Chapter 20: Q-23RQ (page 1120)
What is the margin of safety? What are the three ways it can be expressed?
Answer
Margin of safety is a cushion between profit and loss.
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Question: Determining total mixed cost
John Street Barber Shop pays \(25 per month for water for the first 8,000 gallons and \)3.50 per thousand gallons above 8,000 gallons. Calculate the total water cost when the barber shop uses 7,000 gallons, 10,000 gallons, and 13,000 gallons.
What are the three approaches to calculating the sales required to achieve the breakeven point? Give the formula for each one.
Why is the calculation to determine the target profit considered a variation of the breakeven calculation?
Analyzing a cost-volume-profit graph
Nolan Rouse is considering starting a Web-based educational business, e-Prep MBA. He plans to offer a short-course review of accounting for students entering MBA programs. The materials would be available on a password-protected Web site; students would complete the course through self-study. Rouse would have to grade the course assignments, but most of the work would be in developing the course materials, setting up the site, and marketing. Unfortunately, Rouse’s hard drive crashed before he finished his financial analysis. However, he did recover the following partial CVP chart:
Requirements
1. Label each axis, the sales revenue line, the total costs line, the fixed costs line, the operating income area, and the breakeven point.
2. If Rouse attracts 300 students to take the course, will the venture be profitable? Explain your answer.
3. What are the breakeven sales in students and dollars?
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
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