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Free CMA Exam Braindumps (page: 85)

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Associated Supply, Inc. is considering introducing a new product that will require a $250,000 investment of capital. The necessary funds would be raised through a bank loan atan interest rate of 8%. The fixed operating costs associated with the product would be $122,500, while the contribution margin percentage would be 42%. Assuming a selling price of $15 per unit, determine the number of units (rounded to the nearest whole unit) Associated would have to sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the new product.

  1. 35,318 units.
  2. 32,143 units.
  3. 25,575 units.
  4. 23,276 units.

Answer(s): B

Explanation:

Associated has determined it must generate EBIT equal to 32% of the capital invested in this project, or $80,000 ($250,000 x 32%). The number of units it must produce to achieve this level of EBIT can be derived as follows:



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Delphi Company has developed a new project that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented as follows Delphi is subject to a40% income tax rate.


The number of units of the new product that Delphi Company must sell during the next fiscal year in order to break even is

  1. 20.930
  2. 18,140
  3. 22,500
  4. 25,500

Answer(s): C

Explanation:

The breakeven point in units equals fixed costs divided by the unit contribution margin (in 1dollars). The unit contribution margin is $20 ($36 selling price --$16 unit variable cost). Hence, the breakeven point equals 22,500 units ($450,000 ÷ $20).



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Delphi Company has developed a new project hat will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacily to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented as follows. Delphi is subject to a40% income tax rate.



The maximum after-tax profit that can be earned by Delphi Company from sales of the new product during the next fiscal year is

  1. $30,000
  2. $50,000
  3. $110,000
  4. $66,000

Answer(s): A

Explanation:

Delphi Company has developed a new project that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented as follows. Delphi is subject to a 40% income tax rate.



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Delphi Company's management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least $75,000 the first year. The unit selling price to achieve this target profit must be at least

  1. $37.00
  2. $36.60
  3. $34.60
  4. $39.00

Answer(s): D

Explanation:

lf X represents the necessary selling price, 25,000 equals maximum sales volume, $16 is the variable cost per unit, $450,000 is the total fixed cost, and $125,000 [$75,000 target after-tax profit + (1.0-- .4 tax rate)] is the desired pre-tax profit, the following formula may be solved to determine the requisite unit price:






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