# Management Accounting Fundamentals

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1 Management Accounting Fundamentals Module 4 Cost behaviour and cost-volume-profit analysis Lectures and handouts by: Shirley Mauger, HB Comm, CGA Part Module 4 - Table of Contents Content 4.1 Variable cost behaviour patterns 4.2 Fixed costs 4.3 Analysis of mixed costs 4.4 Contribution margin and contribution format income statement 4.5 Computer illustration Regression analysis (not covered) 4.6 Basics of cost-volume-profit analysis 4.7 Break-even analysis 2 Part Module 4 - Table of Contents Content (continued) 4.8 CVP considerations in choosing a cost structure 4.9 Structuring sales commissions 4.10 Sales mix 4.11 Assumptions of CVP analysis 4.12 Computer illustration: CVP sensitivity analysis (not covered) Review questions: Cost volume profit analysis Review questions: Cost volume profit analysis Review questions: Sales mix and weighted average Review questions: Multiple choice Q1-Q9 Review questions: Multiple choice Q10-Q14 3

2 MA1 MODULE 4 Part 1 Variable cost behavior patterns Fixed costs Topics Part 1 Variable cost behavior patterns (Topic 4.1) Identify examples of variable costs, and explain the effect of a change in activity on both total variable costs and per unit variable costs. (Level 1) Variable cost: Total cost changes in direct proportion to activity Unit cost stays the same e.g. The cost of skateboards for a sports retailer is variable. Number of skateboards sold Cost per skateboard Total cost of skateboards 1 \$150 \$150 2 \$150 \$ \$150 \$1,500 Cost of skateboards Skateboards sold 5 Part 1 Variable cost behavior patterns (Topic 4.1) Step-variable cost: Total cost changes only in response to wide changes in activity Treated as variable if steps are narrow e.g. The cost of salestaff (no commision) Number of skateboards sold Total cost 1-50 \$5, \$10, \$15,000 Cost of sales staff Skateboards sold 6

3 Part 1 Variable cost behavior patterns (Topic 4.1) Relevant range of Step-variable cost: activity Total cost changes only in response to wide changes in activity If no change within the relevant range than treat as fixed. e.g. The cost of salesstaff (no commission) Number of skateboards sold Total cost 1-50 \$5, \$10, \$15,000 Cost of salesstaff Skateboards sold 7 Part 1 Variable cost behavior patterns (Topic 4.1) Relevant range of activity Curvilinear cost: Many variable costs are more accurately described as being curvilinear Can be described as variable within the relevant range Cost Volume 8 Part 1 Fixed costs (Topic 4.2) Identify examples of fixed costs, and explain the effect of a change in activity on both total fixed costs and fixed costs expressed on a per unit basis. (Level 1) Fixed cost: Total cost remains constant regardless of changes in activity Unit cost becomes smaller as the activity increases. e.g. The rental cost for the sports retailer s shop is fixed Number of skateboards sold Cost of rent per skateboard Total cost of rent 1 \$2,000 \$2,000 2 \$1,000 \$2, \$20 \$2,000 Cost of store rent Skateboards sold Discretionary vs. Committed 9

4 MA1 MODULE 4 Part 2 Analysis of mixed costs Topic Part 2 Analysis of mixed costs (Topic 4.3) Analyze a mixed cost using the high-low method and the regression method. (Level 1) Mixed cost: Contains both variable and Total cost fixed costs To analyze, should be separated into fixed & variable e.g. The rental cost is \$2,000 plus 1% of the \$200 selling price for each board sold. # sold Fixed cost Variable cost Total cost 1 \$2,000 \$2 \$2, \$2,000 \$40 \$2, \$2,000 \$200 \$2,200 Cost of store rent Skateboards sold 11 Part 2 Analysis of mixed costs (Topic 4.3) Analyze a mixed cost using the high-low method and the regression method. (Level 1) Mixed cost: Contains both variable and Total cost fixed costs To analyze, should be separated into fixed & variable e.g. The rental cost is \$2,000 plus 1% of the \$200 selling price for Xeach board a sold. bx Y # sold Fixed cost Variable cost Total cost 1 \$2,000 \$2 \$2, \$2,000 \$40 \$2, \$2,000 \$200 \$2,200 Cost of store rent Skateboards sold Cost function: Y= a + bx 12

