CVP Analysis and Marginal Analysis Paper 5

1

For one of its divisions, Buona Fortuna Company has fixed costs of $300,000 and a variable-cost percentage equal to 60% of its $10 per unit selling price. It would like to earn a pre-tax income of $90,000 per year from the division. What is the breakeven point in dollars?






2

Oak Fine Furnishings manufactures a wide range of home furnishings. One of their products is an oak headboard. The company currently sells 4,000 headboards at an average price of $100 per unit. To manufacture the headboards, the variable costs are $55 per unit and the total fixed cost assigned to the oak headboards is $150,000. If the sale of headboards increases by 50% and all else remains constant, this would result in






3

Dimmell has a potential foreign customer that has offered to buy 1,500 tons at $450 per ton. Assume that all of Dimmell’s costs would be at the same levels and rates as in Year 2. What net income would Dimmell make if it took this order and rejected some business from regular customers so as not to exceed capacity?






4

Kimbeth Carpet cleans carpets for residences and offices. It charges an average price of $100 to clean a standard room. The variable cost per room is $60, and the annual fixed costs are $80,000. The total fixed cost includes $20,000 of annual depreciation on the cleaning equipment. Given this information, how many rooms must Kimbeth clean to break even?






5

A company uses cost-volume-profit (CVP) analysis to evaluate a new product. The total fixed cost of production is $600,000. If the product would break even with 10,000 units sold per year, and the unit variable cost is $25, the unit selling price is






6

Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:
Direct labor $180
Direct materials 240
Factory overhead 105
Variable production costs 525
Marketing costs 75
Total variable costs $600
Madengrad’s income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years. For Madengrad Company to achieve an after-tax net income of $540,000, annual sales revenue must be






7

The data below pertain to the forecasts of XYZ Company for the upcoming year.
Total Cost Unit Cost
Sales (40,000 units) $1,000,000 $25
Raw materials 160,000 4
Direct labor 280,000 7
Factory overhead
Variable 80,000 2
Fixed 360,000
Selling and general expenses
Variable 120,000 3
Fixed 225,000
How many units does XYZ Company need to produce and sell to make a before-tax profit of 10% of sales?






8

The data below pertain to the forecasts of XYZ Company for the upcoming year.
Total Cost Unit Cost
Sales (40,000 units) $1,000,000 $25
Raw materials 160,000 4
Direct labor 280,000 7
Factory overhead
Variable 80,000 2
Fixed 360,000
Selling and general expenses
Variable 120,000 3
Fixed 225,000
Assuming that XYZ Company sells 80,000 units, what is the maximum that can be paid for an advertising campaign while still breaking even?






9

Associated Supply, Inc., is considering introducing a new product that will require a $250,000 investment of capital. The necessary funds would be raised through a bank loan at an interest rate of 8%. The fixed operating costs associated with the product would be $122,500, while the contribution margin percentage would be 42%. Assuming a selling price of $15 per unit, determine the number of units (rounded to the nearest whole unit) Associated would have to sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the new product.






10

BE&H Manufacturing is considering dropping a product line. It currently produces a multi-purpose woodworking clamp in a simple manufacturing process that uses special equipment. Variable costs amount to $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate of $3.50 a unit and will continue whether or not production ceases. Depreciation on the special equipment amounts to $20,000 a year. If production of the clamp is stopped, the special equipment can be sold for $18,000; if production continues, however, the equipment will be useless for further production at the end of 1 year and will have no salvage value. The clamp has a selling price of $10 a unit. Ignoring tax effects, the minimum number of units that would have to be sold in the current year to break even on a cash flow basis is






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