ACCT 130 – Principles of Management Accounting

Spring 2024, S1
Practice Sheet 4 – Chapter 5 CVP

MCQs:
1. A company has fixed costs of $900 and a per-unit contribution margin of $3. Which of the
following statements is true?
A. Each unit "contributes" $3 toward covering the fixed costs of $900.
B. Once the break-even point is reached; the company will increase income at the rate of $3 per
unit.
C. The firm will definitely lose money in this situation.
D. Each unit "contributes" $3 toward covering the fixed costs of $900 and once the break-
even point is reached, the company will increase income at the rate of $3 per unit.

2. Arthur's Plumbing reported the following:

Revenues $4,500
Variable manufacturing costs $900
Variable nonmanufacturing costs $810
Fixed manufacturing costs $620
Fixed nonmanufacturing costs $545
The contribution margin would be:
A. $3,600
B. $2,980
C. $2,790
D. $1,710

3. Brooklyn sells a single product to wholesalers. The company's budget for the upcoming year
revealed anticipated unit sales of 31,600, a selling price of $20, variable cost per unit of $8, and
total fixed costs of $360,000. If Brooklyn's unit sales are 200 units less than anticipated, its
breakeven point will:
A. increase by $12 per unit sold.
B. decrease by $12 per unit sold.
C. increase by $8 per unit sold.
D. decrease by $8 per unit sold.
E. not change.

4. Sales in North Corporation increased from $60,000 per year to $63,000 per year while net
operating income increased from $10,000 to $12,000. Given this data, the company's degree of
operating leverage must have been:
A. 4.0
B. 1.5
C. 5.0
D. 21.0

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5. O'Dale sells three products: R, S, and T. Budgeted information for the upcoming accounting
period follows.
Product Sales Volume (units) Selling Price Variable Cost
R 16,000 $14 $9
S 12,000 $10 $6
T 52,000 $11 $8

The company's weighted-average unit contribution margin is:

A. $3.00.
B. $3.55.
C. $4.00.
D. $19.35.
E. None of the other answers is correct.

6. Edmonco Company produced and sold 45,000 units of a single product last year, with the
following results:
Sales $1,350,000

Manufacturing Costs:
Variable $585,000
Fixed $270,000

Selling Costs:
Variable $40,500
Fixed $54,000

Administrative Costs:
Variable $184,500
Fixed $108,000

If Edmonco's sales revenues increase 15%, what will be the percentage increase in income before
income taxes?
A. 15%.
B. 45%.
C. 60%.
D. 75%.
E. None of the other answers is correct.

Answer questions the next two questions using the information below:

The following information is for Alex Corp:

Product X: Revenue $15.00 Variable Cost $2.50
Product Y: Revenue $25.00 Variable Cost $10.00
Total fixed costs $50,000

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7. What is the breakeven point assuming the sales mix consists of two units of Product X and one
unit of Product Y?
A) 1,000 units of Y and 2,000 units of X
B) 1,113 units of Y and 2,025 units of X
C) 2,313 units of Y and 4,025 units of X
D) 1,250 units of Y and 2,500 units of X

8. What is the operating income, assuming actual sales total 150,000 units, and the sales mix is
two units of Product X and one unit of Product Y?
A) $1,950,000
B) $1,850,000
C) $1,750,000
D) $2,150,000

Short Computational:

1. Digital Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling
commission of 10% of selling price. Fixed manufacturing costs total $1,250 per month, while
fixed selling and administrative costs total $2,500. How many phones must be sold to earn pre-
tax income of $7,500?

Solution:
CM per unit = $100 - $50 - $100*10% = $40 per unit
Target Profit units = ($7500 + $1,250 + $2,500)/ $40 = 281.25 ~ 282 units

2. Bee-Max Enterprises has prepared the following budget for the month of September:
Selling Variable Unit
price per unit cost per unit sales
Product A ............... $10.00 $4.00 15,000
Product B ............... $15.00 $8.00 20,000
Product C ............... $18.00 $9.00 5,000

Assuming that total fixed expenses will be $150,000 and the sales mix remains
constant, what would be the break-even point in dollars?