5 Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Tutorial Exercise 5-1, page 214 Month Units Shipped Total Shipping Expense January 4 \$2,200 February 7 3,100 March 5 2,600 April 2 1,500 May 3 2,200 June 6 3,000 July 8 3,600 Stop the audio and turn to page 214 in your textbook 13 Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Account analysis Scattergram plot High-low method Regression analysis Based on prior knowledge of account activity weight units shipped distance traveled 14 Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Visual estimation Account analysis Scattergram plot High-low method Regression analysis Y X 15

6 Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Visual estimation Account analysis Scattergram plot High-low method Regression analysis trendline intercept 5 units, \$2, Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Visual estimation Account analysis Total costs: \$2,600 Scattergram plot Fixed costs: 1,000 High-low method Variable costs: 1,600 Regression analysis Cost per unit:1,600/5=\$320 intercept 5 units, \$2, Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Visual estimation Account analysis Scattergram plot High-low method Regression analysis Y=\$1,000+\$320x intercept 5 units, \$2,600 18

7 Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Account analysis Scattergram plot High-low method Regression analysis Based on two extreme values 2 units, \$1,500 8 units, \$3, Part 2 Analysis of mixed costs (Topic 4.3) High-low method Units Shipped Shipping Expense Highest observation of cost driver 8 \$3,600 Lowest observation of cost driver 2 1,500 Difference 6 \$2, Part 2 Analysis of mixed costs (Topic 4.3) High-low method Slope (b) = change in cost (variable change in activity cost) Units Shipped \$2,100 6 Shipping Expense Highest observation of cost driver 8 \$3,600 Lowest observation of cost driver 2 1,500 Difference 6 \$2,100 = \$350 per unit Y= a + bx 21

8 Part 2 Analysis of mixed costs (Topic 4.3) High-low method Slope (b) = change in cost (variable change in activity cost) Constant (a) = Total Variable (fixed cost) cost cost Units Shipped \$2,100 6 = \$350 per unit Shipping Expense Highest observation of cost driver 8 \$3,600 Lowest observation of cost driver 2 1,500 Difference 6 \$2,100 Y=\$800+\$350x \$3,600 - \$350 x 8 = \$800 OR \$1,500 - \$350 x 2 = \$ Part 2 Analysis of mixed costs (Topic 4.3) Mixed cost analysis: Account analysis Scattergram plot High-low method Regression analysis Statistical technique that fits a line to the observed relationships between cost and volume Used when more than one activity drives the variable cost. Coefficients Intercept X Variable Y=\$1,011+\$318x Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 7 23 MA1 MODULE 4 Part 3 Contribution margin and contribution format income statement Basics of cost-volume profit analysis Break-even analysis Topics 4.4, 4.6, and

9 Part 3 Contribution margin and contribution format income statement (Topic 4.4) Prepare an income statement using the contribution method. (Level 1) External reporting Management analysis McGraw-Hill Ryerson Limited., Part 3 Contribution margin and contribution format income statement (Topic 4.4) Prepare an income statement using the contribution method. (Level 1) Direct materials Direct labour Variable overhead Variable selling and administrative McGraw-Hill Ryerson Limited., Part 3 Contribution margin and contribution format income statement (Topic 4.4) Prepare an income statement using the contribution method. (Level 1) Fixed overhead Fixed selling and administrative McGraw-Hill Ryerson Limited.,

10 Part 3 Basics of cost-volume-profit analysis (Topic 4.6) Explain how changes in activity and changes in variable costs, fixed costs, selling price, and volume affect contribution margin and net income. (Level 1) Exercise 6-1, page 259 Porter Company Total Unit Sales (30,000 units) \$150,000 \$5 Less variable expenses 90,000 3 Contribution margin \$60,000 \$2 Less fixed expenses 50,000 Net operating income \$10,000 Stop the audio and turn to page 259 in your textbook 28 Part 3 Basics of cost-volume-profit analysis (Topic 4.6) Explain how changes in activity and changes in variable costs, fixed costs, selling price, and volume affect contribution margin and net income. (Level 1) Exercise 6-1, page 259 Porter Company Total Unit Sales (30,000 units) \$150,000 \$5 Less variable expenses 90,000 3 Contribution margin \$60,000 \$2 Less fixed expenses 50,000 Net operating income \$10,000 Contribution margin ratio CM/Sales 60,000/150,000= 40% 29 Part 3 Basics of cost-volume-profit analysis (Topic 4.6) Exercise 6-1, page 259 Porter Company Total Unit Sales (30,000 units) \$150,000 \$5 Less variable expenses 90,000 3 Contribution margin \$60,000 \$2 Less fixed expenses 50,000 Net operating income \$10, Sales increased by 15% (\$150,000x15%) \$22,500 x 40% = \$9,000 Contribution margin ratio CM/Sales 60,000/150,000= 40% 30

