Chapter 8 Cost-Volume-Profit Analysis Answers to Review Questions

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CHAPTER 8 Cost-Volume-Profit Analysis
ANSWERS TO REVIEW QUESTIONS
8-1 a. In the contribution-margin approach, the break-even point in units is calculated using the following formula:
Break-even point = fixed expenses unit contribution margin

b. In the equation approach, the following profit equation is used: sales volume ⎞ ⎛ unit variable sales volume ⎞ ⎛ unit fixed ⎜ ⎟ −⎜ ⎟ − ⎜ sales price × ⎟ ⎜ expense × ⎟ expenses = 0 in units ⎠ ⎝ in units ⎠ ⎝

This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-2 The term unit contribution margin refers to the contribution that
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West Company's cost structure will include a larger proportion of variable costs than East Company's cost structure. A firm's operating leverage factor, at a particular sales volume, is defined as its total contribution margin divided by its net income. Since East Company has proportionately higher fixed costs, it will have a proportionately higher total contribution margin. Therefore, East Company's operating leverage factor will be higher.

8-14

8-15

When sales volume increases, Company X will have a higher percentage increase in profit than Company Y. Company X's higher proportion of fixed costs gives the firm a higher operating leverage factor. The company's percentage increase in profit can be found by multiplying the percentage increase in sales volume by the firm's operating leverage factor. The sales mix of a multiproduct organization is the relative proportion of sales of its products. The weighted-average unit contribution margin is the average of the unit contribution margins for a firm's several products, with each product's contribution margin weighted by the relative proportion of that product's sales.

8-16

8-17

The car rental agency's sales mix is the relative proportion of its rental business associated with each of the three types of automobiles: subcompact, compact, and full-size. In a multi-product CVP analysis, the sales mix is assumed to be constant over the relevant range

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