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# Quiz 3 Key

1. When the level of activity increases within the relevant range, how does each of the following change? A. B. C. D. Choice A Choice B Choice C Choice D

2.

The following is Alsatia Corporation's contribution format income statement for last month:

The company has no beginning or ending inventories and produced and sold 10,000 units during the month. Required: a. What is the company's contribution margin ratio? b. What is the company's break-even in units? c. If sales increase by 100 units, by how much should net operating income increase? d. How many units would the company have to sell to attain target profits of \$225,000? e. What is the company's margin of safety in dollars? f. What is the company's degree of operating leverage?

a. CM ratio CM ratio = Contribution margin Sales \$1,400,000 = 0.357 = \$500,000 b. Break-even units

Unit sales to break even = Fixed expenses/Unit CM = \$300,000/(\$140-\$90) = \$300,000/\$50 = 6,000 units c. Increase in net operating income from additional sales of 100 units

d. Unit sales to attain target profit = (Target profit + Fixed Expenses)/Unit CM = (\$225,000+\$300,000)/\$50 = 10,500 units

2 Break-even sales = \$140 per unit x 6,000 units = \$840,000 Margin of safety in dollars = Sales - Break-even sales = \$1,400,000 - \$840,000 = \$560,000

e. Margin of safety in dollars Break-even sales = \$140 per unit x 6,000 units = \$840,000 Margin of safety in dollars = Sales - Break-even sales = \$1,400,000 - \$840,000 = \$560,000 f. Degree of operating leverage = Contribution margin Net operating income = \$500,000 \$200,000 = 2.5 3. Magers Corporation produces and sells a single product. Data concerning that product appear below:

Required: Determine the monthly break-even in either unit or total dollar sales. Show your work!

Unit sales to break even = Fixed expenses/Unit CM = \$214,720/\$97.60 = 2,200 Dollar sales to break even = Fixed expenses/CM ratio = \$214,720/0.61 = \$352,000

5.

Giaquinto Corporation reports that at an activity level of 7,600 units, its total variable cost is \$182,856 and its total fixed cost is \$444,296. Required: For the activity level of 7,900 units, compute: (a) the total variable cost; (b) the total fixed cost; (c) the total cost; (d) the average variable cost per unit; (e) the average fixed cost per unit; and (f) the average total cost per unit. Assume that this activity level is within the relevant range.

6.

Tanner Company's most recent contribution format income statement is presented below:

The company sells its only product for \$15 per unit. There were no beginning or ending inventories. Required: a. Compute the company's break-even point in units sold. b. Compute the total variable expenses at the break-even point. c. How many units would have to be sold to earn a target profit of \$9,000? d. The sales manager is convinced that a \$6,000 increase in the advertising budget would increase total sales by \$25,000. Would you advise the increased advertising outlay?

## a. CM ratio = \$30,000 \$36,000 \$90,000

\$75,000 = 0.40

0.40 = \$90,000 break-even sales \$15 per unit = 6,000 units to break even. \$75,000 = 0.60

## b. Variable expense ratio = \$45,000

\$90,000 sales x 60% variable expense ratio = \$54,000 c. (\$9,000 + \$36,000) 0.40 = \$112,500 \$112,500 \$15 per unit = 7,500 units d.

## Yes, the advertising budget should be increased.

7.

Mateo Company's average cost per unit is \$1.425 at the 16,000 unit level of activity and \$1.38 at the 20,000 unit level of activity. Assume that all of the activity levels mentioned in this problem are within the relevant range. Required: Predict the following items for Mateo Company: a. Variable cost per unit. b. Total fixed cost per period. c. Total expected costs at the 18,000 unit level of activity.

8.

The Central Valley Company is a merchandising firm that sells a single product. The company's revenues and expenses for the last three months are given below:

Required: a. Determine which expenses are mixed and, by use of the high-low method, separate each mixed expense into its variable and fixed components. State the cost formula for each mixed expense. b. Compute the company's total contribution margin for May.

a. The cost of goods sold for this company is a variable cost and is \$56 per unit. The Shipping Expense and the Salaries and Commissions Expense are mixed. All other expenses are constant for each of the months shown and are therefore fixed. Shipping Expense: (\$71,000 - \$56,000)/(6,000 - 4,500) = \$15,000/1,500 = \$10 per unit \$56,000 - (4,500 x \$10) = \$11,000 Cost formula = \$11,000 per month plus \$10 per unit Salaries and Commissions: (\$180,500 - 143,000)/(6,000 - 4,500) = \$37,500/1,500 = \$25 per unit \$143,000 - (4,500 x \$25) = \$30,500 Cost formula = \$30,500 per month plus \$25 per unit

9.

Unified Parcel, Inc., operates a local parcel delivery service. The company keeps detailed records relating to operating costs of trucks, and has found that if a truck is driven 110,000 miles per year the operating cost is 7.5 cents per mile. This cost increases to 8.75 cents per mile if a truck is driven 60,000 miles per year. Required: Estimate the cost formula for truck operating costs using the high-low method.

Total cost at high level of activity: 110,000 x \$0.075 = \$8,250 Total cost at low level of activity: 60,000 x \$0.0875 = \$5,250

Variable cost = Change in cost Change in activity 50,000 miles = \$0.06 per mile = \$3,000 Fixed cost element = \$8,250 - (\$0.06 per mile x 110,000 miles) = \$1,650 The cost formula is \$1,650 per year plus \$0.06 per mile.

10.

Rawlings Company prepared the following budget information for the coming year:

The budget assumes the sale of 20,000 units of A, 100,000 units of B, and 80,000 units of C. Required: a. What is the company's break-even point given the sales mix above? b. If the budgeted sales mix is maintained, what is the total contribution margin and net operating income if 300,000 units are sold?

a.

## Unit sales to break even = Fixed expenses

CM Ratio = \$255,000

27% = \$944,444

b. Per unit contribution margins for Products A, B, and C are as follows: Product A: \$60,000 Product B: \$200,000 Product C: \$80,000 20,000 units = \$3 per unit 100,000 units = \$2 per unit 80,000 units = \$1 per unit

Product mix for Products A, B, and C: Product A: 20,000 Product B: 100,000 Product C: 80,000 (20,000 + 100,000 + 80,000) = 10% (20,000 + 100,000 + 80,000) = 50% (20,000 + 100,000 + 80,000) = 40%

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