11 Part 3 Basics of cost-volume-profit analysis (Topic 4.6) Exercise 6-1, page 259 Porter Company Total Unit Total Change Sales (30,000 units) \$150,000 \$5 \$172,500 \$22,500 Less variable expenses 90, ,500 13,500 Contribution margin \$60,000 \$2 \$69,000 \$9,000 Less fixed expenses 50,000 50,000 0 Net operating income \$10,000 \$19,000 \$9, Sales increased by 15% (\$150,000x15%) \$22,500 x 40% = \$9,000 New sales level is 34,500 units 31 Part 3 Basics of cost-volume-profit analysis (Topic 4.6) Exercise 6-1, page 259 Porter Company Total Unit Units Total Sales (30,000 units) \$150,000 \$4.5 36,000 \$162,000 Less variable expenses 90, , ,000 Contribution margin \$60,000 \$1.5 36,000 \$54,000 Less fixed expenses 50,000 50,000 Net operating income \$10,000 \$4, Selling price decreases by \$.50 per unit and sales volume increases by 20% 32 Part 3 Basics of cost-volume-profit analysis (Topic 4.6) Exercise 6-1, page 259 Porter Company Total Unit Units Total Sales (30,000 units) \$150,000 \$5.5 28,500 \$156,750 Less variable expenses 90, ,500 85,500 Contribution margin \$60,000 \$2.5 28,500 \$71,250 Less fixed expenses 50,000 60,000 Net operating income \$10,000 \$11, The selling price increases by \$.50 per unit, fixed expenses increase by \$10,000 and the sales volume decreases by 5% 33

12 Part 3 Break-even analysis (Topic 4.7) Compute the break-even point by both the equation method and the contribution margin method. (Level 1) Sales SPx Variable Costs VCx Fixed Costs FC = Profit P At breakeven profit is: 0 34 Part 3 Break-even analysis (Topic 4.7) Compute the break-even point by both the equation method and the contribution margin method. (Level 1) Sales SPx Variable Costs VCx Fixed Costs FC = Profit P Sales SPx = Variable Costs VCx At breakeven profit is: + Fixed Costs FC 0 35 Part 3 Break-even analysis (Topic 4.7) SP \$90 VC \$63 FC \$135,000 x? 1. Break-even point in number of lanterns \$90*x = \$63*x + \$135,000 Sales SPx = Variable Costs VCx + Fixed Costs FC Stop the audio and turn to page 260 in your textbook 36

13 Part 3 Break-even analysis (Topic 4.7) SP \$90 VC \$63 FC \$135,000 x? 1. Break-even point in number of lanterns \$90*x = \$63*x + \$135,000 SPx = VCx + FC x = FC SP - VC = \$135,000 = 5,000 Lanterns \$90-\$63 37 Part 3 Break-even analysis (Topic 4.7) SP \$90 VC \$63 FC \$135,000 x 5, Break-even point in number of lanterns Sales SPx Variable Costs VCx Fixed Costs FC = Profit P \$90*5,000 - \$63*5,000 - \$135,000 = 0 \$450,000 - \$315,000 - \$135,000 = 0 38 Part 3 Break-even analysis (Topic 4.7) SP \$90+\$10=\$ 100 VC \$63+\$10= \$ 73 What happens to the breakeven point if the selling price and variable cost both increase by \$10? 39

