The change in period-to-period operating income when using variable costing can be explained by the change in the
Answer(s): C
In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales, especially when the UCM (selling price per unit--variable costs per unit) is constant. Unit sales times the UCM equals the total CM, and operating income (a pretax amount) equals the CM minus fixed costs of operations. If the UCM is constant and fixed costs are stable, the change in operating income will approximate the change in the CM (UCM x unit sales).
What is the breakeven point in units for a product that sells for $10 if fixed costs are $4,000 and variable costs are 20%?
Answer(s): B
The breakeven point is where profit is zero and sales = fixed costs + variable costs, so 1 4,000 + 2x. Thus, 8x = 4,000, or x = 500 units. Alternatively, dividing the $4,000 of fixed costs by the $8 per unit contribution margin gives the same result.
Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:Madengrad's income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years.If Madengrad Company achieves a sales and production volume of 8.000 units, the annual before-tax income (loss) will be
Answer(s): A
At a volume of 8000 units, sales will be $7,200,000 (8000 units x $900). Variable costs will ,be $4,800,000 (8,000 units x $600). Thus. the contribution margin is $2,400,000. Deducting the $6,600,000 of fixed 9costs from the contribution margin leaves a net loss of $4,200,000.
Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:Madengrad's income tax rate is4O%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years.The annual sales volume required for Madengrad Company to break even is
The formula for the breakeven point in units divides the fixed costs by the unit contribution margin ($900 selling price -- $600 variable costs $300). Hence, the breakeven point is 22,000 units ($6,600,000 + 300).
Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:Madengrad's income tax rate is 40% and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years.For Madengrad Company to achieve an after-tax net income of $540,000, annual sales revenue must be
The formula for the breakeven point in sales divides fixed costs by the contribution margin percentage. The contribution margin percentage is 33 1/3% [$300 unit contribution margin ($900 selling price -- $600 variable costs) + $900 selling price]. The after-tax income specified is $540000, which is equal to 60% (1 .0 -- A tax rate) of the before-tax income. Consequently, the before-tax income needed is $900,000 ($540,000 + .6). This amount may be treated as a fixed cost for the purpose of the formula. The breakeven point in sales dollar is therefore $22,500,000 [($6,600,000 + $900,000) + 33 1/3%].
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