ACC 533

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Answers: Chapter 9

COST-VOLUME-PROFIT ANALYSIS: A MANAGERIAL PLANNING TOOL

ANSWERS TO QUESTIONS:  [TOP]

1.

CVP analysis allows managers to focus on prices, volume, costs, profits, and sales mix. Many different "what if" questions can be asked to assess the effect on profits of changes in key variables.

2.

The units-sold approach defines sales volume in terms of units of product and gives answers in these same terms. The sales-revenue approach defines sales volume in terms of revenues and provides answers in these same terms.

3.

Break-even point is the level of sales activity where total revenues equal total costs, or where zero profits are earned.

4.

At the break-even point, all fixed costs are covered. Above the break-even point, only variable costs need to be covered. Thus, contribution margin per unit is profit per unit, provided that the unit selling price is greater than the unit variable cost (which it must be for breakeven to be achieved).

5.

Profit = $7.00 x 5,000 = $35,000.

6.

Variable cost ratio = Variable costs/Sales. Contribution margin ratio = Contribution margin/Sales. Contribution margin ratio = 1 - Variable cost ratio.

7.

Break-even revenues = $20,000/0.4 = $50,000.

8.

No. The increase in contribution is $9,000 (0.3 x $30,000), and the increase in advertising is $10,000.

9.

Sales mix is the relative proportion sold of each product. For example, a sales mix of 3:2 means that three units of one product are sold for every two of the second product.

10.

Packages of products, based on the expected sales mix, are defined as a single product. Price and cost information for this package can then be used to carry out CVP analysis.

11

Package contribution margin: (2 x $10) + (1 x $5) = $25. Break-even point = $30,000/$25 = 1,200 packages or 2,400 units of A and 1,200 units of B.

12

Profit = 0.6($200,000 - $100,000) = $60,000.

13

A change in sales mix will change the contribution margin of the package (defined by the sales mix) and, thus, will change the units needed to break even.

14

Margin of safety is the sales activity in excess of that needed to break even. The higher the margin of safety, the lower the risk.

15.

Operating leverage is the use of fixed costs to extract higher percentage changes in profits as sales activity changes. It is achieved by increasing fixed costs while lowering variable costs.

16.

Sensitivity analysis is a "what if" technique that examines the impact of changes in underlying assumptions on an answer. A company can input data on prices, variable costs, fixed costs, and sales mix and set up formulas to calculate break-even points and expected profits. Then the data can be varied as desired to see what impact changes have on the expected profit.

17.

By specifically including the costs that vary with nonunit drivers, the impact of changes in the nonunit drivers can be examined. In traditional CVP, all nonunit costs are lumped together as "fixed costs." While the costs are fixed with respect to units, they vary with respect to other drivers. ABC analysis reminds us of the importance of these nonunit drivers and costs.

18.

JIT simplifies the firm's cost equation since more costs are classified as fixed (e.g., direct labour). Additionally, the batch‑level variable is gone (in JIT the batch is one unit). Thus, the cost equation for JIT includes fixed costs, unit variable cost times the number of units, and unit product-level cost times the number of products (or related cost driver).

19.

The profit would be equal to 2P because cost and revenue relationships are roughly linear in the relevant range.