The Smith Company produces two products: 158-D and 074-J. 158-D accounts for 35% of
Smith’s total sales revenue, while 074-J accounts for the remainder. The variable cost for 158-D is 45% of
its selling price, while 074-J’s variable cost is 55% of its selling price. If Smith’s fixed costs are $250,000,
what is the company’s total breakeven revenue?
Detailed Answer
Correct answer: (B)
Product 158-D accounts for 35% of total sales revenue and its contribution margin ratio is (1 − 0.45),
or 0.55. Product 074-J accounts for 65% of total sales revenue, and its contribution margin ratio is (1 −
0.55), or 0.45. Therefore, the weighted average contribution margin ratio of the product mix is: (0.35 × 0.55)
+ (0.65 × 0.45) = 0.485. Thus, the breakeven sales revenue for the two products together is: $250,000 ÷
0.485 = $515,464.
2
Gleason Co. has two products ready for
introduction, a frozen dessert and ready-to-bake breakfast rolls. However, plant capacity is limited, and
only one product can be introduced at present. Therefore, Gleason has conducted a market study at a
cost of $26,000 to determine which product will be more profitable. The results of the study follow.
Sales of Desserts
Sales of Rolls
at $1.80/unit
at $1.80/unit
Volume
Probability
Volume
Probability
250,000
0.30
200,000
0.20
300,000
0.40
250,000
0.50
350,000
0.20
300,000
0.20
400,000
0.10
350,000
0.10
The costs associated with the two products have been estimated by Gleason’s cost accounting department
and are shown as follows.
Dessert
Rolls
Ingredients per unit
$ 0.40
$ 0.25
Direct labor per unit
0.35
0.30
Variable overhead per unit
0.40
0.20
Production tooling*
$48,000
$25,000
Advertising
$30,000
$20,000
* Production tooling is treated as a current operating expense rather than capitalizing it.
According to Gleason’s market study, the expected value of the sales volume of the
breakfast rolls is:
Detailed Answer
Correct answer: (B)
The expected value is calculated by taking the probability of each result and multiplying it by that
result. The resulting products are summed to calculate the expected value, as follows: (200,000 × 0.2) +
(250,000 × 0.5) + (300,000 × 0.2) + (350,000 × 0.10) = 260,000 units as the expected value of the sales
volume.
3
Gleason Co. has two products ready for
introduction, a frozen dessert and ready-to-bake breakfast rolls. However, plant capacity is limited, and
only one product can be introduced at present. Therefore, Gleason has conducted a market study at a
cost of $26,000 to determine which product will be more profitable. The results of the study follow.
Sales of Desserts
Sales of Rolls
at $1.80/unit
at $1.80/unit
Volume
Probability
Volume
Probability
250,000
0.30
200,000
0.20
300,000
0.40
250,000
0.50
350,000
0.20
300,000
0.20
400,000
0.10
350,000
0.10
The costs associated with the two products have been estimated by Gleason’s cost accounting department
and are shown as follows.
Dessert
Rolls
Ingredients per unit
$ 0.40
$ 0.25
Direct labor per unit
0.35
0.30
Variable overhead per unit
0.40
0.20
Production tooling*
$48,000
$25,000
Advertising
$30,000
$20,000
* Production tooling is treated as a current operating expense rather than capitalizing it.
Applying a deterministic approach, Gleason’s revenue from sales of frozen desserts would
be:
Detailed Answer
Correct answer: (B)
Under the deterministic approach we simply choose the possible outcome that has the highest
probability. The volume of frozen dessert sales with the greatest probability of occurring is 300,000 units.
Since the question asks for the revenue, we need to multiply 300 units by the sales price of $1.80. The
resulting most probable revenue using the deterministic approach is $540,000.
4
Gleason Co. has two products ready for
introduction, a frozen dessert and ready-to-bake breakfast rolls. However, plant capacity is limited, and
only one product can be introduced at present. Therefore, Gleason has conducted a market study at a
cost of $26,000 to determine which product will be more profitable. The results of the study follow.
Sales of Desserts
Sales of Rolls
at $1.80/unit
at $1.80/unit
Volume
Probability
Volume
Probability
250,000
0.30
200,000
0.20
300,000
0.40
250,000
0.50
350,000
0.20
300,000
0.20
400,000
0.10
350,000
0.10
The costs associated with the two products have been estimated by Gleason’s cost accounting department
and are shown as follows.
Dessert
Rolls
Ingredients per unit
$ 0.40
$ 0.25
Direct labor per unit
0.35
0.30
Variable overhead per unit
0.40
0.20
Production tooling*
$48,000
$25,000
Advertising
$30,000
$20,000
* Production tooling is treated as a current operating expense rather than capitalizing it.
