When an organization is operating above the breakeven point, the degree or amount that sales may decline before losses are incurred is called the
Answer (C) is correct. The margin of safety is the excess of budgeted revenues over breakeven revenues. It is considered in sensitivity analysis.
Which one of the following is true regarding a relevant range?
Answer (B) is correct. The relevant range is the range of activity over which unit variable costs and total fixed costs are constant.
Positive operating income is shown on a cost-volume-profit chart when the
Answer (D) is correct. A cost-volume-profit chart contains elements (lines, points, axes) that identify variable cost, fixed cost, the breakeven point, total revenue, profit, and volume in units. When the total sales revenue line rises above the total expense line, a company will have positive net income.
Breakeven quantity is defined as the volume of output at which revenues are equal to
Answer (B) is correct. Breakeven quantity is defined as the volume of output at which revenues are equal to total costs.
All of the following are assumptions of cost-volume-profit analysis except
Answer (C) is correct. CVP analysis assumes the variable costs per unit are constant over the relevant range.
Blount, Inc., is considering discontinuing a certain product line if it does not have a margin of safety higher than 15%. The breakeven sales are $76,800, and the margin of safety is $13,200. Based on this information, the controller has recommended that Blount keep this product line. Did the controller make the appropriate decision?
Answer (C) is correct. The margin of safety ratio is the ratio of margin of safety (in dollars) to budgeted sales. In this question, budgeted sales are not given but can be calculated using the margin of safety (in dollars) formula and the values given in the question:
Margin of safety (in dollars) = Budgeted sales – Breakeven sales
$13200= Budgeted sales – $76800
Budgeted sales = $90000
Given the budgeted sales, the margin of safety ratio is 14.47% ($13,200 ÷ $90,000). Because this value does not exceed the 15% requirement, the controller did not make the appropriate decision.
Which one of the following would cause a profitable company’s margin of safety to decrease?
Answer (A) is correct. The margin of safety is the excess of budgeted sales over breakeven sales. It is the amount by which sales can decline before losses occur. If sales fall, the margin of safety will also fall.
Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product for each company is the same. Company 1 has a contribution margin ratio of 40% and fixed costs of $25 million. Company 2 is more automated, making its fixed costs 40% higher than those of Company 1. Company 2 also has a contribution margin ratio that is 30% greater than that of Company 1. By comparison, Company 1 will have the breakeven point in terms of dollar sales volume and will have the dollar profit potential once the indifference point in dollar sales volume is exceeded.
Answer (A) is correct. Company ’s breakeven point is lower because its fixed costs are lower. Company 1’s breakeven point is $62,500,000 ( 25,000,000 ÷ 40%). Company ’s breakeven point is $67,307,692 [($25,000,000 × 1.4) ÷ (40% × 1.3)]. The indifference point, at which dollar profits are equal, is $83,333,333 ($25,000,000 + .60X = $35,000,000 + .48X). Once the indifference point is passed, Company 1 will make lower profits than Company 2 because Company 2 has a higher contribution margin.
The breakeven point in units sold for Tierson Corporation is 44,000. If fixed costs for Tierson are equal to $880,000 annually and variable costs are $10 per unit, what is the contribution margin per unit for Tierson Corporation?
Answer (B) is correct. The breakeven point in units is equal to the fixed costs divided by the contribution margin per unit. Thus, the UCM is $20.00 ($880,000 ÷ 44,000 units).
How much does each additional sales dollar contribute toward profit for a firm with $4 million breakeven level of revenues and $1.2 million in fixed costs including depreciation?
Answer (A) is correct. The breakeven point in dollars equals total fixed costs divided by the contribution margin ratio. This firm’s CMR is 30% ($4,000,000 = $1,200,000 ÷ .30), so each additional sales dollar contributes $0.30 toward profit.