b.Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and percent.
2.The company has just developed a new product to be called Samoan Delight. Assume that the company could sell 12,000 units at $17.50 each. The variable expenses would be $14.00 each. The company’s fixed expenses would not change.
a.Prepare another contribution format income statement, including sales of the Samoan Delight (sales of the other two products would not change).
b.Compute the company’s new break-even point in dollars and the new margin of safety in both dollars and percent.
3.The president of the company examines your figures and says, “There’s something strange here. Our fixed costs haven’t changed and you show greater total contribution margin if we add the new product, but you also show our break-even point going up. With greater contribution margin, the break-even point should go down, not up. You’ve made a mistake somewhere.” Explain to the president what has happened.
PROBLEM 6–24 Interpretive Questions on the CVP Graph (LO2, LO6)
A CVP graph such as the one shown below is a useful technique for showing relationships among an organization’s costs, volume, and profits.
1. Identify the numbered components in the CVP graph.
2. State the effect of each of the following actions on line 3, line 9, and the break-even point. For line 3 and line 9, state whether the action will cause the line to:
Have a steeper slope (i.e., rotate upward).
Have a flatter slope (i.e., rotate downward).
Shift upward and have a steeper slope.
Shift upward and have a flatter slope.
Shift downward and have a steeper slope.
Shift downward and have a flatter slope.
In the case of the break-even point, state whether the action will cause the break-even point to:
Probably change, but the direction is uncertain.
Treat each case independently.
x. Example. Fixed costs are reduced by $5,000 per period.
Answer (see choices above): Line 3: Shift downward.
Line 9: Remain unchanged.
Break-even point: Decrease.
a. The unit selling price is decreased from $22 to $20.
b. Unit variable costs are increased from $10 to $12.
c. Fixed costs are decreased by $5,000 per period.
d. Three thousand fewer units are sold during the period than were budgeted.
e. Due to paying salespersons a commission rather than a flat salary, fixed costs are reduced
by $10,000 per period and unit variable costs are increased by $5.
f. Due to a decrease in the cost of materials, both unit variable costs and the selling price are decreased by $2.
g. Advertising costs are decreased by $7,000 per period, resulting in a 5% decrease in the number of units sold.
h. Due to automating an operation previously done by workers, fixed costs are increased by $14,000 per period and unit variable costs are reduced by $6.
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