Question

. Smith Pharmaceuticals is trying to estimate the breakeven volume of sales on a newly developed drug. Which of the following would be expected to reduce the number of pills Smith would need to sell to breakeven (i.e., which would result in a lower breakeven volume) assuming everything else remains the same? a. An increase in total fixed costs b. A decrease in the selling price per pill c. An increase in the variable cost per pill d. An increase in the unit (per pill) contribution margin e. An increase in allocated overhead (indirect) costs Expain! 2. Assume the local children's hospital implements an outpatient asthma intervention to improve the health outcomes of children with asthma. As a result, the hospital sees a dramatic reduction in the number of inpatient admissions for children with asthma, but very little change in the total cost of operating the hospital. Which of the following statements describes the most likely reason for the lack of cost savings? a. The hospital's cost structure primarily consists of variable costs b. The hospital's cost structure primarily consists of fixed costs c. The hospital's cost structure consists of an equal mix of variable and fixed costs d. The hospital reduced its capacity (i.e., downsized) following the drop in admissions e. The hospital has a very high variable cost per admission. Explain! 3. Seattle Radiology Group plans to invest in a new CT scanner. The group estimates $1,500 net revenue per scan. Preliminary market assessments indicate that demand will be less than 5,000 scans per year. The group is considering a scanner (Scanner B) that would result in total fixed costs of $800,000 and would yield a profit of $450,000 per year at a volume of 5,000 scan:s What is the estimated breakeven volume (in number of scans) for Scanner B? a. 3,200 b. 160 c. 834 d. 5,000 | e. 250 Explain 4. True or False: In general, the best way to allocate costs in a large organization is to assign all overhead expenses to a single cost pool with one cost driver. Why?

Answer 1

Answer:

1. D increase in unit margin

2. B hospital structures primarily fixed cost

3. A 3,200

4. False

Explanation:

1.By increasing the unit margin, breakeven volume will reduce. Total fixed cost and unit margin has inverse relationship with each other with regards to breakeven volume. Let’s say, we have unit sales at $10, variable cost at 5. So the contribution margin is 5, and we have $3,500 fixed cost for example. Breakeven volume of this scenario is at 700 unit (3,500/5), let’s simply divide our total fixed cost by our unit contribution margin. Sample we increase our unit margin to $7, our breakeven volume will become 500 units only.

BEP = total fixed cost / unit margin

BEP = $3,500/7

BEP = 500 units. It is obviously lower than our previous breakeven volume.

2. The reason why hospital has a very little change in the total cost despite of the dramatic decrease of the inpatient admission is that, their cost is primarily fixed cost. That means, occurrence of fixed cost does not depends on the volume of inpatients that the hospital has. It is unavoidable and would still exist no matter how many patients is to be admitted.

3. Breakeven volume is computed by dividing total fixed cost to unit margin. So let’s compute the unit margin first.

$800,000 + $450,000 = $1,250,000 is our contribution margin. We did our work back since operating income + total fixed cost = contribution margin. So $1,250,000 / 5,000 = 250 is our unit margin. Now we can compute our breakeven volume by simply dividing total fixed cost over unit contribution margin.

BEP = Total fixed cost / unit contribution margin

BEP = $800,000/$250

BEP = $3,200

4. In a large organization, allocation of overhead cost basically done by allocating it to various cost pool. Every department must have their own reporting so that, the organization will know which department is profitable and which is not and needed to be dropped.