14 Part 3 Break-even analysis (Topic 4.7) SP \$90+\$10=\$ 100 VC \$63+\$10= \$ 73 CM \$27 \$ 27 What happens to the breakeven point if the selling price and variable cost both increase by \$10? \$90*x = \$63*x + \$135,000 SPx = VCx + FC x = FC CM = \$135,000 = 5,000 Lanterns \$27 Contribution margin 40 Part 3 Break-even analysis (Topic 4.7) SP \$90 VC \$63 CM \$27 Calculate the breakeven in sales dollars. Y = FC CM x SP \$135,000 \$27 x \$90 = \$450,000 In sales 41 Part 3 Break-even analysis (Topic 4.7) SP \$90 VC \$63 CM \$27 Calculate the breakeven in sales dollars. Y = FC CM x SP \$135,000 \$27 x \$90 = \$450,000 In sales Contribution margin ratio CM/SP = \$27/\$90 = 30% Y = FC CM ratio 30% \$135,000 = \$450,000 In sales 42

15 Part 3 Break-even analysis (Topic 4.7) Breakeven Sales \$ Total costs Fixed costs 43 MA1 MODULE 4 Part 4 CVP considerations when choosing a cost structure Structuring sales commissions Topics Part 4 CVP considerations in choosing a cost structure (Topic 4.8) Use cost-volume-profit formulas to determine the activity level needed to achieve a desired target net profit figure. (Level 1) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? 4. How many lanterns would have to be sold at the new selling price (\$81) to yield a minimum net operating income of \$72,000 per month? SPx VCx FC = P Stop the audio and turn to page 260 in your textbook 45

16 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) Use cost-volume-profit formulas to determine the activity level needed to achieve a desired target net profit figure. (Level 1) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? x + = FC P CM 4. How many lanterns would have to be sold at the new selling price (\$81) to yield a minimum net operating income of \$72,000 per month? SPx VCx FC = P \$135,000 + \$72,000 \$18 = 11,500 Lanterns 46 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) Use cost-volume-profit formulas to determine the activity level needed to achieve a desired target net profit figure. (Level 1) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? 4. How many lanterns would have to be sold at the new selling price (\$81) to yield a minimum net operating income of \$72,000 per month? SPx VCx FC = P SPx VCx FC = P \$81*11,500 - \$63*11,500 - \$135,000 = \$72,000 \$931,500 - \$724,500 - \$135,000 = \$72, Part 4 CVP considerations in choosing a cost structure (Topic 4.8) Use cost-volume-profit formulas to determine the activity level needed to achieve a desired target net profit figure. (Level 1) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? x = FC + CM PAT (1-T) 4. How many lanterns would have to be sold at the new selling price (\$81) to yield a minimum net operating income after taxes of \$72,000 per month? The company s tax rate is 25% \$72,000 \$135,000 + (1-.25) \$18 = 12,833 Lanterns 48

17 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? Margin of safety: Identifies how much sales can drop before a loss is incurred. Budgeted or actual sales - break-even sales Margin of safety percentage: Margin of safety in \$ / budgeted (actual) sales 49 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? Desired sales Breakeven sales Margin of safety: Identifies how much sales can drop before a loss is incurred. Budgeted or actual sales - break-even sales \$135,000 + \$72,000 = \$18 \$135,000 = \$18 Margin of safety: 11,500 Lanterns 7,500 Lanterns 4,000 Lanterns 50 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) SP \$81 VC \$63 FC \$135,000 P \$72,000 x? Margin of safety: Margin of safety percentage: Margin of safety in \$ / budgeted (actual) sales 4,000 lanterns x \$81 11,500 lanterns x \$81 \$324,000 = = 35% \$931,500 If sales dropped by 35% the company would just break even 51

18 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) SP \$81 VC \$63 FC \$135,000 P \$72,000 x 11,500 Operating leverage: Measures the sensitivity of net income to change in sales Degree of Contribution margin = operating Net operating income leverage 52 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) SP \$81 VC \$63 FC \$135,000 P \$72,000 x 11,500 Operating leverage: Measures the sensitivity of net income to change in sales Degree of Contribution margin = operating Net operating income leverage \$18 x 11,500 lanterns \$72,000 = Degree of operating leverage 53 Part 4 CVP considerations in choosing a cost structure (Topic 4.8) Operating leverage: If sales increase by 10%, operating income will increase by 10% x = 28.75% Reveen Products 10% Total Unit Increase Sales (11,500 units) \$931,500 \$81 \$1,024,650 Less variable expenses 724, ,950 Contribution margin \$207,000 \$18 \$227,700 Less fixed expenses 135, ,000 Net operating income \$72,000 X \$92,700 54

