Warren%20SMChap19_04_ - CHAPTER 19(FIN MAN CHAPTER 4(MAN...

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143 CHAPTER 19 (FIN MAN); CHAPTER 4 (MAN) COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS EYE OPENERS 1. Total variable costs vary in direct proportion to changes in the level of activity. Unit vari- able costs remain the same with changes in the level of activity. 2. a. Variable costs b. Variable costs c. Variable costs 3. a. Total fixed costs remain the same as the level of activity increases. b. Unit fixed costs decrease as the level of activity increases. 4. a. Fixed costs b. Fixed costs c. Fixed costs 5. Mixed costs are separated into their fixed and variable cost components. 6. (b) 7. (a) 8. (b) 9. The total variable cost (variable cost per unit times total units produced) at either the highest or lowest level of production is de- termined, and this amount is subtracted from the total cost at that level to determine the total fixed cost. 10. a. No impact on the contribution margin. b. Income from operations would decrease. 11. A high contribution margin ratio, coupled with idle capacity, indicates a potential for increased income from operations if addi- tional sales can be made. A large percent- age of each additional sales dollar would be available, after providing for variable costs, to cover promotion efforts and to increase income from operations. Thus, a substantial sales promotion campaign should be con- sidered in order to expand sales to maxi- mum capacity and to take advantage of the low ratio of variable costs to sales. 12. Decreases in unit variable costs, such as a decrease in the unit cost of direct materials, will decrease the break-even point. 13. Increases in total fixed costs will increase the break-even point. 14. Austin Company had lower fixed costs and a higher percentage of variable costs to sales than did Hill Company. Such a situation re- sulted in a lower break-even point for Austin Company. 15. CVP analysis depends on five primary as- sumptions. They are (1) total sales and total costs can be represented by straight lines; (2) within the relevant range of operating ac- tivity, the efficiency of operations does not change; (3) costs can be accurately divided into fixed and variable components; (4) the sales mix is constant; and (5) there is no change in the inventory quantities during the period. 16. The individual products are treated as com- ponents of one overall enterprise product. These components are weighted by the sales mix percentages. 17. Operating leverage measures the relative mix of a business’s variable costs and fixed costs. It is computed as follows: = Operations from Income Margin on Contributi Operating Leverage
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144 PRACTICE EXERCISES PE 19–1A (FIN MAN); PE 4–1A (MAN) a. $20 per unit = ($380,000 – $140,000)/(18,000 – 6,000) b. $20,000 = $380,000 – ($20 × 18,000), or $140,000 – ($20 × 6,000) PE 19–1B (FIN MAN); PE 4–1B (MAN) a. $50 per unit = ($200,000 – $150,000)/(2,500 – 1,500) b. $75,000 = $200,000 – ($50 × 2,500), or $150,000 – ($50 × 1,500) PE 19–2A (FIN MAN); PE 4–2A (MAN)
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Warren%20SMChap19_04_ - CHAPTER 19(FIN MAN CHAPTER 4(MAN...

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