3.6 Interpret the results of CVP analysis in complex strategic, multi-product, and multiple cost driver situations.
1) The relative combination of quantities of products or services that constitute total revenues are called the sales target.
2) The key to applying CVP analysis in non-profit and service organizations is to measure their output.
3) Changes in product quality could be considered an example of a revenue driver.
4) There is no unique break-even point when there are multiple cost drivers.
5) In multi-product situations when sales mix shifts toward the product with the highest contribution margin, operating income will be higher.
6) To calculate the break-even point in a multi-product situation, one must assume that the sales mix of the various products remains constant.
Use the information below to answer the following question(s).
The following information is for Winnie Company:
Product A: Revenue
Product B: Revenue
Total fixed costs are
7) What is the break-even point assuming the sales mix consists of two units of Product A and one unit of Product B?
A) 2,000 units of B and 4,000 units of A
B) 2,025 units of B and 4,050 units of A
C) 4,025 units of B and 8,050 units of A
D) 4,000 units of B and 4,000 units of A
E) 4,000 units of B and 8,000 units of A
8) What is the operating income assuming actual sales are 300,000 units, and the sales mix is one unit of Product A and two units of Product B?
9) A hospital receives $1,000,000 monthly in funding from various sources. Annual fixed costs are projected to be $5,000,000 and the variable cost per patient, across all departments is projected to be $534.80. Last year they treated 11,500 patients. The hospital expects a 5% increase in patients this year. A governing bylaw requires that the hospital be run as a non-profit organization.
What is the maximum number of patients the hospital can expect to be able to treat assuming the operating income is zero?
D) more than 13,000
E) CVP analysis is not relevant for non-profit organizations.
10) A social agency receives a budget appropriation of $11,000 monthly from the municipality. Annual fixed costs are projected to be $20,000 and the variable cost per client was $238.50 last year. Although the agency projects its case load to increase by the usual 15% this year (as it has done historically), the municipality appropriated funds based on last year's case load. Which of the following strategies would be ineffective in dealing with the expected shortfall in budget appropriation for the agency?
A) reducing the number of clients served
B) reducing the variable cost of serving a client
C) reducing the total fixed costs
D) increasing funding from other sources
E) changing the measure of output used to calculate service