19 Part 4 Structuring sales commissions (Topic 4.9) Explain the importance of considering contribution margin when structuring sales commissions. (Level 2) Base sales commissions on contribution margin. Reveen Products Basic model Economy model Selling price \$81 \$70 Less variable expenses \$63 \$40 Contribution margin \$18 \$30 The lower priced product brings a higher return 55 MA1 MODULE 4 Part 5 Sales mix Assumptions of CVP analysis Topics Part 5 Sales mix (Topic 4.10) Compute the break-even point for a multiple product company, and explain the effects of shifts in the sales mix on contribution margin and the break-even point. (Level 1) Exercise 6-5, page 261 Okabee Enterprises A100 Model B900 Sales \$700,000 \$300,000 Contribution margin ratio 60% 70% Fixed expenses: \$598,500 Stop the audio and turn to page 261 in your textbook 57

20 Part 5 Sales mix (Topic 4.10) Compute the break-even point for a multiple product company, and explain the effects of shifts in the sales mix on contribution margin and the break-even point. (Level 1) Exercise 6-5, page 261 Okabee Enterprises Model A100 B900 TOTAL Sales \$700,000 \$300,000 \$1,000,000 Contribution margin ratio 60% 70% Fixed expenses: \$598,500 70% of total sales mix 30% of total sales mix 58 Part 5 Sales mix (Topic 4.10) Compute the break-even point for a multiple product company, and explain the effects of shifts in the sales mix on contribution margin and the break-even point. (Level 1) Exercise 6-5, page 261 Okabee Enterprises A100 Model B900 Sales \$700,000 \$300,000 Contribution margin ratio 60% 70% Fixed expenses: \$598,500 (SP 1 x 1 VC 1 x 1 ) + (SP 2 x 2 VC 2 x 2 ) FC = 0 Calculate breakeven sales 59 Exercise 6-5, page 261 Okabee Enterprises Part 5 Sales mix (Topic 4.10) Model A100 % B900 % Sales \$700, \$300, Variable costs 280, , Contribution margin Fixed expenses: 598,500 Operating income \$420, \$210, Prepare a contribution margin statement 60

21 Exercise 6-5, page 261 Okabee Enterprises Part 5 Sales mix (Topic 4.10) Model Total A100 % B900 % % Sales \$700, \$300, ,000, Variable costs 280, , , Contribution margin Fixed expenses: \$598,500 Operating income Calculate the overall contribution margin ratio \$420, \$210, \$630, ,500 \$31, Part 5 Sales mix (Topic 4.10) Exercise 6-5, page 261 Okabee Enterprises Model Total A100 % B900 % % Sales \$700, \$300, ,000, Variable costs 280, , , Contribution margin Fixed expenses: \$598,500 Operating income \$420, \$210, \$630, Use the BE formula: FC/CM ratio= 598,500/.63 = \$950, ,500 \$31, Part 5 Sales mix (Topic 4.10) Allocation of \$950,000 Sales mix: A100 is 70% B900 is 30% Exercise 6-5, page 261 Okabee Enterprises Model Total A100 % B900 % % Sales \$665, \$285, \$950, Variable costs 266, , , Contribution margin Fixed expenses: \$598,500 Operating income \$399, \$199, \$598, PROOF 598,500 \$0 63

22 Part 5 Sales mix (Topic 4.10) Exercise 6-5, page 261 Okabee Enterprises Model Total A100 % B900 % % Sales \$665, \$285, \$950, Variable costs 266, , , Contribution margin Fixed expenses: \$598,500 Operating income \$399, \$199, \$598, Alternative method: CM Sales ratio mix Model A100: 60% x 70% = 42% Model B900: 70% x 30% = 21% 63% 598,500 \$0 64 Part 5 Sales mix (Topic 4.10) Exercise 6-5, page 261 Okabee Enterprises Model Total A100 % B900 % % Sales \$475, \$475, , Variable costs 190, , , Contribution margin Fixed expenses: \$598,500 Operating income \$285, \$332, \$617, Alternative method: CM Sales ratio mix Model A100: 60% x 50% = 30% Model B900: 70% x 50% = 35% 65% 598,500 \$19, Part 5 Assumptions of CVP analysis (Topic 4.11) Explain cost-volume profit with uncertainty. (Level 2) Selling price is constant Costs are linear within the relevant range The sales mix is constant for multiple products The number of units produced equals the number of units sold Ignores present values Decision trees are used as a tool to determine expected value 66

