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CVP questions

9. What is the basic C-V-P equation? What is a more detailed version of this equation?

10. What is the contribution margin, and why is it important for managers to know the contribution margins of their products?

11. How much will profits increase for every unit sold over the break-even point?

12. What is the major advantage of using C-V-P graphs?

13. When other factors are constant, what is the effect on profits of an increase in fixed costs? Of a decrease in variable costs?

14. What are the limiting assumptions of C-V-P analysis?

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b. Chapter 16: Practice Exercises 16-13, 16-14, and 16-17

Practice 16-13 The C-V-P Equation
The company sells lawnmowers for $895 each. The variable cost per lawnmower is $520. The company's monthly fixed costs are $84,500. Using the C-V-P equation, compute the amount of profit the company will have for a month in which the company sells 375 lawnmowers.

Practice 16-14 Break-Even Units
The company sells shovels for $27.75 each. The variable cost per shovel is $14.25. The company's monthly fixed costs are $2,538. Compute the number of shovels the company must sell to break even.

Practice 16-17 Break-Even Sales Revenue
The company has a variable cost ratio of 65% and monthly fixed costs of $91,000. What is the company's break-even point in terms of sales dollars?

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c. Chapter 16: Exercise 16-17 (Note this is different from Practice Exercise 16-17 above!)

Exercise 16-17 C-V-P Analysis
The Last Outpost is a tourist stop in a western resort community. Kerry Yost, the owner of the shop, sells hand-woven blankets for an average price of $30 per blanket. Kerry buys the blankets from weavers at an average cost of $21. In addition, he has selling expenses of $3 per blanket. Kerry rents the building for $300 per month and pays one employee a fixed salary of $500 per month.
1. Determine the number of blankets Kerry must sell to break even.
2. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.
3. Assume that Kerry can produce and sell his own blankets at a total variable cost of $16 per blanket, but that he would need to hire one additional employee at a monthly salary of $600.
a. Determine the number of blankets Kerry must sell to break even.
b. Determine the number of blankets Kerry must sell to generate a profit of $1,000 per month.

d. Chapter 22: Exercises 22-2 and 22-3

Exercise 22-2 Importance of Manufacturing Overhead Allocation
The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows:

Based on this information, which of these three companies would probably improve its product costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.

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Exercise 22-3 Product Cost Hierarchy
For the following list of costs, indicate by the appropriate letter which category of activities each
cost applies to: unit level (U), batch level (B), product line (P), or facility support (F):

a. Machine fine-tuning adjustment cost (required after the production of each unit)
b. Salary of vice president of finance
c. Machine inspection cost (required after the completion of each day's production)
d. Cost of the external audit firm
e. Direct labor
f. Product testing cost (performed at the start of each day's production)
g. Direct materials
h. Factory security cost
i. Machine straight-line depreciation cost (Generally, machines are dedicated to producing a particular type of product.)
j. Warehousing cost (Each type of product has its own warehouse.)
k. Employee training cost (Training is generally specific to different types of products.)

See attached file for full problem description.

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9. What is the basic C-V-P equation? What is a more detailed version of this equation?

The basic CVP equation is
Profit = Total Contribution Margin - Fixed Costs
The detailed version of the equation is
Profits = Total revenues - Total Variable Costs - Fixed Costs

10. What is the contribution margin, and why is it important for managers to know the contribution margins of their products?

Contribution Margin is the amount available after the variable costs have been accounted for. Contribution margin is calculated by subtracting the variable costs from the revenues. It is important to know about the contribution margin, since the contribution margin tells a manager if a product is profitable. A product, which does not even meet its variable costs, is no use selling. With the fixed costs not changing, a positive contribution margin is also worth selling. The contribution margin is also the amount available for setting off the fixed costs and getting a profit.
Thus the contribution margin is a vital tool in deciding the price of a product as also in making a decision whether to sell or not.

11. How much will profits increase for every unit sold over the break-even point?

At the breakeven point, all fixed costs have been accounted for. Beyond the breakeven, after accounting for variable costs, all increase will go to profits. The increase in profit would be equal to the contribution margin per unit per each unit sold beyond the breakeven.

12. What is the major advantage of using C-V-P graphs?

A CVP graph looks as shown below

A CVP graph is made with units on the x-axis and dollars on the y-axis. The major advantage is that the graph gives and insight into the behavior of costs and profits. Looking at the graph, we can make out the breakeven point, the profit and losses made at various level of sales.

13. When other factors are constant, what is the effect on profits of an increase in fixed costs? Of a decrease in variable costs?

An increase in fixed costs will increase the breakeven point. More number of units would be ...

Solution Summary

The solution has various questions relating to CVP analysis

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