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# Cost Analysis- Break Even Point

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1. Assume the following cost information for Marie Company:

Selling price per unit \$144
Variable costs per unit \$80
Total fixed costs \$80,000
Tax rate 40%

If fixed costs increased by 10% and management wanted to maintain the original break-even point, then the selling price per unit would have to be increased to:

a)\$158.40
b)\$208.00
c)\$150.40
d)\$155.20

2. Assume the following cost information for Zachary Company:

Selling price per unit \$144
Variable costs per unit \$80
Total fixed costs \$80,000
Tax rate 40%

________ must be sold to earn an after-tax net income of \$40,800.

a)3,700 units
b)2,313 units
c)1,594 units
d)1,063 units

3. Rampart Hospital has total variable costs of 90% of total revenues and fixed costs of \$50 million per year. There are 50,000 patient-days estimated for next year. What is the average daily revenue per patient necessary to breakeven?
a)\$1,000 is the average daily revenue per patient necessary to breakeven.
b)\$4,000 is the average daily revenue per patient necessary to breakeven.
c)\$250 is the average daily revenue per patient necessary to breakeven.
d)\$10,000 is the average daily revenue per patient necessary to breakeven.

4. ________ is how the activities of an organization affect its costs.
a)Cost behavior
b)Cost driver
c)Volume-related cost drivers
d)None of these answers is correct.

#### Solution Preview

1. Assume the following cost information for Marie Company:

Selling price per unit \$144
Variable costs per unit \$80
Total fixed costs \$80,000
Tax rate 40%

If fixed costs increased by 10% and management wanted to maintain the original break-even point, then the selling price per unit would have to be increased to:

contribution margin in first case = (144-80)=\$64
break even point = fixed costs/contribution margin = 80000/64=1250

Now revised fixed costs= 80000*1.1=88000
Contribution margin needed to make same break even = 88000/1250=70.4
Selling price = ...

#### Solution Summary

Solutions to three basic problems explain the steps needed in calculating break even point and sales needed to achieve a profit target.

\$2.19

## Benefits of Breakeven Analysis and Operating Leverage: formulas

Discuss and give examples of the following formulas that are used in breakeven analysis:

Contribution Margin Method - Breakeven in Units and Breakeven in Sales Dollars.

Targeted Profit Analysis - Targeted Profit in Units and Targeted Profit in Sales Dollars.

Margin of Safety - Margin of Safety in dollars and Margin of Safety Percentage.

How is Breakeven Analysis beneficial to Management and Planning? Is Breakeven Analysis very useful in sensitivity analysis? Discuss Operating Leverage. Is there any relationship between Breakeven Analysis and Operating Leverage? Discuss.

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