Chapter 18: 4DQ (page 832)
How is cost-volume-profit analysis useful?
Answer
CVP analysis helps evaluate various business strategies by reflecting the business position under each alternative strategy. Break-even analysis is also performed under CVP analysis.
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Google uses variable costing for several business decisions. How can variable costing income be converted to absorption costing income?
Aces Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. Each racket was sold at a price of \(90. Fixed overhead costs are \)78,000, and fixed selling and administrative costs are \(65,200. The company also reports the following per unit costs for the year. Prepare an income statement under variable costing.
Variable production cost | \)25 |
Variable selling and administrative expenses | $2 |
Determine whether each of the following is best described as a fixed, variable, or mixed cost with respect to product units.
1. Rubber used to manufacture athletic shoes. | 5. Factory supervisor’s salary |
2. Maintenance of factory machinery | 6. Taxes on factory building |
3. Packaging expenses | 7. Depreciation expenses of warehouse |
4. Wages of an assembly line worker paid on the basis of acceptable units produced. |
Singh Co. reports a contribution margin of \(960,000 and fixed costs of \)720,000. (1) Compute the company’s degree of operating leverage. (2) If sales increase by 15%, what amount of income will Singh Co. report?
In performing CVP analysis for a manufacturing company, what simplifying assumption is usually made about the volume of production and the volume of sales?
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