Solution:
A B C Total
Sales (SP/unit * units) $ 150,000 $ 300,000 $ 90,000 $ 540,000
CM (CM/unit * units) $ 90,000 $ 140,000 $ 45,000 $ 275,000
WACM ratio (CM/Sales) 0.509259259

Fixed Costs $150,000

WACM ratio 0.509259259
BE ($) $294,545.45

OR

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Product Sales Mix Unit CM $ WA Unit CM $ BE units BE unit *SP
A 37.5% 6 2.25 8,181.82 81,818.18
B 50.0% 7 3.5 10,909.09 163,636.36
C 12.5% 9 1.125 2,727.27 49,090.91
6.875 *21,818.18 294,545.45

*BE units for company = $150,000/$6.875 = 21,818.18 unit, then calculate the BE units for each
product using the sales mix

3. Moruzzi Corporation is a single-product company that expects the following operating results
for next year:
Sales ........................................................... $320,000
Contribution margin per unit ..................... $0.20
Contribution margin ratio .......................... 25%
Degree of operating leverage .................... 8

How many units would Moruzzi have to sell next year to break-even?

Solution:
CM = $320,000 * 25% = $80,000
NOI = CM/DOL = $80,000/8 = $10,000
FC = CM – NOI = $80,000 - $10,000 = $70,000
BE units = FC/CM per unit = $70,000/0.2 = 350,000

4. A company sells its product for $6.00 per unit. Fixed expenses total $37,500 per month and
variable expenses are $2.00 per unit. What is the number of units that must be sold each month to
realize a profit of 15% of sales?

Solution:
Unit sales to attain a target profit = (Target profit + Fixed expenses) ÷ Unit CM
Q = [(0.15 × $6 per unit × Q) + $37,500] ÷ ($6 per unit - $2 per unit)
Q = [(0.15 × $6 per unit × Q) + $37,500] ÷ $4 per unit
$4.00 per unit × Q = ($0.90 per unit × Q) + $37,500
$3.10 per unit × Q = $37,500
Q = $37,500 ÷ $3.10 per unit = 12,097 units

5. A company produces and sells a single product with a selling price of $180 per unit and
variable cost of $36 per unit. Fixed expenses are $716,000 per month and the company is
currently selling 6,000 units per month.

a. The marketing manager would like to cut the selling price by $17 and increase the advertising
budget by $42,000 per month. The marketing manager predicts that these two changes would
increase monthly sales by 1,000 units. What should be the overall effect on the company's
monthly net operating income of this change?

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b. Using original data, assume that another marketing report has indicated that the company has
under-priced its product compared to its competitors. The marketing manager predicts that just
by increasing the selling price the net operating income can be improved. By what percentage
would the selling price need to be increased, in order to improve the net operating income by
15%?

Solution:
a. Change in NOI = Change in CM +/- Change in FC
= ($180-$17-$36)*7,000 – ($180-$36)*6,000 – $42,000 = $17,000 decrease

b. Current NOI = $144*6,000 - $716,000 = $148,000

As there is no change in FC, Change in NOI = Change in CM

15%*$148,000 = $CM/unit* 6,000
Change in CM/unit = $3.7
New SP = $180+$3.7 = 183.7/unit
% change in SP = $3.7/$180 = 2%

Long form Problems:

Question 1:
Baker Company has a product that sells for $20 per unit. The variable expenses are $12 per unit,
and fixed expenses total $30,000 per year.

Required:
a. What is the total contribution margin at the break-even point?
b. What is the contribution margin ratio for the product?
c. If total sales increase by $20,000 and fixed expenses remain unchanged, by how much would
net operating income be expected to increase.
d. The marketing manager wants to increase advertising by $6,000 per year. How many
additional units would have to be sold to increase overall net operating income by $2,000?

