# Prepare, Apply, and Confirm

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2 Prepare, Apply, and Confirm etext Features Keep students engaged in learning on their own time, while helping them achieve greater conceptual understanding of course material through author-created solutions videos, opportunities to Try It!, and live exhibits. Accounting Cycle Tutorial Accessed by computer, smartphone, or tablet, provides students with brief explanations of each concept of the accounting cycle through engaging videos and/or animations. Dynamic Study Modules Work by continuously assessing student performance and activity, then using data and analytics to provide personalized content in real time to reinforce concepts that target each student s particular strengths and weaknesses. Animated Lectures Pre-class introduction to or post-class refresher of key concepts throughout the chapter. These audio and animated lectures explain critical information and provide worked problems that students can view on their own time at their own pace.

3 230 chapter What is target profit? 15. What are the three approaches to calculating the sales required to achieve the target profit? Give the formula for each one. 16. Of the three approaches to calculate sales required to achieve target profit, which one(s) calculate the required sales in units and which one(s) calculate the required sales in dollars? 17. What is the breakeven point? 18. Why is the calculation to determine the breakeven point considered a variation of the target profit calculation? 19. On the CVP graph, where is the breakeven point shown? Why? 20. What is sensitivity analysis? How do managers use this tool? 21. What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs? 22. What is the margin of safety? What are the three ways it can be expressed? 23. What is a company s cost structure? How can cost structure affect a company s profits? 24. What is operating leverage? What does it mean if a company has a degree of operating leverage of 3? 25. How can CVP analysis be used by companies with multiple products? 26. What is a sales mix? Provide an example of a sales mix. 27A. What is absorption costing? 28A. What is variable costing? 29A. How are absorption costing and variable costing the same? How are they different? 30A. When units produced equal units sold, how does operating income differ between variable costing and absorption costing? 31A. When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why? 32A. When units produced are less than units sold, how does operating income differ between variable costing and absorption costing? Why? 33A. Explain why the fixed manufacturing overhead cost per unit changes when there is a change in the number of units produced. 34A. Explain how increasing production can increase gross profit when using absorption costing. > short exercises Learning Objective 1 S21-1 Identifying variable, fixed, and mixed costs Philadelphia Acoustics builds innovative speakers for music and home theater systems. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of speakers produced and sold. 1. Units of production depreciation on routers used to cut wood enclosures. 2. Wood for speaker enclosures. 3. Patents on crossover relays. 4. Total compensation to salesperson who receives a salary plus a commission based on meeting sales goals. 5. Crossover relays.

4 Cost-Volume-Profit Analysis Straight-line depreciation on manufacturing plant. 7. Grill cloth. 8. Cell phone costs of salesperson. 9. Glue. 10. Quality inspector s salary. S21-2 Identifying variable, fixed, and mixed costs Holly s Day Care has been in operation for several years. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of students enrolled. 1. Building rent. 2. Toys. 3. Compensation of the office manager, who receives a salary plus a bonus based on number of students enrolled. 4. Afternoon snacks. 5. Lawn service contract at \$200 per month. 6. Holly s salary. 7. Wages of afterschool employees. 8. Drawing paper for student artwork. 9. Straight-line depreciation on furniture and playground equipment. 10. Fee paid to security company for monthly service. S21-3 Using the high-low method Mark owns a machine shop. In reviewing the shop s utility bills for the past 12 months, he found that the highest bill of \$2,400 occurred in August when the machines worked 1,000 machine hours. The lowest utility bill of \$2,200 occurred in December when the machines worked 500 machine hours. 1. Calculate the variable rate per machine hour and the total fixed utility cost. 2. Show the equation for determining the total utility cost for the machine shop. 3. If Mark anticipates using 700 machine hours in January, predict the shop s total utility bill using the equation from Requirement 2. Learning Objective 1 Learning Objective 1 S21-4 Calculating contribution margin Gabby Company sells a product for \$105 per unit. Variable costs are \$65 per unit, and fixed costs are \$2,200 per month. The company expects to sell 540 units in September. Calculate the contribution margin per unit, in total, and as a ratio. S21-5 Preparing a contribution margin income statement Gabrick Company sells a product for \$30 per unit. Variable costs are \$20 per unit, and fixed costs are \$2,500 per month. The company expects to sell 560 units in September. Prepare an income statement for September using the contribution margin format. S21-6 Calculating required sales in units, contribution margin given Malden, Inc. sells a product with a contribution margin of \$60 per unit. Fixed costs are \$10,500 per month. How many units must Malden sell to earn an operating income of \$15,000? Learning Objective 2 Learning Objective 2 Learning Objective 3

