Chapter 18: Q6DQ (page 832)
Describe the contribution margin ratio in layperson’s terms.
The contribution margin is the portion of sales dollar remainingto cover the fixed cost and contribute to profit after deducting the variable cost.
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R&R Tax Service offers tax and consulting services to individuals and small businesses. Data for fees and costs of three types of tax returns follow. R&R provides services in the ratio of 5:3:2 (easy, moderate, business). Fixed costs total \(18,000 for the tax season. Use this information to determine the (1) selling price per composite unit, (2) variable costs per composite unit, (3) break-even point in composite units, and (4) number of units of each product that will be sold at the break-even point.
Types of return | Fee charged | Variable cost per return |
Easy (Form 1040EZ) | \)50 | $30 |
Moderate (Form 1040) | 125 | 75 |
Business | 275 | 100 |
Felix & Co. reports the following information about its unit sales and cost of sales. Draw an estimated line of cost behavior using a scatter diagram, and compute fixed costs and variable costs per unit sold. Then use the high-low method to estimate the fixed and variable components of the cost of sales.
Period | Unit | Cost of sales | Period | Unit | Cost of sales |
1 | 0 | \(2,500 | 6 | 2,000 | \)5,500 |
2 | 400 | 3,100 | 7 | 2,400 | 6,100 |
3 | 800 | 3,700 | 8 | 2,800 | 6,700 |
4 | 1,200 | 4,300 | 9 | 3,200 | 7,300 |
5 | 1,600 | 4,900 | 10 | 3,600 | 7,900 |
Refer to the information from Exercise 18-6. Use spreadsheet software to use ordinary least-squares regression to estimate the cost equation, including fixed and variable cost amounts.
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?
How is cost-volume-profit analysis useful?
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