23 Part 5 Assumptions of CVP analysis (Topic 4.11) Cost-volume-profit formulas 1. Operating income (before tax): SPx VCx FC = P 2. Contribution margin: SP-VC=CM 3. Contribution margin ratio: CM SP 4. Breakeven in units: FC =x CM 5. Breakeven in sales dollars: FC =Y CM ratio 6. Unit sales to reach target FC + P before tax operating income: CM 7. Unit sales to reach target FC + after tax operating income: CM =CM ratio =x PAT (1-T) 8. Sales dollars to reach target FC + P =Y before tax operating income: CM ratio =x See page 1 ma1_mod4_ handout1.pdf 67 Part 5 Assumptions of CVP analysis (Topic 4.11) Cost-volume-profit variables P PAT SP VC FC x CM CM ratio Y T Before tax profits (before tax operating income) After tax profits (after tax operating income) Selling price per unit Variable cost per unit Fixed costs Number of units Contribution margin (SP-VC) CM/SP Total sales dollars Tax rate See page 1 ma1_mod4_handout1.pdf 68 MA1 MODULE 4 Part 6 Review questions: Cost volume profit analysis December 1992 December 2005 (download the additional questions handout: ma1_mod4_handout1.pdf) 69

24 Part 6 Review questions: Cost volume profit analysis December 1992 and 2005 Question 4 December 1992 Handout pages 2 thru 3 a) How many units would Omego have to sell in order to break even? b) How many units would Omego have to sell in order to produce a profit of \$22,000 before taxes? c) What price would omego have to charge in order to produce a profit of \$28,000 after taxes? d) What price would Omego have to charge in order to produce a before tax profit equal to 30% of sales? Stop the audio, read and attempt the question in the handout then come back to 70 listen to the solution. Part 6 Review questions: Cost volume profit analysis December 1992 and 2005 Question 4 December 1992 Handout pages 2 thru 3 a) How many units would Omego have to sell in order to break even? b) How many units would Omego have to sell in order to produce a profit of \$22,000 before taxes? c) What price would omego have to charge in order to produce a profit of \$28,000 after taxes? d) What price would Omego have to charge in order to produce a before tax profit equal to 30% of sales? 71 Part 6 Review questions: Cost volume profit analysis December 1992 and 2005 Question 4 December 1992 Handout pages 2 thru 3 a) How many units would Omego have to sell in order to break even? b) How many units would Omego have to sell in order to produce a profit of \$22,000 before taxes? c) What price would Omego have to charge in order to produce a profit of \$28,000 after taxes? d) What price would Omego have to charge in order to produce a before tax profit equal to 30% of sales? 72

25 Part 6 Review questions: Cost volume profit analysis December 1992 and 2005 Question 5 December 2005 Handout page 4 a) Determine the break-even point in units for the two machines b) Determine the sales level in units at which the new machine will achieve a 10% target profit-to-sales ratio c) Determine the sales level at which profits will be the same for either the old or new machine d) Which machine represents a lower risk if demand is uncertain. Explain. 73 Part 6 Review questions: Cost volume profit analysis December 1992 and 2005 Question 5 December 2005 Handout page 4 a) Determine the break-even point in units for the two machines b) Determine the sales level in units at which the new machine will achieve a 10% target profit-to-sales ratio c) Determine the sales level at which profits will be the same for either the old or new machine d) Which machine represents a lower risk if demand is uncertain. Explain. 74 MA1 MODULE 4 Part 7 Review questions: Cost volume profit analysis March 1994 March 2005 (download the additional questions handout: ma1_mod4_handout1.pdf) 75