5 232 chapter 21 Learning Objective 3 Learning Objectives 2, 3 S21-7 Calculating required sales in units, contribution margin ratio given Summer Company sells a product with a contribution margin ratio of 60%. Fixed costs are \$650 per month. What amount of sales (in dollars) must Summer Company have to earn an operating income of \$7,000? If each unit sells for \$30, how many units must be sold to achieve the desired operating income? S21-8 Computing contribution margin, units to achieve target profit, and breakeven point Compute the missing amounts for the following table. A B C Number of units 870 units 25,000 units 2,800 units Sales price per unit \$ 1,000 \$ 100 \$ 160 Variable costs per unit Total fixed costs 79,200 80,000 64,000 Target profit 268, , ,000 Calculate: Contribution margin per unit Contribution margin ratio Required units to achieve target profit Required units to break even Required sales dollars to break even Use the following information to complete Short Exercises S21-9 through S Playtime Park competes with Water World by providing a variety of rides. Playtime Park sells tickets at \$60 per person as a one-day entrance fee. Variable costs are \$24 per person, and fixed costs are \$226,800 per month. Learning Objectives 2, 3 Learning Objectives 2, 3 Learning Objective 4 S21-9 Computing contribution margin per unit, breakeven point in sales units Compute the contribution margin per unit and the number of tickets Playtime Park must sell to break even. Perform a numerical proof to show that your answer is correct. S21-10 Computing contribution margin ratio, breakeven point in sales dollars Compute Playtime Park s contribution margin ratio. Carry your computation to two decimal places. Use the contribution margin ratio approach to determine the sales revenue Playtime Park needs to break even. S21-11 Applying sensitivity analysis of changing sales price and variable cost Using the Playtime Park information presented, do the following tasks. 1. Suppose Playtime Park cuts its ticket price from \$60 to \$54 to increase the number of tickets sold. Compute the new breakeven point in tickets and in sales dollars. 2. Ignore the information in Requirement 1. Instead, assume that Playtime Park increases the variable cost from \$24 to \$30 per ticket. Compute the new breakeven point in tickets and in sales dollars.

6 Cost-Volume-Profit Analysis 233 S21-12 Applying sensitivity analysis of changing fixed costs Refer to the original information (ignoring the changes considered in Short Exercise S21-11). Suppose Playtime Park reduces fixed costs from \$226,800 per month to \$208,800 per month. Compute the new breakeven point in tickets and in sales dollars. S21-13 Computing margin of safety Refer to the original information (ignoring the changes considered in Short Exercises S21-11 and S21-12). If Playtime Park expects to sell 7,000 tickets, compute the margin of safety in tickets and in sales dollars. S21-14 Computing degree of operating leverage Refer to the original information (ignoring the changes considered in Short Exercises S21-11 and S21-12). If Playtime Park expects to sell 7,000 tickets, compute the degree of operating leverage. Estimate the operating income if sales increase by 15%. Learning Objective 4 Use the following information to complete Short Exercises S21-15 and S SoakNFun Swim Park sells individual and family tickets. With a ticket, each person receives a meal, three beverages, and unlimited use of the swimming pools. SoakNFun has the following ticket prices and variable costs for 2016: Individual Family Sales price per ticket \$ 40 \$ 120 Variable cost per ticket SoakNFun expects to sell one individual ticket for every four family tickets. SoakNFun s total fixed costs are \$76,000. S21-15 Calculating breakeven point for two products Using the SoakNFun Swim Park information presented, do the following tasks. 1. Compute the weighted-average contribution margin per ticket. 2. Calculate the total number of tickets SoakNFun must sell to break even. 3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even. S21-16 Calculating breakeven point for two products For 2017, SoakNFun expects a sales mix of four individual tickets for every one family ticket. 1. Compute the new weighted-average contribution margin per ticket. 2. Calculate the total number of tickets SoakNFun must sell to break even. 3. Calculate the number of individual tickets and the number of family tickets the company must sell to break even.

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