Accounting exam CH 5-7

The cost to manufacture an unfinished unit is $120 ($90 variable, $30 fixed). The selling price per unit is $150. The company has unused productive capacity and has determined that units could be finished and sold for $195 with an increase in variable costs of 40%. What is the additional net income per unit to be gained by finishing the unit?

$9

If revenues are $315,000 under alternative A and $324,000 under alternative B, and costs are $285,000 for A and $306,000 for B, then using the basic approach in incremental analysis, incremental revenues, costs, and net income, in comparing B to A are respectively

$9,000, $(21,000), $(12,000).

sales in dollars formula

(fixed costs+ target NI) / (contribution margin ratio)

sales in units formula

(fixed costs+ target NI) / (unit contribution margin)

Assumptions for CVP analysis

1) behaviors of both costs and revenues is linear throughout the relevant range of the activity index 2) costs can be classified as variable or fixed 3) all units produced are sold 4) when more than one product type is sold, the sales mix will remain constant

how does sales mix affect break even point in units? STEP 1

1) calculate weighted average unit contribution margin >>> Product 1 (unit contribution margin)(sales mix %) PLUS >>>>Product 2 (unit contribution margin)(sales mix %) EQUALS= weighted average contribution margin FORMULAS>> Unit contribution margin= selling price- variable costs Sales mix %= # of units sold of product/total units sold of all products

how does operating leverage affect profitability?

1) cost structure- the relative proportion of fixed vs variable costs that a company incurs may have a significant effect on profitability 2) operating leverage- the extent that NI reacts to a given change in sales 3) degree of operating leverage- provides a measure of a companies earnings volatility and can be used to compare companies

special order decisions important concerns

1) will sales of other products be affected 2) is the company already oporating at full capacity

how does sales mix affect break even point in units? STEP 3

1)Take (SALES IN UNITS) x (Unit Contribution margin) of each product 2) add those two numbers together (2 products) 3) get total contribution margin

managements decision making process

1. identify the problem and assign responsibility 2. determine and evaluate possible courses of action 3. make a decision 4. review results of the decision

Assume the weighted-average contribution margin ratio from above is 15.5% and fixed costs are $5,000, the sales dollars needed per products A and Z to break-even are:

14,516 and 17,742.

If total fixed costs are $900,000 and variable costs as a percentage of unit selling price are 40%, then the break-even point in dollars is

15000000

Chloe Incorporated manufactures products A and Z. Product A accounts for 45% of all sales and has a contribution margin ratio of 18% while product Z accounts for the other 55% of sales and has a contribution margin ratio of 15%. What weighted-average contribution margin ratio:

16.35%

If the fixed cost for a company is 20,000, the contribution margin ratio 20%, and actual sales are 120,000. What is the margin of safety in dollars? 12,500 20,000 35,000 40,000

20,000

cvp graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.

high low method step 1 & 2

A1) determine the highest and lowest activity levels and their costs A2) calculate the numerator (change in total costs) by subtracting the high-low total costs A3) calculate the denominator by subtracting the high-low activity level A4) calculate the variable cost per unit by dividing the numerator/denominator B1) Determine total fixed cost using formula> Total cost (high OR low) - (variable cost per unit)(units produced high OR low) = total fixed cost

margin of safety in dollars

Actual (Expected) Sales - Break-Even Sales

how does sales mix affect break even point in dollars? STEP 2

Determine break even sales in dollars by dividing fixed costs by the weighted average cont. margin ratio 1) Fixed costs / weighted average cont margin ratio EQUALS= break even sales in dollars

how does sales mix affect break even point in units? STEP 2

Determine the break even sales in units by dividing fixed costs by the weighted average cont. margin (found in step 1) 1) Fixed costs DIVIDED BY Weighted average unit contribution margin = Break even sales in units

margin of safety ratio formula

Margin of Safety in Dollars / Actual (Expected) Sales

sell or process further

Process further as long as the incremental revenue from such processing exceeds the incremental processing costs.

special order decisions process

Rejecting order vs accepting REJECT= sales reveue 0, costs 0, NI 0 ACCEPT= sales 35000, costs 30500, NI +4500 ACCEPT SPECIAL ORDER IF NI POSITIVE

If revenue per unit is $80 and variable cost is 40% of revenue, then contribution margin per unit is $48. T/F

T

In incremental analysis fixed costs may change under alternative courses of action, while variable costs may not change. T?F

T

Sales mix is the relative percentage in which each product is sold when a company sells more than one product. T?F

T

The CVP income statement classifies costs as variable or fixed and computes a contribution margin T?F

T

The relevant data to consider in accepting an order at a special price are the additional manufacturing costs incurred and expected revenues. T?F

T

Variable costs are costs that remain the same per unit at every level of activity. T/F

T

relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid. Its the range over which the company expects to operate during the year

sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

cvp analysis

The study of the effects of changes in costs and volume on a company's profits.