26 Part 7 Review questions: Cost volume profit analysis March 1994 and 2005 Question 4 March 1994 Handout pages 5 thru 6 a) What is the breakeven point in sales dollars for Dry Rot? b) If Dry Rot employs its own salespeople, what would be the breakeven point in sales dollars? c) What would be the volume of sales dollars to yield the same net income if Dry Rot continues to use the independent sales agents and agrees to their demand? d) Compute the sales volume in sales dollars that would generate an identical net income under both methods. Stop the audio, read and attempt the question in the handout then come back to listen to the solution. 76 Part 7 Review questions: Cost volume profit analysis March 1994 and 2005 Question 4 March 1994 Handout pages 5 thru 6 a) What is the breakeven point in sales dollars for Dry Rot? b) If Dry Rot employs its own salespeople, what would be the breakeven point in sales dollars? c) What would be the volume of sales dollars to yield the same net income if Dry Rot continues to use the independent sales agents and agrees to their demand? d) Compute the sales volume in sales dollars that would generate an identical net income under both methods. 77 Part 7 Review questions: Cost volume profit analysis March 1994 and 2005 Question 4 March 1994 Handout pages 5 thru 6 a) What is the breakeven point in sales dollars for Dry Rot? b) If Dry Rot employs its own salespeople, what would be the breakeven point in sales dollars? c) What would be the volume of sales dollars to yield the same net income if Dry Rot continues to use the independent sales agents and agrees to their demand? d) Compute the sales volume in sales dollars that would generate an identical net income under both methods. 78

27 Part 7 Review questions: Cost volume profit analysis March 1994 and 2005 Question 3 March 2005 Handout pages 7 thru 8 a) Calculate the new net income if both changes were implemented and the resulting sales were as predicted b) Calculate the total sales volume that must be achieved in order for the purchase of the new equipment to have a positive effect on net income. c) What is the minimum price that Timeworks should charge the subsidiary for each of its tandard clocks. Stop the audio, read and attempt the question in the handout then come back to listen to the solution. 79 Part 7 Review questions: Cost volume profit analysis March 1994 and 2005 Question 3 March 2005 Handout pages 7 thru 8 a) Calculate the new net income if both changes were implemented and the resulting sales were as predicted b) Calculate the total sales volume that must be achieved in order for the purchase of the new equipment to have a positive effect on net income. c) What is the minimum price that Timeworks should charge the subsidiary for each of its tandard clocks. 80 MA1 MODULE 4 Part 8 Review questions: Cost volume profit analysis Sales mix and weighted average method (download the additional questions handout: ma1_mod4_handout1.pdf) 81

28 Part 8 Review questions: Cost volume profit analysis Sales mix and weighted average method Question 4 June 2007 Handout pages 9 thru 10 a) Using the weighted average contribution margin method, calculate the break-even point for the company as a whole b) How many pairs of each type of show would have to be sold to achieve a target after-tax profit of \$1,000,000, assuming the corporate tax rate was 40%? c) What is the margin of safety in part (b)? State it in terms of each type of shoe sold. Stop the audio, read and attempt the question in the handout then come back to listen to the solution. 82 MA1 MODULE 4 Part 9 Review questions: Multiple Choice Questions Q1-Q9 (download the additional questions handout: ma1_mod4_handout1.pdf) 83 Part 9 Review questions: Multiple choice Q1-Q9 Multiple choice questions Handout pages 11 thru 13 Now working on page 11 Q1 What is Xenon s fixed cost? Q2 How much must Upsilon Co. increase sales? Q3 What is the expected shipping cost? Stop the audio, read and attempt the question in the handout then come back to listen to the solution. 84

29 Part 9 Review questions: Multiple choice Q1-Q9 Multiple choice questions Handout pages 11 thru 13 Now working on page 12 Q4 High low method of mixed cost analysis Q5 Sales for Division West. Q6 Sales in Division B 85 Part 9 Review questions: Multiple choice Q1-Q9 Multiple choice questions Handout pages 11 thru 13 Now working on page 13 Q7 By how much will fixed expenses have to be reduced? Q8 What is the contribution margin? Q9 How many sections must be sold to earn an aftertax income of \$4,000? 86 MA1 MODULE 4 Part 10 Review questions: Multiple Choice Questions Q10-Q14 (download the additional questions handout: ma1_mod4_handout1.pdf) 87

30 Part 10 Review questions: Multiple choice Q10-Q14 Multiple choice questions Handout pages 14 thru 15 Now working on page 14 Q10 What will the breakeven point be fore Gorge in units of X and Y? Q11 (a) What is Belton s breakeven point (b) What is the new unit selling price? Stop the audio, read and attempt the question in the handout then come back to listen to the solution. 88 Part 10 Review questions: Multiple choice Q10-Q14 Multiple choice questions Handout pages 14 thru 15 Now working on page 15 Q12 What are Ceta s total fixed costs? Q13 Effect on break even Q14 (a) How many units must Liu Co sell? (b) What happens to break even if fixed costs double and contribution margin was cut in half? 89

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