The expected value of Gleason’s operating profit directly traceable to the sale of frozen
desserts is:
Detailed Answer
Correct answer: (C)
The expected value of the operating profit of frozen desserts is calculated by first determining the
expected value of the sales volume for frozen desserts. (250,000 × 0.3) + (300,000 × 0.4) + (350,000 ×
0.2) + (400,000 × 0.10) = 305,000 units as the expected value of the sales volume. The price of frozen
desserts is $1.80, and with variable costs of $1.15 per unit, the contribution per unit is $0.65. The expected
volume of 305,000 units multiplied by the unit contribution margin of $0.65 equals a total contribution of
$198,250. Subtracting from $198,250 the fixed costs and advertising costs ($78,000 in total) we get an
operating profit from desserts of $120,250.
5
Gleason Co. has two products ready for
introduction, a frozen dessert and ready-to-bake breakfast rolls. However, plant capacity is limited, and
only one product can be introduced at present. Therefore, Gleason has conducted a market study at a
cost of $26,000 to determine which product will be more profitable. The results of the study follow.
Sales of Desserts
Sales of Rolls
at $1.80/unit
at $1.80/unit
Volume
Probability
Volume
Probability
250,000
0.30
200,000
0.20
300,000
0.40
250,000
0.50
350,000
0.20
300,000
0.20
400,000
0.10
350,000
0.10
The costs associated with the two products have been estimated by Gleason’s cost accounting department
and are shown as follows.
Dessert
Rolls
Ingredients per unit
$ 0.40
$ 0.25
Direct labor per unit
0.35
0.30
Variable overhead per unit
0.40
0.20
Production tooling*
$48,000
$25,000
Advertising
$30,000
$20,000
* Production tooling is treated as a current operating expense rather than capitalizing it.
In order to recover the costs of production tooling and advertising for the breakfast rolls,
Gleason’s sales of the breakfast rolls would have to be:
Detailed Answer
Correct answer: (B)
For breakfast rolls the contribution margin per unit is $0.45 per unit ($1.20 − $0.75). The production
tooling and advertising total $45,000. Therefore, to cover the production tooling and advertising costs,
Gleason must sell 100,000 breakfast rolls ($45,000 ÷ $0.45).
6
Forelite Corporation is considering three new product lines but can invest in only one of the
three. The expected annual revenue and costs for each product line are shown below. All three product
lines are assumed to operate for the same length of time.
A
B
C
Units
10,000
12,000
15,000
Price/unit
$ 10
$ 10
$ 8
Variable cost/unit
4
5
6
Fixed costs
25,000
22,000
15,000
Recommend which product line Forelite should select to implement.
Detailed Answer
Correct answer: (B)
Investment B should be recommended because it will result in the highest operating income of the
three potential investments. Since all of the projects are assumed to operate for the same length of time, we
can simply calculate the operating income per unit for each product and then multiply the operating income
per unit by the total units for each product to find which product will be most profitable.
All the data except for fixed costs is on a per-unit basis. The fixed costs can be converted to per-unit costs by
dividing the fixed costs for each product by the number of units for each product, as follows: Product A:
$25,000 ÷ 10,000 = $2.50.
Product B: $22,000 ÷ 12,000 = $1.83.
Product C: $15,000 ÷ 15,000 = $1.00.
The operating income per unit for each product is:
A
B
C
Price per unit
$ 10.00
$ 10.00
$ 8.00
Variable cost per unit
4.00
5.00
6.00
Fixed cost per unit
2.50
1.83
1.00
Operating income per unit
$3.50
$3.17
$1.00
Expected volume
10,000.00
12,000.00
15,000.00
Total operating income
$35,000.00
$36,840.00
$15,000.00
Product B has the highest total operating income
7
KJCarter’s Used Cars would like to hire a new salesperson. There are 2 candidates who each
have different expectations regarding their compensation. One candidate would like to have a fixed salary
of $45,000 per year. The second candidate would like to be paid by a commission of 5% of sales. KJCarter
believes that the individual sales person has very little impact on the level of sales. At what level of
expected sales from this position would it not matter to Carter which salesperson is hired.
Detailed Answer
Correct answer: (B)
The two compensation plans simply need to be set equal to each other in this formula, where S is
equal to the level of sales:
0.05 S = $45,000
Solving for S we get $900,000. If the expected level of sales is $900,000, it does not matter who Carter hires.
If sales are expected to be more than $900,000 Carter is better off hiring the sales person who wants a fixed
salary. At an expected sales level of less than $900,000, the commissioned sales person would be preferable
8
Which of the following is correct? The break-even point occurs on the CVP graph where:
Detailed Answer
Correct answer: (C)
total contribution margin equals total fixed expenses.
9
If a company decreases its total fixed expenses while increasing the variable expense per unit, the total expense line relative to its previous position on a cost-volume-profit graph will:
Detailed Answer
Correct answer: (C)
shift downward and have a steeper slope.
10
East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?
Contribution margin per unit; Contribution margin ration
A)
B)
C)
D)
