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Exam 9: Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

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Question 1

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In performing short-term CVP analysis for a new product or service, the decision-maker would:

A) Include all current and future fixed costs.
B) Include only current fixed costs.
C) Include only future fixed costs.
D) Include only incremental fixed costs.
E) Include only allocated fixed costs.

F) B) and E)
G) A) and C)

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Question 2

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Which of the following equations is correct for determining the required sales in units to generate a targeted amount of pre-tax income (πB) under the equation method (where Q = sales in units, F = total fixed costs, πB = pre-tax profit, v = variable cost per unit, and p = selling price per unit) ?

A) [vQ + F] + πB − pQ = 0.
B) vQ − F + πB − pQ = 0.
C) F − πB − vQ − pQ = 0.
D) pQ + vQ + F + πB = 0.
E) πB = F × (p − v) Q.

F) A) and B)
G) C) and D)

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Question 3

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Headlines Publishing Company (HPC) specializes in international business news publications. Its principal product is HPC-Monthly, which is mailed to subscribers the first week of each month. A weekly version, called HPC-Weekly, is also available to subscribers over the Web at a higher cost. Sixty percent (60%) of HPC's subscribers are international customers. The company experienced a fast growth in subscribers in its first few years of operation, but sales have begun to slow in recent years as new competitors have entered the market. HPC has the following cost structure and sales revenue for its subscription operations on a yearly basis. All costs and all subscription fees are in U.S. dollars. Required: Use these data to determine the following: 1. Contribution margin per unit for weekly and for monthly subscriptions. 2. Contribution margin ratio for weekly and for monthly subscriptions. (Round answers to two decimal points.) 3. HPC's breakeven point in annual sales units and sales dollars (round answers up, to nearest whole number). 4. HPC's required sales to reach a target before-tax profit (πB) of $75,000 for the year. What is the breakdown of this overall level of subscriptions into Weekly and Monthly subscriptions? (Round answers up to nearest whole number.) 5. What are the critical success factors for HPC? For its domestic subscribers? For its international subscribers? How can CVP analysis be used to make HPC more competitive?

Premium Beds is a retailer of luxury bed frames located in Los Angeles, California. Due to a recent industry-wide financial crisis, the CFO of Premium Beds fears a significant drop in the firm's upcoming income stream. The CFO asked you to use the company financial information provided below.If 4,000 bed frames were sold, Premium Bed's operating income (πB) would be:

Crown Co. can produce two types of lamps, the Enlightner and Foglighter. The data on the two lamp models are as follows:It takes one machine hour to produce each product. Total fixed costs for the manufacture of both products are $90,000. Demand is high enough for either product to keep the plant operating at maximum capacity. Assuming that sales mix in terms of units remains constant, what is the breakeven point in total units? (Round intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Grant's Western Wear is a retailer of western hats located in Atlanta, Georgia. Although Grant's carries numerous styles of western hats, each hat has approximately the same price and invoice purchase cost, as shown below. Sales personnel receive large commissions to encourage them to be more aggressive in their sales efforts. Currently the economy of Atlanta is really humming, and sales growth at Grant's has been great. However, the business is very competitive, and Grant has relied on its knowledgeable and courteous staff to attract and retain customers, who otherwise might go to other western wear stores. Also, because of the rapid growth in sales, Grant is finding it more difficult to manage certain aspects of the business, such as restocking of inventory and hiring and training new salespeople.The annual breakeven point in dollar sales is calculated to be:

In measuring the variable cost per unit, CVP analysis includes:

Which of the following is not an assumption of conventional cost/volume/profit (CVP) analysis?

Daley Co.manufactures computer monitors.Following is a summary of its basic cost and revenue data: Assume that Daley Co.is currently selling 700 computer monitors per month.Fixed costs are expected to be $96,000. Required: 1.Calculate Daley Co.'s degree of operating leverage (DOL) if 700 units are sold.Round your answer to 3 decimal places. 2.Define what is meant by the DOL. 3.Of what purpose/value is the DOL to decision makers?

