End of Chapter 3 Questions - Chapter 03 Analysis of Cost Volume and Pricing to Increase Profitability Home Metro State ACC 2020 Chap003 Answers to

End of Chapter 3 Questions - Chapter 03 Analysis of Cost...

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Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability Home Metro State ACC 2020 Chap003 Answers to Questions 1. Break-even is the point where total revenue is equal to total costs. It can be measured in units or sales dollars. 2. In the contribution margin income statement all variable costs are subtracted from sales revenues to de- termine the contribution margin before subtracting all fixed costs to derive profit. The traditional state- ment does not disclose contribution margin because cost of goods sold and operating expenses con- sist of both variable and fixed costs. 3. The contribution margin can be used to determine break-even for the number of units (volume) needed to be produced and sold or the total amount of sales dollars needed to be earned. The concept can also be used to determine the production and sales volume or sales dollars necessary to attain a target profit. Finally, the contribution margin can be used to measure the effects on profitability of changes in sales price, sales volume, fixed cost, variable costs, or simultaneous changes among these variables. 4. The margin of safety is the decrease in sales that can occur before experiencing a loss. The margin of safety expressed as a percentage would mean Company A’s actual sales could decline by only 22% be- low budgeted sales before the company reaches break-even and a greater decline would result in a loss. Company B sales would have to decline by more than 52% below budgeted sales to experience a loss. Accordingly, Company A is at greater risk of a loss when sales are less than budgeted. 5. The variables that affect profitability are sales price, volume, variable costs, and fixed costs. Two tech- niques for analyzing the relationships among these variables in order to estimate profitability are sensi- tivity analysis, performed by spreadsheet software that executes what-if statements, and the contribu- tion margin approach. 3-1
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Chapter 03 - Analysis of Cost, Volume, and Pricing to Increase Profitability 6. Customers are often willing to pay a premium price for a product that incorporates a new technology they would like to be the first to use, especially when there has been widespread advertising of the product. Products that carry a prestigious brand name are also likely to sell at a premium. Prestige pricing would be an appropriate pricing strategy for such products. Prestige pricing is pricing the prod- uct at a greater than average mark-up with the expectation that the increased demand will motivate cus- tomers to pay higher than average prices. Other examples are possible. 7. Three approaches for determining break-even are as follows: The per unit contribution margin approach shows break-even in units.
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