CVP analysis

The study of the effects of changes in costs and volume on a company's profits. 1) important in profit planning 2) critical factor in management decisions

Contribution margin ratio formula

Unit Contribution Margin / Unit Selling Price

Unit Contribution Margin Formula

Unit Selling Price (USP) - Unit Variable Cost (UVC)

sunk cost

a cost that has already been committed and cannot be recovered

operating leverage

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

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

contribution margin

amount of revenue remaining after deducting variable costs

Contribution margin technique

at break-even point, contribution margin must equal total fixed costs (CM = total revenues - variable costs) Break-even point can be computed using either contribution margin per unit or contribution margin ratio.

repair or replace equipment

book value of the old machine doesnt affect the decision, its a sunk cost any trade in allowance or cash disposal value is relevant

variable costs

change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when fewer units are produced

how does activity level impact cost?

changes in level or volume of activity should be correlated with changes in cost

cvp income statement

classifies costs as variable or fixed and computes a contribution margin

how does sales mix affect break even point in dollars? STEP 1

companies can compute break even sales for a mix of two or more divisions by determining the weighted average unit cont. margin ratio of all divisions 1) Division 1 (cont margin ratio)(sales mix %) PLUS Division 2 (cont margin ratio)(sales mix %) EQUALS ==== weighted average contribution margin ratio FORMULAS -cont margin ratio: cont margin/sales -sales mix %: sales revenue of division/total company sales revenue

how does sales mix affect break even point in units?

companies can compute break even sales for a mix of two or more products by determining the weighted average unit contribution margin of all the products

decide whether to make or buy

concerns: 1) manufacturing costs that will be saved 2) purchasing price of units 3) opportuity costs

fixed costs

costs that remain the same in total regardless of the changes in activity level EX: rent, insurance, etc

per unit fixed costs

decreases with an increase in production.

when sales revenue decreases, too much operating leverage can have ___

devestating consequences

margin of safety

difference between your actual or expected profitability and the break even point

relevant cost and revenue

factors to be considered because they differ between the available alternatives

break even point in units formula

fixed costs / contribution margin per unit

break even point in dollars formula

fixed costs / contribution margin ratio

Special Order Decisions

focus on whether a specially priced order should be accepted or rejected

mixed costs

have properties of both fixed and variable costs due to the presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it usually consists of a fixed component such as line rent and fixed subscription charges as well as variable cost charged per minute cost. Another mixed cost example is a delivery cost which has a fixed component of depreciation cost of trucks and a variable component of fuel expense.

higher fixed costs relative to variable costs cause a company to have a ___ operating leverage

higher

activity index

identifies the activity that causes changes in the behavior of costs, and allows costs to be classified as variable, fixed, or mixed

total variable cost example

if activity level decreased by 25%, the total variable costs would also decrease by the same

When sales revenues are increasing, high operating leverage means that profits will _______

increase rapidly

multiple product scenerio

joint product costs are sunk costs and thus not relevant to the sell or process further decision

target income

must determine level of sales needed to achieve a target income

what is the break even point

occurs where total sales is equal to variable and fixed costs IE net income equals zero

Which of the following is not a step in management's decision-making process? Identify the problem and assign responsibility. Determine and evaluate possible courses of action. Make a decision. Prepare financial statements.

prepare financial statements

incremental analysis

process used to identify the financial data that change under alternative courses of action such as costs and revenues that may vary, or only revenues or costs

Break even point units formula

required sales - variable costs - fixed costs =NI

when should a company eliminate an unprofitable segment or product

retain the segment unless fixed costs elimiated exceeds the contribution margin loss

target net income formula

sales - variable costs- fixed costs

opportunity cost

the most desirable alternative given up as the result of a decision

cost behavior analysis

the study of how specific costs respond to changes in the level of business activity

contribution margin per unit of limited resources formula

unit contribution margin / limited resource consumed per unit

If activity level increases 25% and a specific cost increases from $40,000 to $50,000, this cost would be classified as a variable cost. mixed cost. fixed cost. non of the above.

variable cost

per unit variable costs

variable costs remain the same per unit at every level of activity ex: (each yoga class pays the teacher $100). They don't change

For a company selling multiple products, the break-even point in dollars is computed by dividing fixed costs by the

weighted-average contribution margin ratio.