Question

82. Dundas Inc. manufactures a single product. The product sells for $10. The variable manufacturing cost per unit is $2 and the variable selling cost is $2 per unit. Dundas incurs monthly fixed costs of $100,000 for manufacturing and $140,000 for administration and selling If Dundas raises its selling price by 10% in response to a 10% increase in variable costs, and income taxes are 40%, its new breakeven point in sales dollars (relative to that of the original data above) will be: a) Higher b) Unchanged c) Lower d) Cannot be determined Answer: b Difficulty: Medium Learning Objective: Apply CVP calculations for a single product. CPA: Management Accounting 83. The breakeven point for a service organization will decrease if a) The variable cost ratio increases b) The mix of less profitable services increases c) The contribution margin ratio increases d) Fixed costs increase Answer: c Difficulty: Easy Learning Objective: Apply CVP calculations for a single product. 84. The breakeven point for a service organization will decrease if a) Volume increases b) The variable cost ratio decreases c) Fixed costs increase d) The contribution margin ratio decreases Answer: b Difficulty: Easy Learning Objective: Apply CVP calculations for a single

Answer 1

82.

First calculate the break even point before increase in Sales and Variable costs:

Break even point in sales dollars = Fixed Costs/Profit Volume Ratio

= ($100,000 + $140,000)/0.60

= $240,000/0.60

= $400,000

Hence, Break even point in sales dollars before increase in Sales and Variable Costs is $400,000.

Working Notes:

Contribution Margin Per Unit = Selling Price per unit - Variable cost per unit

= $10 - ($2 + $2)

= $10 - $4

= $6

Profit Volume Ratio = Contribution Margin Per Unit/Selling Price per unit*100

= $6/$10*100

= 60%

Now, calculate the break even point in sales dollars after considering the increase in Sales and Variable Costs:

Break even point in sales dollars = Fixed Costs/Profit Volume Ratio

= $240,000/0.60

= $400,000

Hence, Break even point in sales dollars after increase in Sales and Variable $400,000.

The break even point in sales dollars is same as before that is $400,000 only even after increase in sales and variable costs by 10%.

Therefore, the correction option is b) Unchanged.

As per HOMEWORKLIB RULES, the first question is answered. Please post the remaining questions separately.

Working Notes:

Contribution Margin Per Unit = Selling Price per unit - Variable cost per unit

= {$10 + ($10*10/100) - {$4 + $4*10/100)

= ($10 + $1) - ($4 + $0.40)

= $11 - $4.40

= $6.60

Profit Volume Ratio = Contribution Margin Per Unit/Selling Price per unit*100

= $6.60/$11*100

= 60%