ACCT 212 Chapter 6: Cost-Volume-Profit Relationships

What is the amount of the break-even sales for Grace Good Company? a) $1.2 million b) $2.2 million c) $2.0 million d) $1.5 million

d) $1.5 million

Once the break-even point has been reached, net operating income will increase by the amount of the _______ for each additional unit sold. a) unit contribution margin b) unit selling price c) variable expense per unit d) fixed expense per unit

a) unit contribution margin

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? a) $25,000 b) $2,500 c) $250 d) $16,667

a) $25,000

(Question 5) Assume a company produces one product that sells for $55, has a variable cost per unit of $35, and has fixed costs of $100,000. How many units must the company sell to earn a target profit of $50,000? a) 7,500 units b) 10,000 units c) 12,500 units d) 15,000 units

A

Cost-Volume-Profit (CVP) Graph

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

Operating Leverage

A measure of how sensitive net operating income is to a given percentage change in unit sales.

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. the degree of operating leverage is computed by dividing contribution margin by net operating income.

Contribution Margin Ratio (CM RATIO)

A ratio computed by dividing contribution margin by sales.

Variable Expense Ratio

A ratio computed by dividing variable expenses by sales.

Which of the following statements is a common assumption underlying cost-volume-profit analysis? a) The variable cost per unit remains constant b) The selling price per unit remains constant c) Total fixed costs are constant within the relevant range d) The total variable costs remain constant as the level of sales fluctuates

A, B, and C

Incremental Analysis

An analysis approach that focuses only on those costs and revenues that change as a result of a decision.

Given the same facts as in question 5, if the company exactly meets its target profit, what will be its margin of safety in sales dollars? a) $110,000 b) $127,500 c) $137,500 d) $150,000

C

Once a company hits its break-even point, net operating income will a) Increase by an amount equal to the selling price per unit multiplied by the number of units sold above the break-even point b) Increase by an amount equal to the contribution margin ratio multiplied by the number of units sold above the break-even point c) Increase by an amount equal to the contribution margin per unit multiplied by the number of units sold above the break-even point d) Increase by an amount equal to the variable cost per unit multiplied by the number of units sold above the break-even point

C

Which of the following statements is false with respect to the margin of safety? (You may select more than one answer.) a) The total budgeted (or actual) sales minus sales at the break-even point equals the margin of safety in dollars b) The margin of safety in dollars divided by total budgeted (or actual) sales in dollars equals the margin of safety percentage c) In a single product company, the margin of safety in dollars divided by the - variable cost per unit equals the margin of safety in units d) The margin of safety in dollars can be a negative number

C

Target Profit Analysis

Estimating the level of sales needed to achieve a desired target profit.

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?

Selling Price Per Unit: $300

Margin of Safety

The excess of budgeted or actual dollar sales over the break-even dollar sales.

Break-Even Point

The level of sales at which profit is zero.

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.

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

a) $12,000

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? a) $21,500 b) $30,000 c) $24,500 d) $22,000

a) $21,500

Income Statement of Base Corporation i) Sales ii) Variable expenses iii) Contribution margin iv) Fixed expenses v) Net operating income Sales Volume Present i) $100,000 ii) 50,000 iii) 50,000 iv) 20,000 v) 30,000 If sales increase by $50,000, what will be the net operating income for the company? a) $25,000 b) $55,000 c) $15,000 d) $50,000

b) $55,000

Which of the scattergraph plots above suggests a mixed cost relationship between direct labor-hours and manufacturing overhead? a) (a) b) (b) c) (c) d) (d)

b) (b)

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio? a) 40% b) 60% c) 100% d) 20%

b) 60%

The current sales of Trent, Incorporated, are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Incorporated? a) 24% b) 30% c) 60% d) 25%

b) 60%

With regards to interpretation, what are the important areas that appear on a CVP graph? a) Excess of variable costs over fixed costs b) Break-even point, loss area, and profit area c) Contribution margin d) Year-to-year sales volumes and dollars

b) Break-even point, loss area, and profit area

The measure of how sensitive net operating income is to a given percentage change in volume sales is called _______. a) sensitivity leverage b) operating leverage c) risk leverage

b) operating leverage

Month: Direct Labor-Hours; Machine Cost Incurred January: 5,000; $2,900 February: 4,000; $2,500 March: 7,000; $3,200 April: 8,000; $3,400 May: 3,000; $2,100 June: 9,000; $4,000 July: 6,000; $3,100 August: 2,000; $1,900 Using the high-low method, what is the variable cost? a) $2 per direct-labor hour b) $2.31 per direct-labor hour c) $0.30 per direct-labor hour d) $3.33 per direct-labor hour

c) $0.30 per direct-labor hour ($4,000 - $1,900)/(9,000 - 2,000)

