CVP analysis requires costs to be categorized as

MULTIPLE CHOICE

1. CVP analysis requires costs to be categorized as _______. (Points : 1)

2. According to CVP analysis, a company could never incur a loss that exceeded its total _______. (Points : 1)

3. CVP analysis is based on concepts from _______. (Points : 1)

4. Which of the following factors is involved in studying cost-volume-profit relationships? (Points : 1)

5. After the level of volume exceeds the break-even point _______. (Points : 1)

6. The method of cost accounting that lends itself to break-even analysis is _______. (Points : 1)

7. Given the following notation, what is the break-even sales level in units?
SP = selling price per unit, FC = total fixed cost, VC = variable cost per unit
(Points : 1)

8. To compute the break-even point in units, which of the following formulas is used? (Points : 1)

9. Below is an income statement for Thompson Company. Based on the cost and revenue structure on the income statement, below, what was Thompson's break-even point in dollars?
Sales $400,000
Variable costs (125,000)
Contribution margin $275,000
Fixed costs (200,000)
Profit before taxes $ 75,000
(Points : 1)

10. Unique Company manufactures a single product. In the prior year, the company had sales of $90,000, variable costs of $50,000, and fixed costs of $30,000. Unique expects its cost structure and sales price per unit to remain the same in the current year, however total sales are expected to increase by 20 percent. If the current year projections are realized, net income should exceed the prior year's net income by _______. (Points : 1)

11. Which of the following is not a characteristic of relevant costing information? It is _______. (Points : 1)

12. Relevant costs are _______. (Points : 1)

13. If a cost is irrelevant to a decision, the cost could not be _______. (Points : 1)

14. A cost is sunk if it _______. (Points : 1)

15. In deciding whether an organization will keep an old machine or purchase a new machine, a manager would ignore the _______. (Points : 1)

16. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is _______. (Points : 1)

17. In a make or buy decision, the opportunity cost of capacity could _______. (Points : 1)

18. When a scarce resource, such as space, exists in an organization, the criterion that should be used to determine production is _______. (Points : 1)

19. Fixed costs are ignored in allocating scarce resources because _______. (Points : 1)

20. The minimum selling price that should be acceptable in a special order situation is equal to total _______. (Points : 1)

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(Break-even and other CVP relationships) Cedars Hospital has average revenue of $180 per patient day

3. Break-even and other CVP relationships

Cedars Hospital has average revenue of $180 per patient day. Variable costs are $45 per patient day; fixed costs total $4,320,000 per year.

a. How many patient days does the hospital need to break even?
b. What level of revenue is needed to earn a target income of $540,000?
c. If variable costs drop to $36 per patient day, what increase in fixed costs can be tolerated without changing the break-even point as determined in part (a)?

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(ACC 561 EXCEL Application Exercise 2-65 CVP and Break-Even) Phonetronix is a small manufacturer of telephone and communications devices

ACC 561

4. Individual Assignment: Practice Text Exercises

• Complete the following problem sets from the Introduction to Management Accounting text:

EXCEL Application Exercise, CVP and Break-Even, on p. 89
2-65 CVP and Break-Even
Goal: Create an Excel spreadsheet to perform CVP analysis and show the relationship between price, costs, and break-even points in terms of units and dollars. Use the results to answer questions about your findings.
Scenario: Phonetronix is a small manufacturer of telephone and communications devices. Recently, company management decided to investigate the profitability of cellular phone production. They have three different proposals to evaluate. Under all the proposals, the fixed costs for the new phone would be $110,000. Under proposal A, the selling price of the new phone would be $99 and the variable cost per unit would be $55. Under proposal B, the selling price of the phone would be $129 and the variable cost would remain the same.
Under proposal C, the selling price would be $99 and the variable cost would be $49.
When you have completed your spreadsheet, answer the following questions:
1. What are the break-even points in units and dollars under proposal A?
2. How did the increased selling price under proposal B impact the break-even points in
units and dollars compared to the break-even points calculated under proposal A?
3. Why did the change in variable cost under proposal C not impact the break-even points
in units and dollars as significantly as proposal B did?
Step-by-Step:
1. Open a new Excel spreadsheet.
2. In column A, create a bold-faced heading that contains the following:
Row 1: Chapter 2 Decision Guideline
Row 2: Phonetronix
Row 3: Cost-Volume-Profit (CVP) Analysis
Row 4: Today’s Date
3. Merge and center the four heading rows across columns A through D.
4. In Row 7, create the following bold-faced, right-justified column headings:
Column B: Proposal A
Column C: Proposal B
Column D: Proposal C
Note: Adjust cell widths when necessary as you work.
5. In Column A, create the following row headings:
Row 8: Selling price
Row 9: Variable cost
Row 10: Contribution margin
Row 11: Contribution margin ratio
Skip a row
Row 13: Fixed cost
Skip a row
Row 15: Break-even in units
Skip a row
Row 17: Break-even in dollars
6. Use the scenario data to fill in the selling price, variable cost, and fixed cost amounts
for the three proposals.
7. Use the appropriate formulas from this chapter to calculate contribution margin,
contribution margin ratio, break-even in units, and break-even in dollars.
8. Format all amounts as:
Number tab: Category: Currency
Decimal places: 0
Symbol: None
Negative numbers: Red with parenthesis
9. Change the format of the selling price, contribution margin, fixed cost, and break-even
in dollars amounts to display a dollar symbol.
10. Change the format of both contribution margin headings to display as indented:
Alignment tab: Horizontal: Left (Indent)
Indent: 1
11. Change the format of the contribution margin amount cells to display a top border,
using the default line style.
Border tab: Icon: Top Border
12. Change the format of the contribution margin ratio amounts to display as a percentage
with two decimal places.
Number tab: Category: Percentage
Decimal places: 2
13. Change the format of all break-even headings and amounts to display as bold-faced.
14. Activate the ability to use heading names in formulas under Tools ? Options:
Calculation tab: Check the box: Accept labels in formulas
15. Replace the cell-based formulas with “word-based” equivalents for each formula used
in Proposal A.
Example: Contribution margin for proposal B would be:
= (‘Selling price’ ‘Proposal B’) - (‘Variable cost’ ‘Proposal B’)
Note: The tic marks used in the example help avoid naming errors caused by data having similar titles (i.e., “contribution
margin” and “contribution margin ratio”). The parentheses help clarify groupings.
Help: Ask the Answer Wizard about “Name cells in a workbook.”
Select “Learn about labels and names in formulas” from the right-hand panel.
16. Save your work to a disk, and print a copy for your files.

Click here for the solution: (ACC 561 EXCEL Application Exercise 2-65 CVP and Break-Even) Phonetronix

ACC 561 Question 2-61, CVP in a Modern Manufacturing Company

ACC 561
4. Individual Assignment: Practice Text Exercises

• Complete the following problem sets from the Introduction to Management Accounting text:
Question 2-61, CVP in a Modern Manufacturing Company, on p. 87

A division of Hewlett-Packard Company changed its production operations from one where a large labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures. Improvements in quality, reliability, and flexibility of production schedules were necessary just to match competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets:

Old Production Operation Old Production Operation
Unit variable cost
Material $0.88 $0.88
Labor $1.22 0.22
Total per unit $2.10 $1.10
Monthly fixed costs
Rent and depreciation 450,000.00 $875,000.00
Supervisory labor 80,000.00 175,000.00
Other 50,000.00 90,000.00
Total per month $580,000.00 $1,140,000.00

Expected volume is 600,000 units per month, with each unit selling for $3.10 Capacity is 800,000 units.

1. Compute the budgeted profit as the expected volume of 600,000 units under both the old and the new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3 .Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments.
4 .Discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.
5 .Comment on the riskiness of the new operation versus the old operation.
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ACC 561 Question 2-48 CVP and Financial Statements for a Mega-Brand Company

ACC 561
Axia College of University of Phoenix (UoP)
Introduction to Management Accounting
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2008). Introduction to Management Accounting (14th ed.). Upper Saddle River, New Jersey: Pearson-Prentice Hall.

4. Individual Assignment: Practice Text Exercises
• Complete the following problem sets from the Introduction to Management Accounting text:
Question 2-48, CVP and Financial Statements for a Mega-Brand Company, on p. 82


Question 2-48 CVP and Financial Statements for a Mega-Brand Company, on p. 82
Procter & Gamble Company is a Cincinnati-based company that produces household products under brand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company’s 2006 income statement showed the following (in millions):
Net sales $68,222
Costs of products sold 33,125
Selling, general, and administrative expense 21,848
Operating income $13,249
Suppose that the cost of products sold is the only variable cost; selling, general, and administrative expenses are fixed with respect to sales.
Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no change in costs except for increases associated with the higher volume of sales. Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase. Explain why the percentage increase in income differs from the percentage increase in sales.

 Click here for the solution: ACC 561 Question 2-48 CVP and Financial Statements for a Mega-Brand Company