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Unformatted text preview: Chapter 7 CostVolumeProfit (CVP) Analysis Chapter Review Quiz Answers: 1. c 3. a 5. c 7. b 9. b 2. b 4. d 6. a 8. a 10. c Explanations: 1. c. $60 sale price $10 variable cost = $50 unit contribution margin Contribution margin ratio = $50 / $60 = 83.33% 2. b. Breakeven in dollars = $50,000 / .8333 = $60,000 (rounded) Breakeven in units = $50,000 / 50 = 1,000 units sales price per unit $60 Breakeven in dollars $60,000 3. a. If the railway sells 1,001 tickets, it has sold 1 more ticket than its breakeven point. Each ticket in excess of breakeven contributes its unit contribution margin to profit; therefore, the operating income will be $50. 4. d. ($50,000 + $100,000) / $50 = 3,000 tickets 5. c. The two lines intersect at breakeven. Chapter 7 CostVolumeProfit (CVP) Analysis 171 6. a. Margin of = Expected sales breakeven sales = 1,200 1,000 = 200 7. b. Contribution Margin (1,200 $50) = $60,000 Less: Fixed costs (50,000) Operating Income $10,000 Operating Leverage Factor = Contribution Margin / Operating Income $60,000 / $10,000 = 6 8.a. Operating income will decrease by 48% (the operating leverage factor of 6 multiplied by 8%) 9.b. The new contribution margin is $40 per unit, so the new breakeven point is: $50,000 / 40 = 1,250 passengers The old breakeven point was 1,000 passengers, so the breakeven point increases by 250 passengers as a result of the price cut. 10.c. The contribution margin per passenger will increase by $4 (because each passenger is expected to contribute another $4 of contribution margin by purchasing a souvenir). Therefore, the number of passengers needed to break even will decline. Managerial Accounting ClassTest Edition 172 Short Exercises (510 min.) S 71 a. Sales price per passenger $ 60 Less: Variable cost per passenger (20 ) Contribution margin per passenger $ 40 b. Contribution margin per passenger $40 Divided by sales price per passenger 60 Contribution margin ratio 66 .667 % c. Total contribution margin (10,000 $40) = $400,000 Less: Fixed costs 275,000 Operating income $125,000 d. Total Contribution margin ($500,000 66.667%) = $333,335 Less: Fixed costs 275,000 Operating income $ 58,335 (5 min.) S 72 The unit contribution margin tells managers how much income is earned on each unit of sales before considering fixed costs. Each sale contributes its unit contribution margin towards covering fixed costs and generating a profit. Therefore, if the number of dinner cruises sold increases by 500 and each sale generates $40 of contribution margin, operating income will increase (or operating loss will decrease) by $20,000 (= 500 passengers $40 per passenger). Chapter 7 CostVolumeProfit (CVP) Analysis 173 (510 min.) S 73 a....
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 Spring '08
 Venkateswar
 Managerial Accounting

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