ACCT 2302 | Chapter 6

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

fasle Reason: This is the engineering approach.

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

CVP analysis focuses on how profits are affected by ______.

selling price, mix of products sold, total fixed costs, sales volume, unit variable cost

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

contribution margin/sales

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ______.

$ 7,750 Reason: Change in net operating income = ($735,000 - $700,000) × 45% - $8,000 = $7,750.

The term "cost structure" refers to the relative proportion of (1) and (2) costs in an organization. (Enter only one word per blank.)

1. variable 2. fixed

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

Profit Formula

= (Sales - Variable expenses) - Fixed expenses

if Margin of safety is negative then you are operating _______ breakeven point

Below

Degree of Operating Leverage Formula

Contribution Margin / Net Operating Income

The degree of operating leverage = ______.

Contribution Margin / Net Operating Income

The amount by which an item contribution towards covering fixed cost and providing for profit is known as?

Contribution margin

Margin of safety can presented in ____ and ____.

Percent and Units

The variable expense ratio is the ratio of variable expense to ______.

Sales

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

Sales mix

The rise-over-run formula for the slope of a straight line is the basis of ______.

The high-low method

Formula for Variable Expense Ratio?

Variable expense / sales

Cost behavior is considered linear whenever ______.

a straight line approximates the relationship between cost and activity

When a company produces and sells multiple products ______. Select all that apply. a. a change in the sales mix will most likely change the break-even point b. each product most likely has different costs c. each product most likely has a unique contribution margin d. the sales mix has no effect on the company's profit

a,b,c

The contribution margin equals sales minus ______.

all variable cost

A company with a high ratio of fixed costs ______. Select all that apply. a. will be able to avoid some of the fixed costs when sales decrease by lowering production b. is more likely to experience a loss when sales are down than a company with mostly variable costs c. will not be concerned about fluctuating sales d. is more likely to experience greater profits when sales are up than a company with mostly variable costs.

b,d

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 ______.

decrease by 2,000 Reason: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

The relative proportions in which a company's products are sold is referred to as ______.

sales mix

Percent Change in profits Formula

% change in sales/ Degree of operating leverage

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: Sales volume = ($520,000 + $320,000) ÷ $21 = 40,000 blankets.

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 ______.

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

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 ______.

8,400 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

True or 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.

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False Reason: The margin of safety is the excess of the budgeted (or actual) sales dollars over break-even sales dollars.

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

False Reason: Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

Place the following items in the correct order in which they appear on the contribution margin format income statement. a. Contribution Margin b. Sales c. Fixed Expenses d. Net operating income e. Variable expenses

b. Sales e. Variable expenses a. Contribution Margin c. Fixed Expenses d. Net operating income

To prepare a CVP graph, lines must be drawn representing total revenue, ______. a. break-even point, and profit b. total expense, and total fixed expense c. total expense, and profit d. total variable expenses, and total fixed expense

b. total expense, and total fixed expense

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

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

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as ______. a. the leverage leap b. the margin of safety c. the degree of operating leverage d. sales commissions percentage

c. the degree of operating leverage

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______. a. increase in total fixed cost b. decrease in unit selling price c. change in sales mix d. decrease in the unit variable cost

d. decrease in the unit variable cost

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

dollars

estimating the fixed and variable components of a mixed cost using the ____ approach involves a detailed analysis of what cost behavior should be.

engineering

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called ______.

least-square regression

The best fitting line minimizes the sum of the squared errors when using ______.

least-square regression

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals _______ _______ behavior.

linear cost

True or false: The sales mix must be taken into 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 Reason: Because selling prices, costs, and contribution margins of the products differ, the sales mix is assumed to be constant when doing break-even calculations.

When using the high-low method, the slope of the line equals the ________ cost per unit of activity.

variable

Which of the following items are found above the contribution margin on a contribution margin format income statement?

variable expenses and sales

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month:

total sales = $1925 total sales = 35 x $55 = $1925 profits = $875 profits = 35 x ($55-$10) - $700 = $875 total variable costs = $350total variable costs = (35 x $10) = $350