Solution:
a. At the break-even, the total contribution margin equals total fixed expenses. Therefore, the
total contribution margin would be $30,000.

b. Contribution margin ratio =Unit contribution margin ÷ Selling price

= ($20 - $12) ÷ $20 = 40%

c. Increase in sales ....................................... $20,000

CM ratio .................................................. 40%
Increase in net operating income ............. $8,000

d. Increase in advertising expenses ................... $6,000

Desired increase in net operating income ..... 2,000
Total required contribution margin ............... $8,000

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÷ Contribution margin per unit ...................... $8
Required additional unit sales ........................................ 1,000

Question 2:

Next year, Coma Paint Company expects to sell 18,000 gallons of paint. Coma is budgeting the
following operating results for next year:
Sales .............................................. $270,000
Variable expenses .......................... 108,000
Contribution margin ...................... 162,000
Fixed expenses .............................. 90,000
Net operating income .................... $ 72,000

Required:
a. What is Coma's break-even point next year in sales dollars?
b. How many gallons of paint would Coma have to sell next year in order to double its
projected net operating income of $72,000?
c. Assume that Coma wants to sell 20,000 gallons next year. What minimum selling price
would Coma have to charge for each gallon in order to still obtain its projected net
operating income of $72,000?

Solution:
a. At break even point, FC=CM= $90,000
CM ratio = $162,000/$170,000 = 60%
BE $ = $90,000/0.6 = $150,000

b. Q = (Target profit + FC) / Unit CM

= ($72,000 * 2 + $90,000) / ($162,000/18,000)
= 26,000 gallons

c. Profit = Sales – VC – FC
$72,000 = SP * 20,000 – ($108,000 * 20,000/18,000) - $90,000
SP = $14.1 per unit

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Question 3:

Spring Company offers two products. At present, the following represents the usual
results of a month's operations:
Product K Product L
Per Per Combined
Amount Unit Amount Unit Amount

Sales revenue $120,000 $1.20 $80,000 $0.80 $200,000

Variable expenses $60,000 $0.60 $60,000 $0.60 $120,000
Contribution margin $60,000 $0.60 $20,000 $0.20 $80,000
Fixed expenses $50,000
Net operating income $ 30,000

Required:
a. Find the break-even point in terms of dollars.
b. Find the margin of safety in terms of dollars.
c. The company is considering decreasing product K's unit sales to 80,000 and increasing
product L's unit sales to 180,000, leaving unchanged the selling price per unit, variable expense
per unit, and total fixed expenses. Would you advise adopting this plan?
d. Refer to (c) above. Under the new plan, find the break-even point in terms of dollars.
e. Under the new plan in (c) above, find the margin of safety in terms of dollars.
f. Refer to (d) above. Why did the break-even point in dollars change?

Solution:
Note:
Sales mix using units: 50% K + 50% L
Sales mix using sales $: 60% K + 40% L

The weightage of sales mix changes slightly using sales $, as each product has a different selling
price. So, in order to calculate BE sales units and allocate the BE units to each product, we need
the sales mix using units and in order to calculate BE sales $ and allocate the BE sales to each
product, we need the sales mix using the sales $.

*Side calculations:
WA unit CM = $0.6*50% + $0.2*50% = $0.4/unit
WA CM ratio = $80/$200, 000 = 40%
or
WA CM ratio = ($0.6/$1.20)*60% + ($0.2/$0.8)*40% = 40%

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 34,000

f. The break even point in dollars changed for the worse because the company decided to shift the sales
mix in favour of Product L which has a lower contribution margin (25%) than Product K (50%), thereby,
decreasing the overall weighted contribution margin of the company to 35% compared to 40% in part a,
and increasing the break-even point in dollars.
Terminology Formula
1. Profit Equation for a single product (Unit CM × Q) – Fixed expenses
2. Profit Equation for one or more (CM ratio x Sales) – Fixed expenses
products
3. BE sales in units Fixed expenses / Unit CM
4. BE sales in $ Fixed expenses / CM ratio
5. Sales in units to obtain target profit (Target profit + Fixed expenses) / Unit CM
6. Sales in $ to obtain target profit (Target profit + Fixed expenses) / CM ratio
7. WA Unit CM in a multi-product Unit CM(A) * Sales Mix% +Unit CM(B) * Sales Mix %
company *sales mix based on units sold
8. WA CM Ratio in a multi- product CM Ratio(A) * Sales Mix% + CM Ratio(B) * Sales Mix%
company *sales mix based on $ sales
Company Contribution Margin in $/ Company Sales in $