Chapter 7, Problem 7.74ACT

Discussion Questions

1. 1. Define breakeven point. Why is the breakeven point important to managers?
2. 2. Describe four different ways cost-volume-profit analysis could be useful to management.
3. 3. The purchasing manager for Rockwell Hall Bags has been able to purchase the material for its signature handbags for $9 less per bag than in the prior year. Keeping everything else the same, what effect would this reduction in material cost have on the breakeven point for Rockwell Hall Bags? Now assume that the sales manager decides to reduce the selling price of each handbag by $9. What would the net effect of both of these changes be on the breakeven point in units for Rockwell Hall Bags?
4. 4. Describe three ways that cost-volume-profit concepts could be used by a service organization.
5. 5. Breakeven analysis isn’t very useful to a company because companies need to do more than break even to survive in the long run.” Explain why you agree or disagree with this statement.
6. 6. What conditions must be met for cost-volume-profit analysis to be accurate?
7. 7. Why is it necessary to calculate a weighted-average contribution margin ratio for a multiproduct company when calculating the breakeven point for that company? Why can’t all of the products’ contribution margin ratios just be added together and averaged?
8. 8. Is the contribution margin ratio of a grocery store likely to be higher or lower than that of a plastics manufacturer? Explain the difference in cost structure between a grocery store and a plastics manufacturer. How does the cost structure difference impact operating risk?
9. 9. Alston Jewelry had sales revenues last year of $2.4 million, while its breakeven point (in dollars) was $2.2 million. What was Alston Jewelry’s margin of safety in dollars? What does the term margin of safety mean? What can you discern about Alston Jewelry from its margin of safety?
10. 10. Rondell Pharmacy is considering switching to the use of robots to fill prescriptions that consist of oral solids or medications in pill form. The robots will assist the human pharmacists and will reduce the number of human pharmacy workers needed. This change is expected to reduce the number of prescription filling errors, to reduce the customer’s wait time, and to reduce the total overall costs. How does the use of the robots affect Rondell Pharmacy’s cost structure? Explain the impact of this switch to robotics on Rondell Pharmacy’s operating risk.
11. 11. Suppose a company can replace the packing material it currently uses with a biodegradable packing material. The company believes this move to biodegradable packing materials will be well received by the general public. However, the biodegradable packing materials are more expensive than the current packing materials, and the contribution margin ratios of the related products will drop. What are the arguments for the company to use the biodegradable packing materials? What are the arguments for the company to not use the biodegradable materials? What do you think the company should do?
12. 12. How can CVP techniques be used in supporting a company’s sustainability efforts? Conversely, how might CVP be a barrier to sustainability efforts?