3) Stones Manufacturing, sells a marble slab for $1,000. Fixed costs are $30,000, while the variable costs are $400 per slab. The company currently plans to sell 200 slabs this month. What is the margin of safety assuming 75 slabs are budgeted? A) $40,000 B) $38,000 C) $25,000 D) $33,000 Answer: C
Explanation: C) Breakeven in number of slabs = $30,000 / ($1,000 ? $400) = 50 slabs Actual sales 75 slabs × $1,000 = $75,000 Breakeven sales 50 slabs × $1,000 = $50,000 Margin of safety 25 slabs $25,000 Diff: 3
Objective: 5
AACSB: Application of knowledge
4) Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs. If variable costs decrease by $1 per unit, the new margin of safety is ________. A) $65,000 B) $73,567 C) $68,235 D) $66,765 Answer: C
Explanation: C) Variable cost per unit = $20,000 / 8,000 = $2.50 Contribution margin percentage = [$10 ? ($2.50 ? $1.00)+ / $10 = 85%
New breakeven point = *$10 ? ($2.50 ? $1.00)+ / $10 = 85%; $10,000 / 0.85 = $11,765 Old breakeven point = $10 - 2.50 = $7.50 / $10 = 75%; $10,000 / 0.75 = $13,333 Margin of safety = $80,000 - $11,765 = $68,235
Diff: 3
Objective: 5
AACSB: Application of knowledge
5) Globus Autos sells a single product. 8,000 units were sold resulting in $80,000 of sales revenue, $20,000 of variable costs, and $10,000 of fixed costs. If a change is made in one parameter of CVP analysis, it is an example of ________. A) sensitivity analysis B) incremental budgeting C) variance analysis D) multiple cost drivers Answer: A
Diff: 1
Objective: 5
AACSB: Analytical thinking
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Copyright ? 2015 Pearson Education, Inc.
6) Sensitivity analysis is a \the originally predicted data are not achieved or if an underlying assumption changes. Answer: TRUE
Diff: 1
Objective: 5
AACSB: Analytical thinking
7) Margin of safety measures the difference between budgeted revenues and breakeven revenues. Answer: TRUE
Diff: 1
Objective: 5
AACSB: Analytical thinking
8) If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety percentage is 20%. Answer: TRUE
Explanation: The margin of safety percentage is 20% as the denominator of the ratio is the budgeted level and not the breakeven level. 1,250 - 1,000 = $250 / $1,250 = 20%
Diff: 2
Objective: 5
AACSB: Analytical thinking
9) Sensitivity analysis helps to evaluate the risk associated with decisions. Answer: TRUE
Diff: 1
Objective: 5
AACSB: Analytical thinking
38
Copyright ? 2015 Pearson Education, Inc.
10) Alex Miller, Inc., sells car batteries to service stations for an average of $30 each. The variable cost of each battery is $20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of the company total $8,000.
Required:
a. What is the breakeven point in batteries?
b. What is the margin of safety, assuming sales total $60,000?
c. What is the breakeven level in batteries, assuming variable costs increase by 20%?
d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed manufacturing costs decline by 10%, and other fixed costs decline by $100? Answer:
a. N = Breakeven units $30N - $20N - $10,000 - $8,000 = 0 $10N - $18,000 = 0 N = $18,000/$10 = 1,800 batteries
b. Margin of safety = $60,000 - ($30 × 1,800) = $6,000
c. N = Breakeven units $30N - $24N - $10,000 - $8,000 = 0 $6N - $18,000 = 0 N = $18,000/$6 = 3,000 batteries
d. N = Breakeven units $33N - $20N - $9,000 - $7,900 = 0 $13N - $16,900 = 0 N = $16,900/$13 = 1,300 batteries
Diff: 3
Objective: 5
AACSB: Application of knowledge
11) Explain sensitivity analysis and how do managers use sensitivity analysis to evaluate its implications? Answer: Sensitivity analysis is a \change if the original predicted data are not achieved or if an underlying assumption changes. The
analysis answers questions such as \by 5% from the original prediction?\increases by 10%?\commits to funding a project.
Diff: 2
Objective: 5
AACSB: Analytical thinking
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Copyright ? 2015 Pearson Education, Inc.
12) ________ is the process of varying key estimates to identify those estimates that are the most critical to a decision.
A) The graph method B) A sensitivity analysis
C) The degree of operating leverage D) Sales mix Answer: B
Diff: 1
Objective: 5
AACSB: Analytical thinking
40
Copyright ? 2015 Pearson Education, Inc.