Author Question: The purchase of supplies for cash will a. increase Supplies and decrease Cash. b. increase ... (Read 127 times)

Anajune7 · **on:** Jul 6, 2018

The purchase of supplies for cash will
a. increase Supplies and decrease Cash.
b. increase Supplies Expense and decrease Cash.
c. decrease Cash and increase Accounts Payable.
d. increase Supplies Expense and increase Accounts Payable.
e. decrease Cash and increase Capital.

Question 2

CVP analysis, margin of safety.

(CMA, adapted) Arvin Tax Preparation Services has total budgeted revenues for 2014 of 618,000, based on an average price of 206 per tax return prepared. The company would like to achieve a margin of safety percentage of at least 45. The company's current fixed costs are 327,600, and variable costs average 24 per customer. (Consider each of the following separately).

Required:
1. Calculate Arvin's breakeven point and margin of safety in units.
2. Which of the following changes would help Arvin achieve its desired margin of safety?
a. Average revenue per customer increases to 224.
b. Planned number of tax returns prepared increases by 15
c. Arvin purchases new tax software that results in a 5 increase to fixed costs but e-files all tax returns, which reduces mailing costs an average 2 per customer.

emsimon14 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

A

Answer to Question 2

1.
Selling price 206
Variable costs per unit: 24
Contribution margin per unit (CMU) 182

Breakeven point in units =

Breakeven point in units = = 1,800 returns (units)
Margin of safety (units) = 3,000 1,800 = 1,200 units

618,000 budgeted revenue206 = 3,000 units
Breakeven revenues = 206 1,800 = 370,800
Margin of safety percentage = (618,000370,800) 618,000= 40
2a. Increase selling price to 224

Selling price 224
Variable costs per unit: 24
Contribution margin per unit (CMU) 200

Breakeven point in units =

Breakeven point in units = = 1,638 returns (units)
Breakeven revenues = 224 1,638 units = 366,912
Margin of safety percentage = (618,000 366,912) 618,000 = 40.62
This change will not help Arvin achieve its desired margin of safety of 45.

2b.

Selling price 206
Variable costs per unit: 24
Contribution margin per unit (CMU) 182

Breakeven point in units =

Breakeven point in units = = 1,800 returns (units)

Breakeven revenues = 206 1,800 = 370,800

Budgeted revenues = 618,000 1.15 = 710,700
Margin of safety percentage = (710,700 370,800) 710,700 = 47.8
This change will help Arvin achieve its desired margin of safety of 45.

2c.
Selling price 206
Variable costs per unit 24 2): 22
Contribution margin per unit (CMU) 184

Fixed costs = 327,600 1.05 = 343,980

Breakeven point in units =

Breakeven point in units = = 1,870 returns/units (rounded up)

Breakeven revenues = 206 1,870 units = 385,220
Margin of safety percentage = (618,000 385,220) 618,000= 37.7
This change will not help Arvin achieve its desired margin of safety of 45.

Options 2a and 2b improve the margin of safety, but only option 2b exceeds the company's desired margin of safety. Option 2c actually lowers the company's margin of safety.