Review Questions

I. Cost behavior defined

The left column lists several cost classifications. The right column presents short definitions of those costs. In the blank space beside each of the numbers in the right column, write the letter of the cost best described by the definition.

II. Contribution margin and breakeven

Apollo Company manufactures a single product that sells for $168 per unit and whose total variable costs are $126 per unit. The company's annual fixed costs are $630,000.

Use this information to compute the company's (a). Contribution margin,
(b). Contribution margin ratio, (c). Break-even point in units,
(d). Break-even point in dollars of sales.

III. Computing sales to achieve target income

Apollo Company management (in problem II) targets an annual after-tax income of $840,000. The company is subject to a 20% income tax rate. Assume that fixed costs remain at $630,000. Compute the (1) unit sales to earn the target after-tax net income and (2) dollar sales to earn the target after-tax net income.

IV. CVP analysis using composite units

Home Builders sells windows and doors in the ratio of 8:2 (windows:doors). The selling price of each window is $100 and of each door is $250. The variable cost of a window is $62.50 and of a door is $175. Fixed costs are $450,000.

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.

V. CVP analysis using weighted-average contribution margin

Using the information from IV above, determine the (1) weighted- average contribution margin,
(2) break-even point in units, and (3) number of units of each product that will be sold at the break-even point.

VI. Contribution margin income statement and contribution margin ratio

The following costs result from the production and sale of 4,000 drum sets manufactured by Vince Drum Company for the year ended December 31, 2013. The drum sets sell for $250 each. The company has a 25% income tax rate.

Variable production costs
    Plastic for casing........................................ $68,000
    Wages of assembly     workers.................................................... 328,000
    Drum stands................................................ 104,000

Variable selling costs
    Sales commissions......................................... 60,000

Fixed manufacturing costs
    Taxes on factory.................................................. 10,000
    Factory maintenance............................................... 20,000
    Factory machinery depreciation.................................... 80,000

Fixed selling and administrative costs
    Lease of equipment for sales staff................................. 20,000
    Accounting staff salaries.......................................... 70,000
    Administrative management salaries................................ 150,000

1. Prepare a contribution margin income statement for the company.
2. Compute its contribution margin per unit and its contribution margin ratio.

VII. Break-even analysis, different cost structures, and income calculations

Letter Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.

1. Compute the break-even point in dollar sales for each product.
2. Assume that the company expects sales of each product to decline to 33,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown with columns for each of the two products (assume 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings.

3. Assume that the company expects sales of each product to increase to 64,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products. (Assume a 32% tax rate.)

VIII. Cost behavior estimation - high-low method

The following information is available for a company's maintenance cost over the last seven months.

1. Using the high-low method, estimate both the fixed and variable components of its maintenance cost.

2. Show the cost function formula for monthly maintenance costs.