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Exam 4: Cost-Volume-Profit Analysis

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Question 41

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When performing cost-volume-profit analysis with multiple products, it is assumed that the sales mix remains constant, even when a different number of total units are expected to be sold.

A) True
B) False

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Question 42

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Mixed costs are also referred to as semivariable costs.

A) True
B) False

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Question 43

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The high-low method calculates the total fixed cost as the

Firms have no control over their level of operating leverage.

Why is the level of operating leverage important?

In order to use CVP analysis, costs must be separated into fixed and variable components.

Hanalei Fishing Trips is operating at its break-even point of 4,200 fishing trips per year. Which of the following statements is true?

Splurge Electronics sells homework machines for $80 each. Variable costs per unit are $45 and total fixed costs are $43,750. Splurge is considering the purchase of new equipment that would increase fixed costs to $48,700, but decrease the variable costs per unit by $5. At that level, Splurge Electronics expects it can sell 1,500 units next year. What is the company's break-even point in units if it purchases the new equipment, assuming the selling price remains constant? (Round your answer to the nearest whole number.)

Total costs and activity are assumed to have a linear relationship within the relevant range.

The high-low method fits a straight line to the data points that represent the highest and lowest cost levels of a particular activity.

Talk Time Cellular sells smart phones for $150. The unit variable cost per phone is $25 plus a selling commission of 10%. Fixed manufacturing costs total $5,600 per month, while fixed selling and administrative costs total $2,100. What is the contribution margin per phone?

Variable cost per unit

Total fixed costs divided by the contribution margin ratio equals the break-even point in sales revenue.

CVP analysis for companies that sell more than one product assumes that the contribution margin ratio for all products is the same.

Regression analysis

Angel Toys is a producer of tiny dolls for children. Following is information about its revenue and cost structure: $\begin{array}{ll}\text { Selling price per doll }&\$8.00\\\text { Variable costs per doll: }\\\text { Production (manufacturing costs) } & \$ 1.20 \\\text { Selling and administration (non-manufacturing costs) } & \$ 0.40\\\text { Total fixed costs: }\\\text { Production (manufacturing costs) }&\$ 40,000 \text { per year }\\\text { Selling and administration (non-manufacturing costs) }&\$ 32,000 \text { per year }\end{array}$ Assume that sales are expected to fall from 14,000 units this year to 13,000 units next year. Angel Toys would like to raise the selling price next year from the current $8.00 per unit to achieve the same profits next year as the current year. What will the sales price have to be next year, to generate the same profits next year as this year?

The account analysis approach to estimating fixed and variable costs

Contribution margin is the difference between revenue and total costs.

Holding all other factors constant, the break-even point will decline if

A significant weakness of the high-low method is that the two data points chosen may not be representative of the relationship between cost and activity.