ACCT 201B Exam 2 Chapter 6

to convert the formula for sales dollars required to attain a target profit to sales of dollars required to break-even, set target profit to $__.

$0

the vertical distance between the total revenue line and the total expense line on a CVP graph represents the total

the anticipated profit/loss @ any given level of sales

the cost equation using the high-low method

the high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) are the high and low activity months.

Water world sells wake boards and water skies and pays sales commissions based on product sales price. the wale boards sell for a higher price than the skis and the skis have a higher contribution margin per unit than the wake boards. which of the following are true?

- Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them. -The company would rather see more skis sold as it creates the higher profit per unit for the company.

Calculation Break even point

profit= Unit CM x Q - Fixed expenses, setting profit to zero

A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $

675000. i.e. 90,000 x $7.50

CVP analysis is based on some _____ that may be violated in practice, but the tool is still generally useful.

Assumptions

If a company has a variable expense ration of 35%, its CM ratio must be

CM Ratio= 1-35%=65%

Degree of Operating Leverage

Contribution Margin / Net Operating Income

Contribution Margin Ratio

Contribution Margin / Sales

True or False: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation

False

True or false: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.

False

Calculate break-even point (units)

Fixed Costs ÷ (Price - Variable Costs) = Break even Point in Units 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?

Margin of Safety Percentage

Margin of safety($)/total dollar sales Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, steel's margin of safety percentage is? 559,740/2,946,000=19%

A company sells 500 sleds per month for $80 and incurs $41 of variable cost per unit. Fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. The new material would increase variable costs by $4 per unit. Calculate the change in profit if the company starts using the new material.

New contribution margin would be $35 per unit ($39-$4 new cost) or $19,950 (570 units x $35) an increase in $450

Contribution margin income statement

Sales Variable Costs Contribution Margin Fixed Costs Net Income

when preparing a CVP graph, the horizontal axis represents

Sales volume

Sales mix

The relative proportion in which a company's products are sold

Shonda's shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals

Total sales= $95 x 450= 42,750

Operating Leverage

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

Which statements regarding the high-low method are true?

a) The high-low method should be used if a scattergraph plot indicates a linear relationship between cost and activity. b) It only uses two data points

contribution margin

becomes profit after fixed expenses are covered

The single point where the total revenue line crosses the total expense line on the CVP graph indicates:

break-even point profit equals zero

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

decrease

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

decrease

Margin of Safety

difference between your actual or expected profitability and the break even point Actual - Break even sales

engineering approach

estimating the fixed and variable components of a mixed cost.

Whenever a straight line is a reasonable approximately for the relation between cost and activity

linear cost behavior exists

In the equation Y=a + bX b represents

the variable cost per unit of activity slope of the line

Break-even point can be affected by

total fixed costs sales mix contribution margin per unit

when using excel, the intercept (a), slope (b) and R^2 is determined by selecting any data point in the scattergraph plot and selecting add

trendline

True or false The sales mix must be taken in to consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

true

The slope of the regression line represents the ______ cost per unit.

variable