Module15and16Solutions

Financial & Managerial Accounting for MBAs 2nd

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©Cambridge Business Publishers, 2010 Solutions Manual, Module 13 13-1 Module 15 COST-VOLUME-PROFIT ANALYSIS AND PLANNING QUESTIONS Q15-1. Cost-volume-profit analysis is a technique used to examine the relationships among the total volume of some independent variable, total costs, total revenues, and profits during a time period. It is particularly useful in the early stages of planning when it provides a framework for discussing planning issues. Q15-2. The important assumptions that underlie cost-volume-profit analysis are: 1. All costs are classified as fixed or variable with unit-level activity cost drivers. 2. The total cost function is linear within the relevant range. 3. The total revenue function is linear within the relevant range. 4. The analysis is for a single product, or the sales mix of multiple products is constant. 5. There is only one activity cost driver: unit or dollar sales volume. Q15-3. The use of a single variable in cost-volume-profit analysis is most reasonable when analyzing the profitability of a specific event or the profitability of an organization that produces a single product or service on a continuous basis. Q15-4. In a contribution income statement, costs are classified according to behavior as variable or fixed, and the contribution margin (the difference between total revenues and total variable costs) that goes toward covering fixed costs and providing a profit is emphasized. In a functional income statement, costs are classified according to function (rather than behavior), such as manufacturing and selling and administrative. This is the type of income statement typically included in corporate annual reports.
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Q15-5. The unit contribution margin is equal to the difference between the unit selling price and the unit variable costs. In computing the unit break-even point, the fixed costs are divided by the unit contribution margin. Q15-6. The contribution margin ratio is the portion of each dollar of sales revenue contributed toward covering fixed costs and earning a profit. It is especially useful in situations involving several products or when unit sales information is not available. Q15-7. The desired profit is added to the fixed costs, increasing the sales volume required to cover both. Q15-8. A profit-volume graph contains only one line showing the relationship between volume and profits, while a cost-volume-profit graph contains two lines – one for total revenues and one for total costs. A profit-volume graph is most likely to be used when management is primarily interested in the impact on profits of changes in sales volume and less interested in the related revenues and costs. Q15-9. Income taxes increase the sales volume required to earn a desired after-tax profit. Q15-10. Other things being equal, the higher the degree of operating leverage, the greater the opportunity for profit with increases in sales. Conversely, a higher degree of operating leverage magnifies the risk of large losses with a decrease in sales.
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©Cambridge Business Publishers, 2010
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Module15and16Solutions - Module 15 COST-VOLUME-PROFIT...

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