costs exist.

#7	The required rate of return used to calculate an investmentâs net present value is related to the firmâs
A.	contribution margin.
B.	cost of capital.
C.	total assets.
D.	Price/Earnings ratio.

#8	A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department?
A.	A variable cost and therefore relevant
B.	Avoidable and therefore incremental
C.	Sunk and therefore not relevant
D.	A fixed cost and therefore not relevant

#9	The following information relates to Ajax Widgets during the year. There was no beginning inventory.
	Units produced	11,000
	Units sold	10,000
	Units in ending inventory	1,000
	Fixed manufacturing overhead	$220,000
	How much fixed manufacturing overhead will be expensed during the year (included in Cost of Goods Sold) using full costing?
A.	$220,000
B.	$200,000
C.	$20,000
D.	$10,000

#10	If the required rate of return is greater than the internal rate of return of a potential investment, the company should judge the investment as acceptable.
A.	This is a True statement
B.	This is a False statement
C.	Not enough information provided.

#11	The basic concept involved in time value of money calculations is that
A.	it is better to receive a dollar in the future than to receive a dollar today
B.	incremental revenues must exceed incremental costs.
C.	it is better to receive a dollar today than to receive a dollar in the future.
D.	it can only be applied to positive cash flows

#12	Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows:
		Footballs	Basketballs	Bats	Total
	Sales	$600,000	$800,000	$400,000	$1,800,000
	Cost of goods sold	260,000	400,000	230,000	890,000
	Gross margin	340,000	400,000	170,000	910,000
	Less other variable costs	85,000	120,000	80,000	285,000
	Contribution margin	255,000	280,000	90,000	625,000
	Less direct salaries	50,000	60,000	45,000	155,000
	Less common fixed costs	85,000	100,000	55,000	240,000
	Net income	$120,000	$120,000	-$10,000	$230,000

	Since the profit for bats is a net loss, the company is considering dropping this product line. What is the incremental $ effect on total net income of dropping the Bats line?


#13	Right Air Supply sells a specialized air filter that has a variable cost of $10 each.
	Fixed costs are estimated to be $700,000 across all levels of sales shown below.
	Units Sold	Unit Price	CM per unit x Qty	Fixed Costs	Profit
	90,000	$33		700,000
	100,000	$31		700,000
	110,000	$30		700,000
	120,000	$28		700,000
	Which price should Right Air Supply charge to maximize profits?


#14	Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the companyâs margin of safety?


#15	Roger Excavating Company experienced the following costs in 2016:
	Direct materials	$1.75 per unit
	Direct labor	$2.00 per unit
	Variable manufacturing overhead	$2.50 per unit
	Variable selling	$0.75 per unit
	Fixed manufacturing overhead	$50,000
	Fixed selling	$15,000
	Fixed administrative	$5,000
	During 2016, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the companyâs contribution margin per unit?

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MGA 202 Study Guide - Quiz Guide: Earnings Before Interest And Taxes, Fixed Cost, Variable Cost

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