Which of the following will result in raising the breakeven point?
Answer(s): B
The BEP equals fixed cost divided by the UCM (selling price -- unit variable cost). An increase in semivariable costs increases fixed costs and/or variable costs. An increase in either will raise the BEP. If fixed costs increase, more units must be sold, assuming the same UCM, to cover the greater fixed costs. If variable costs increase, the UCM will decrease and again more units must be sold to cover the fixed costs.
A company's breakeven point in sales dollars may be affected by equal percentage increases in both selling price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage changes in selling price and variable cost per unit will cause the breakeven point in sales dollars to
Answer(s): D
The BEP in sales dollars is equal to the fixed cost divided by the CMR. Accordingly, equal percentage changes in selling price and variable cost per unit will not affect the BEP in sales dollars. For example, assume the unit price of a product is $1 and its unit variable cost is $.60. The CMR equals 40% [($1 -- $.60) UCM ÷,$1 unit price]. If fixed cost is $100, the BEP in sales dollars is $250 ($100 ÷ 40%). Raising the selling price and variable cost by 20% to $1.20 and $.72, respectively, leaves the CMR at4O% ($48 ÷ $1.20). Similarly, lowering the selling price and variable cost to $.80 and $48, respectively, also leaves the CMR at 40% ($.32_÷$.80).
Two companies produce and sell the same product in a competitive industry. Thus, the selling price of the product for each company is the same. Company 1 has a contribution margin ratio of 40% and fixed costs of $25 million. Company 2 is more automated, making its fixed costs 40% higher than those of Company 1. Company 2 also has a contribution margin ratio that is 30% greater than that of Company 1. By comparison, Company 1 will have the <List A> breakeven point in terms of dollar sales volume and will have the <List B> dollar profit potential once the indifference point in dollar sales volume is exceeded.
Answer(s): A
Company 1's breakeven point is lower because its fixed costs are lower. Company 1's breakeven point is $62,500,000 ($25,000,000 ÷ 40%). Company 2's breakeven point is $67,307,692 [($25,000,000 x I A) ÷ (40% x 1 .3)]. The indifference point, at which dollar profits are equal, is $83,333,333 ($25,000,000 + .60X = 35,000,000 + .48X). Once the indifference point is passed, Company 1 will make lower profits than Company 2 because Company 2 has a higher contribution margin.
Which of the following is a characteristic of a contribution income statement?
The contribution income statement emphasizes the distinction between fixed and variable costs. Making this distinction facilitates determination of CVP relationships and the effects of changes in sales volume on income. Thus, fixed manufacturing costs and other fixed costs are separated from variable manufacturing costs and other variable costs. The basic categories in the contribution income statement are variable costs, contribution margin, fixed costs, and operating income.
The breakeven point in units increases when unit costs
The breakeven point in units is calculated by dividing the fixed costs by the contribution margin per unit. If selling price is constant and costs increase, the unit contribution margin will decline, resulting in an increase of the breakeven point.
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