ICQs - Chapter 3 Questions

# Corporate fixed costs can be avoided only if the firm

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Product line fixed costs can be avoided if the product line is dropped. Corporate fixed costs can be avoided only if the firm goes out of business entirely. You may want to use a spreadsheet to perform calculations. REQUIRED A. Assuming that the sales mix remains constant, how many units of premium will be sold each time a unit of regular is sold? B. What are the total fixed product line costs for each product? C. What are the total corporate fixed costs? D. What is the overall corporate breakeven in total revenue and for each product, assuming that the sales mix is the same as last month's? E. What is the breakeven in revenues for regular boomerangs, ignoring corporate fixed costs? F. Why is the breakeven for regular boomerangs different when we calculate the individual product breakeven versus the combined product breakeven? G. When managers monitor the profitability of regular boomerangs, are corporate fixed costs relevant? Explain. H. CVP analysis assumes that the sales mix will remain constant. Explain why managers generally cannot know for certain what their sales mix will be. I. What is the effect of uncertainty about the sales mix on the quality of the information obtained from CVP analyses?

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ICQ #8 3.45 Contribution Margin vs. Gross Margin FongFone Ltd. manufactures cell phones, which are priced at . Mr. Fong, the president of FongFone, has come to you for help in terms of the company's cost structure. You are troubled because the data produced by the accounting system of FongFone do not distinguish between variable and fixed costs. After some analysis, you have identified various cost behaviour patterns. You have determined that the margin of safety is and sales in breakeven units are 2,700; your analysis was made easier by the fact that it is FongFone's policy not to carry any inventories. Instead, the company finishes pending orders sometime in December and gives employees vacations that end in early January of the following year. You have also collected the following information for the 2012 fiscal year: 2012 Direct labour \$170,000 Direct material 210,000 Variable manufacturing overhead 80,000 Gross margin % 22.50% Contribution margin % 30.00% Income-tax rate 25.00% REQUIRED A. Calculate the following costs for 2012: 1. Sales in dollars 2. Variable selling and administrative expenses 3. Fixed manufacturing overhead 4. Fixed selling and administrative expenses 5. Earnings (income) before taxes B. Determine the sales volume in dollars and in units that FongFone must achieve to earn a income after taxes. Calculate the degree of operating leverage. If sales increase by 8%, what is the impact on the operating income?
ICQ #9 ABC Steel, Inc., manufactures furnace air filters that sell for \$1,000. The unit costs are: Direct material \$375 Direct labour 250 Variable manufacturing overhead 130 Variable selling expense 45 Annual fixed manufacturing overhead is \$100,000 and fixed selling and administrative expenses are \$120,000. The company is in a 30% tax bracket.

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