Accounting 2: Chapter 5 (exam 2)

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage? a.2.21 b.0.45 c.0.34 d.2.92

Answer: Answer: a

contribution margin formula:

sales - variable expenses

Cost-volume-profit (CVP) analysis focuses on how profits are affected by the following five factors:

selling prices, sales volume, unit variable costs, total fixed costs, mix of products sold.

formula for profit is = - can also be expressed as: Profit = (P × Q − V × Q) − Fixed expenses

(Sales − Variable expenses) − Fixed expenses

1) profit formula 2) sales = Now, profit can be expressed as (P* Q - variable expenses) - fixed expenses 3) variable expenses can be expressed as = now this gives us profit = (P * Q - V * Q) - fixed expenses

1) (sales - variable expenses) - fixed expenses 2) selling price per unit * quantity sold 3) variable expenses = variable expenses per unit * quantity sold

1) The margin of safety is the excess of budgeted or ____ sales dollars over the break-even volume of ___ dollars. 2) It is the amount by which sales can ___ before ___ are incurred. 3) The higher the margin of safety, the ____ the risk of not breaking even and incurring a loss. 4) Margin of safety in dollars =

1) actual; sales 2) drop; losses 3) lower 4) Total sales − Break-even sales

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

fixed; profit

Operating leverage measures the impact on net operating ____ of a given percentage change in ____.

income; sales

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

unit contribution margin

The variable expenses as a percentage of sales is referred to as the variable expense ratio. This ratio is computed as follows:

variable expenses / sales

In target profit analysis, we estimate what sales volume is needed to achieve a specific... - Profit = Unit CM × Q − Fixed expenses Our goal is to solve for the unknown "Q" which represents the quantity of units that must be sold to attain the target profit.

target profit

Operating Leverage - Changes in Profit With an operating leverage of 5, if RBC increases its sales by 10%, net operating income would increase by...

answer: 50%.

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle? $500 $300 $200 $20,200

answer: 200

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

answer: Increase of $14,200 Contribution margin per unit = ($190,000 − $76,000) / 1,000 units = $114 per unit Change in net operating income = ($114 x 300 units) - $20,000 = $34,200 - $20,000 = 14,200 increase

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. Compute the profit from the sale of 100 bicycles ________. $12,000 $10,000 $20,000 $8,000

answer: 12,000

Break-even point is the level of sales at which ______.

total revenue equals total costs

The sales mix is the relative proportions in which a company's products are ____. The usual assumption in cost-volume-profit analysis is that the sales mix will not ____.

sold; change

what is the meaning of contribution margin? how is it useful? It is used in ___ ___ and ____-___ analysis and can be used to quickly estimate the effect on profits of a change in sales revenue.

target profit; break-even

1) Operating leverage is a measure of how sensitive net operating ____ is to percentage changes in ___. 2) It is a measure, at any given level of sales, of how a percentage change in sales volume will affect ____.

1) income; sales 2) profits.

The profit graph is based on the following linear equation:

Profit = Unit CM x Q - Fixed Expenses.

What is represented on the X axis of a cost-volume-profit (CVP) graph?

Sales volume

in all respects, company A and B are identical, except that company A's costs are mostly variable, whereas company b's costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits/ contribution margin?

All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine the sales dollars that must be generated to attain target profits of $2,500 per month. a.$2,550 b.$5,013 c.$8,458 d.$10,555

answer: Answer: b

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units? a.872 cups b.3,611 cups c.1,200 cups d.1,150 cups

answer: D) 1,150

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch? a.1.319 b.0.758 c.0.242 d.4.139

answer: B) 0.758

Break-Even Point in Sales Dollars: 2 methods 1) the equation method: profit = CM ratio * sales - fixed expenses 2) the formula method: dollar sales to break-even = fixed expenses / CM ratio Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars?

answer: 25,000

Break-Even Point in Unit Sales: 2 methods 1) equation method: profit = Unit CM * Q - fixed expenses 2) formula method: unit sales to break-even = fixed expenses / Unit CM Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales?

answer: 100 units

the contribution margin income statement allows users to easily judge the impact of a change in ____ on profit (3)

cost, volume, price

The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on ___ ___.

cost behavior.

CM is used first to cover fixed expenses. Any remaining CM contributes to...

net operating income.

The measure of how sensitive net operating income is to a given percentage change in dollar sales is called _______.

operating leverage

Cost structure refers to the relative proportion of ___ and ____ costs in an organization. Managers often have some latitude in determining their organization's cost structure.

fixed; variable

In a CVP graph, unit volume is usually represented on the _____ axis and dollars on the ____

horizontal (X); vertical (Y) axis.

explain how a shift in the sales mix could result in higher break-even point and a lower net operating income

if the sales mix shifted from high contribution margin products to low contribution margin products. Such a shift would cause the average contribution margin ratio in the company to decline, resulting in less total contribution margin for a given amount of sales. Thus, net operating income would decline.

An even simpler form of the CVP graph is called the ___ graph.

profit

There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures. 1) An advantage of a high fixed cost structure is that income will be ____ in good years compared to companies with lower proportion of fixed costs. 2) A disadvantage of a high fixed cost structure is that income will be ___ in bad years compared to companies with lower proportion of fixed costs. 3) Companies with low fixed cost structures enjoy greater ___ in ____ across good and bad years.

1) higher 2) lower 3) stability; income

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain target profits of $2,500 per month. a.3,363 cups b.2,212 cups c.1,150 cups d.4,200 cups

Answer: A.

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars? a.$ 1,300 b.$ 1,715 c.$ 1,788 d.$ 3,129

Answer: B: 1,715

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups? a.3,250 cups b.950 cups c.1,150 cups d.2,100 cups

Answer: Answer: b

At Coffee Klatch the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300, and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase? a.30.0% b.20.0% c.22.1% d.44.2%

Answer: Answer: d

Cost-Volume-Profit Analysis: Key Assumptions To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors: 1. Selling price is ____. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed components. The variable costs are ___ per unit and the fixed costs are constant in ____ over the entire relevant range. 3. In multiproduct companies, the mix of products sold remains...

1) constant; 2) constant; total 3) constant

When making a decision using incremental analysis consider the: 1) Change in ___ resulting specifically from the decision. 2) Change in ___ dollars resulting specifically from the decision.

1) cost 2) sales

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100 and decrease fixed expenses by $20,000. What is the net operating income after the changes?

answer: term-14 $21,500 New contribution margin per unit = $175 − $100 = $75New contribution margin = $75 × 1,300 units = $97,500New fixed cost = $96,000 − 20,000 = $76,000New net operating income = $97,500 − 76,000 = $21,500INCREASE of $21,500

Walton Corporation is currently selling 104 units of its product. The company is deciding the price that it should charge for a bulk order of 40 units. The variable cost per unit is $200. This order will not involve any additional fixed costs and the company's current sales will not be affected. The company targets a profit of $4,000 on the bulk order. What selling price per unit should the company quote for the bulk order?

answer: 300