QUESTION: 370 Topic 6: Part 2 Sec Six (318 to 450)

A company that sells its single product for $40 per unit uses cost-volume-profit analysis in its planning. The company's after4ax net income for the past year was $1,188,000 after applying an effective tax rate of 40%. The projected costs for manufacturing and selling its single product in the coming year are in the next column.

The company has learned that a new direct material is available that will increase the quality of its product. The new material will increase the direct material costs by $3 per unit. The company will increase the selling price of the product to $50 per unit and increase its marketing costs by $1 .575,000 to advertise the higher-quality product. The number of units the company has to sell in order to earn a 10% before-tax return on sales would be

337,500 units.
346875 units.
425,000 units.
478,125 units.

Answer(s): D

Explanation:

Pretax net income (10% of dollar sales) equals dollar sales (unit sales x $50), minus total fixed costs (increased by $1 575,000 of marketing costs), minus total variable costs (increased by $3 per unit). Unit sales (5) therefore equal 478,125 units.

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QUESTION: 371 Topic 6: Part 2 Sec Six (318 to 450)

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Green Company produces Product A and sells it for $18.00. The following cost data apply:

Green has thought of marketing a new Product B with the same cost structure as Product A except that the price will be $15.60. Green Company currently has the plant capacityr necessary for this expansion. Because of the cost structure, Green Company will find the production and sale of Product B in the short run to be

Not profitable unless the price can be raised to $17.10.
Not profitable at any price.
Not profitable at $15.60 because the fixed selling expense and fixed manufacturing overhead will not be covered by the price.
Profitable to produce and sell Product B in the short run at the price of $15.60.

Answer(s): D

Explanation:

With excess capacity, production is profitable if the incremental revenues are greater than the incremental costs. Here, the incremental costs equal total costs minus any fixed costs ($17.10 -- $1 .50 -- $2.20 = $13.40). If Product B can be sold for a price greater than $13.40. Short-run production will be profitable. Long-run profit ability, however, will depend on fixed costs as well as variable costs and sales price.

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QUESTION: 372 Topic 6: Part 2 Sec Six (318 to 450)

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Orange Company's controller developed the following direct-costing income statement for Year 1:

Orange Co. based its next year's budget on the assumption that fixed costs, unit sales, and the sales price would remain as they were in Year 1, but with net income being reduced to $300,000. By July of Year 2, the controller was able to predict that unit sales would increase over Year 1 levels by 10%. Based on the Year 2 budget and the new information, the predicted Year 2 net income would be

$300,000
$330,000
$420,000
$585,000

Answer(s): C

Explanation:

Projected net income is estimated total revenue minus estimated total costs. Given the original assumption that FC, unit sales, and sales price remain the same, and that net income will be reduced, the variable costs must increase. If the JulyYear2 prediction that unit sales will increase by 10% from 150,000 to 165,000 is based on the budgeted PC, sales price, and VC, predicted net income will increase from $300,000 to $420,000.

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QUESTION: 373 Topic 6: Part 2 Sec Six (318 to 450)

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Moorhead Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of $1 .00 per machine hour. The sales manager has had a $160,000 increase in the budget allotment for adverbsing and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company's customers.

Suppose the sales manager chooses to devote the entire $160,000 to increased advertising for XY-7, The minimum increase in sales units of XY-7 required to offset the increased advertising is

640,000 units.
160,000 units.
128,000 units.
80,000 units.

Answer(s): B

Explanation:

The contribution margin (CM) for XY-7 is $1 per unit ($4 sales price --$3 variable costs). Thus, 160,000 units of XY-7 will generate an additional $160,000 of CM, which is sufficient to cover the increase in adverting cost

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QUESTION: 370 Topic 6: Part 2 Sec Six (318 to 450)

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QUESTION: 371 Topic 6: Part 2 Sec Six (318 to 450)

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QUESTION: 372 Topic 6: Part 2 Sec Six (318 to 450)

Explanation:

QUESTION: 373 Topic 6: Part 2 Sec Six (318 to 450)

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