Chapter 20: Q2021RQ (page 1120)
What effect does an increase in sales price have on contribution margin? An increase in fixed costs? An increase in variable costs?
Answer
There is an inverse relationship between variable cost and contribution margin.
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A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has $6,000 in fixed costs per month.
6. Prepare a contribution margin income statement for one month if the company sells 200 tables.
7. What is the total contribution margin for the month when the company sells 200 tables?
8. What is the unit contribution margin?
9. What is the contribution margin ratio?
Question: Gilbert’s Steel Parts produces parts for the automobile industry. Thecompany has monthly fixed costs of \(640,220 and a contribution margin of85% of revenues.
Requirements
1. Compute Gilbert’s monthly breakeven sales in dollars. Use the contributionmargin ratio approach.
2. Use contribution margin income statements to compute Gilbert’s monthlyoperating income or operating loss if revenues are \)500,000 and if they are$1,050,000.
3. Do the results in Requirement 2 make sense given the breakeven sales youcomputed in Requirement 1? Explain.
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 is a fixed cost? Give an example.
Identifying variable, fixed, and mixed costs
Philadelphia Acoustics builds innovative speakers for music and home theater systems. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of speakers produced and sold.
1. Units of production depreciation on routers used to cut wood enclosures.
2. Wood for speaker enclosures.
3. Patents on crossover relays.
4. Total compensation to salesperson who receives a salary plus a commission based on meeting sales goals.
5. Crossover relays.
6. Straight-line depreciation on manufacturing plant.
7. Grill cloth.
8. Insurance on the corporate office.
9. Glue.
10. Quality inspector’s salary.
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