For the current year, Power Cords Corp. expected to sell 42,000 industrial power cords. Fixed costs were expected to total $1,650,000; unit sales price was expected to be $3,750; and unit variable costs were budgeted at $2,250. Power Cords Corp.'s margin of safety (MOS) in units is:

The sales and cost data for two companies in the transportation industry are as follows: X Company's degree of operating leverage (DOL) at the current sales volume level is calculated to be:

In the current year, Becker Sofa Company expected to sell 12,000 leather sofas. Fixed costs for the year were expected to be $8,400,000; unit sales price was budgeted at $4,600; and unit variable costs were expected to be $2,200. Becker Sofa Company's margin of safety ratio (MOS %) is (rounded to two decimal places) :

Kelvin Co. produces and sells socks. Variable costs are budgeted at $4 per pair, and fixed costs for the year are expected to total $90,000. The selling price is expected to be $6 per pair. The sales units required for Kelvin Co. to make an after-tax profit (πA) of $15,000, given an income tax rate of 40%, are:

The following information pertains to Korning Corp.:How many total units must be sold to obtain an after-tax profit (πA) of $47,775?

Staley Co. manufactures computer monitors. The following is a summary of its basic cost and revenue data:Assume that Staley Co. is currently selling 600 computer monitors per month and monthly fixed costs are $80,000. What is Staley Co.'s margin of safety (MOS) , in units, if 600 units are sold and all costs and revenues are as budgeted? (Round intermediate calculation up to nearest whole number of units.)

Premium Beds is a retailer of luxury bed frames located in Los Angeles, California. Due to a recent industry-wide financial crisis, the CFO of Premium Beds fears a significant drop in the firm's upcoming income stream. The CFO asked you to use the company financial information provided below.The annual breakeven point in dollars is:

The Subway Sandwich Shop, Inc.is seeking to sell new franchises for its business.The company is in the process of developing a business plan to present to potential investors.Following are various projected cost data for a typical sandwich shop: The average order (sandwich) sells for $4, with food cost of $2. Required: 1.What is the contribution of each order (sandwich) toward covering fixed expenses? 2.What is the projected monthly breakeven point in units (round your answer up, to nearest whole unit)? 3.A potential franchisee has a target before-tax net profit of $2,000 per month.What level of sales (in units and in dollars, per month) must be achieved to meet the franchisee's profit goal (round up, to nearest whole unit)? 4.This potential franchisee has a target after-tax net profit of $1,800 per month.To achieve this profit objective, what level of sales (in units and in dollars, per month) must be achieved if the tax rate is 35% (roundup to nearest whole unit)? 5.What is the degree of operating leverage (DOL) of a typical sandwich shop at the volume level needed to achieve a targeted before-tax profit (i.e., an operating income) of $2,000 per month? Round your answer to 2 decimal places. 6.From the sales volume level needed to achieve the monthly pre-tax profit goal of $2,000, what would be the percentage change in pre-tax (i.e., operating) income if sales increased by 5%?

Staley Co. manufactures electronic equipment. The following is a summary of its basic cost and revenue data:Assume that Staley Co. is currently selling 600 products per month and monthly fixed costs are $80,000. Staley Co.'s operating income (πB) is calculated to be:

The breakeven point is:

The non-profit University Hospital is contemplating purchasing a new laboratory blood analysis machine at a cost of $1,500,000. Useful life of this machine is 10 years. The hospital currently serves 5,000 patients per year, 40 percent of whom need this machine's analysis as part of the diagnostic tests. The patient's blood samples are presently sent to a private laboratory that charges $150 per sample. In-house variable expenses are estimated to be $85 per sample if the hospital purchases the analysis machine. Required Round your answers up, to the nearest whole number. 1. Determine the indifference point (expressed in number of tests per year) between purchasing the machine and using the private laboratory. 2. Determine how many additional patients would be needed so that the hospital would be indifferent between purchasing the analysis machine and paying the $150 lab charge. 3. Determine the amount of the private laboratory charge so that the hospital would be indifferent as to purchasing the machine or using the private laboratory, assuming the current service level of 5,000 patients per year.