Summarized data for Ralph Corporation: Selling price: $200 per unit Variable expenses: $150 per unit Fixed expenses: $1,000,000 per year Unit Sales: 25,000 per year What is Ralph Corporation's margin of safety in dollars? a) $4 million b) $5 million c) $1 million d) $2.2 million

c) $1 million $5,000,000 - $4,000,000 = $1,000,000 Margin of Safety in dollars = Total budgeted sales - Break-even sales

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? a) $500 b) $300 c) $200 d) $20,200

c) $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? a) Increase of $20,000 b) Decrease of $20,000 c) Increase of $14,200 d) Decrease of $12,000

c) Increase of $14,200

What is represented on the X axis of a cost-volume-profit (CVP) graph? a) Sales revenue b) Fixed cost c) Unit volume d) Variable cost

c) Unit volume

The following information is extracted from the records of Johnson Corporation: Target profit: $120,000 Unit contribution margin: $40 Fixed expenses: $40,000 Contribution margin ratio (CM ratio): 0.40 Selling price: $100 What are the unit sales required to attain a target profit of $120,000? a) 400,000 units b) 400 units c) 1,600 units d) 4,000 units

d) 4,000 units ($120,000 - $40,000)/$40

Contribution margin equals _______. a) sales minus fixed costs b) fixed cost minus variable cost c) sales minus variable costs minus fixed costs d) sales minus variable cost

d) sales minus variable cost

Which of the following statements is true? (You may select more than one answer.) a) One minus the contribution margin ratio equals the variable expense ratio b) Incremental analysis focuses only on the costs and revenues that change as a result of a decision c) Sales commissions based on sales dollars can lead to lower profits than commissions based on contribution margin d) If a company's total sales remain constant, then its net operating income must remain constant even if the sales mix fluctuates

A, B, and C

Assume the selling price per unit is $30, the contribution margin ratio is 40%, and the total fixed cost is $60,000. What is the break-even point in unit sales? a) 2,000 b) 3,000 c) 4,000 d) 5,000

D

The contribution margin ratio always increases when (you may select more than one answer): a) Sales increase b) Fixed costs decrease c) Total variable costs decrease d) Variable costs as a percent of sales decrease

D

The following information is extracted from the records of Johnson Corporation: Target profit: $120,000 Unit contribution margin: $40 Fixed expenses: $40,000 Contribution margin ratio (CM ratio): 0.40 Selling price: $100 What are the sales dollars required to attain a target profit of $120,000? a) $400,000 b) $300,000 c) $10,000 d) $60,000

a) $400,000 ($120,000 - $40,000)/0.40

Summarized data for Ralph Corporation: Selling price: $200 per unit Variable expenses: $150 per unit Fixed expenses: $1,000,000 per year Unit Sales: 25,000 per year What is Ralph Corporation's margin of safety in percentage? a) 20% b) 100% c) 80% d) 50%

a) 20% ($5,000,000 - $4,000,000)/$5,000,000 = 20% Margin of safety percentage = Margin of safety in dollars/total budgeted sales in dollars

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage? a) 3.00 b) 0.60 c) 2.00 d) 1.67

a) 3.00

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio? a) 40% b) 60% c) 100% d) 20%

a) 40%

What is usually plotted as a horizontal line on the CVP graph? a) Fixed expenses b) Variable costs c) Sales revenue d) Break-even volume

a) Fixed expenses

The profit graph is based on the following linear equation: a) Profit = Unit CM x Q - Fixed Expenses b) Sales = Unit CM - Unit Variable Cost c) Profit = Unit CM x Q + Fixed Expenses d) Profit = Selling Price x Q - Unit CM x Q

a) Profit = Unit CM x Q - Fixed Expenses

A shift in the sales mix from high-margin items to low-margin items can cause total profit to _______. a) decrease b) increase c) remain the same

a) decrease

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? a) 63 units b) 167 units c) 50 units d) 100 units

d) 100 units

Which of the following methods do managers use to estimate the fixed and variable components of mixed costs by analyzing past records of cost and activity data? a) scattergraph b) account analysis c) least-squares regression

c) least-squares regression

Break-even point is the level of sales at which ________. a) total profits equals total costs b) total profits exceed total costs c) total revenue equals total costs d) total sales equal total projections

c) total revenue equals total costs