ACC 220 smartbook chapter 6

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

Contribution margin is first used to cover _____ expenses. Once the break-even point has been reached, contribution margin becomes _____.

fixed profit

The contribution margin is equal to sales minus

variable expenses

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be ______.

$1,520,000 Sales = ($240,400 + $930,000) ÷ 0.77= $1,520,000

A company sold 20,000 units of its product at a selling price of $20. The variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is

$180,000 Reason: Contribution margin = 20,000 × ($20 - $11) = $180,000.

Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivian's Violins net operating income is:

$184,000-$85,000=$99,000

A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be:

$198,000 reason: Net operating income = (26,000 - 17,000) x $22 = $198,000

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a ______. Multiple choice question.

$450 increase Reason: The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.

profit equals

(P × Q - V × Q) - fixed expenses

Net operating income equals ______.

(unit sales - unit sales to break even) × unit contribution margin

The break-even point calculation is affected by ______.

1. selling price per unit 2. sales mix 3. costs per unit

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans that must be sold to meet the company's goal is

21,645 Reason: Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans.

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is __________for Adams, Inc. and _____________for Baron, Inc.

3 2

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is ______.

4,800 Reason: ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.

Seth's Speakers had actual sales of $1,630,000 If break-even sales equals $935,000, Seth's margin of safety in dollars is ______.

695,000 reason: 1,630,000 - 935,000=695,000

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is ______.

7625 Reason: Break-even point = $305,000 ÷ $40 = 7,625

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______.

Profits would decrease by $2,000. New contribution margin = $6,000 ($1,000 x ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

Contribution margin ______.

becomes profit after fixed expenses are covered Reason: Because contribution margin is a variable amount, it is affected by changes in activity.

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit

When making a decision using incremental analysis consider the ______.

change in cost resulting specifically from the decision change in sales dollars resulting specifically from the decision

To calculate the degree of operating leverage, divide __________________ ________________ by net operating income.

contribution margin

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease

When constructing a CVP graph, the vertical axis represents ______.

dollars (includes sales, variable costs and fixed costs)

If operating leverage is high, a small percentage increase in sales produces a _______________ (higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using

incremental

A company with a high ratio of fixed costs ______.

is more likely to experience a loss when sales are down than a company with mostly variable costs is more likely to experience greater profits when sales are up than a company with mostly variable costs.

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating ___________

leverage

The contribution margin as a percentage of sales is referred to as the contribution margin or CM ______

ratio

The variable expense ratio equals variable expenses divided by ______.

sales

The relative proportions in which a company's products are sold is referred to as_________ ___________

sales mix

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.

total contribution margin will increase by $0.70 net operating income will increase by $0.7

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales:

total contribution margin will increase by $0.70 net operating income will increase by $0.70

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total ______.

$1,800,000 Reason: ($975,000 + $195,000) ÷ 0.65 = $1,800,000

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

CM ratio x Change in sales - Change in fixed expenses.

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will ______.

increase by $24,000 Reason: An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

The break-even point is reached when the contribution margin is equal to ______.

total fixed expense

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

CVP analysis

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $______.

5000(10-6)x10000 - 35000 = 5000

Profit = (selling price per unit x quantity sold) - (________ expense per unit x quantity sold) - _________expenses.

variable fixed

Variable expenses ÷ Sales is the calculation for the ___________ _____________ ratio

variable expense

The break-even point is the level of sales at which the profit equals

zero

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is ______.

$49,800 Reason: $982,000 - $932,200 = $49,800.

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN?

$2,800 Reason: $98,000 ÷ ($50 - $15) = 2,800

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

- Baron's net income grows twice as fast as its sales - Adams has a higher degree of operating leverage than Baron

Place the following items in the correct order in which they appear on the contribution margin format income statement

1.Sales 2.Variable Expenses 3.Contribution margin 4.Fixed Expenses 5.Net Operating Income

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is:

40,000 reason: (520,000 + 320,000) / 21 = 40,000 blankets

A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is ______.

8400 units ($200,800 + $320,000)/(($90 - $28)/90) = $756,000$756,000/$90 = 8400 units

To calculate the degree of operating leverage, divide ____________ ____________ by net operating income.

contribution margin

The calculation of contribution margin (CM) ratio is ______.

contribution margin divided by sales

The calculation of contribution margin (CM) ratio is ______.

contribution margin ÷ sales

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to ______.

decrease by $16,000 Reason: Total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease.

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decreased in the unit variable cost

When a company produces and sells multiple products:

each product most likely has a unique contribution margin a change in the sales mix will most likely change the break-even point each product most likely creates a unique total of fixed costs.

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

false

Cost structure refers to the relative portion of product and period costs in an organization.

false Reason: Cost structure refers to the relative portion of fixed and variable costs in an organization.

The term "cost structure" refers to the relative proportion of ___________ and __________ costs in an organization.

fixed variable

The amount by which sales can drop before losses are incurred is the ____________ of ____________

margin safety

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

The term used for the relative proportion in which a company's products are sold is ______.

sales mix

At the break-even point ______.

total revenue equals total cost net operating income is zero

Which of the following statements is correct? The risk of loss is not impacted by the margin of safety.- The higher the margin of safety, the lower the risk of incurring a loss.- The higher the margin of safety, the higher the risk of incurring a loss.

The higher the margin of safety, the lower the risk of incurring a loss.

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units, net profit will be:

$100 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was ______.

$2,200 reason: (300*(20-7) - 1,700)= 2,200

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.

Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000