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Degree of operating leverage is used to:

calculate change in profit given change in sales. - The degree of operating leverage is a multiplier that we can use to predict how a percentage change in sales revenue will translate into a percentage change in profit.

cost driver

is an activity that causes total costs to change. - A cost driver is an activity that causes total costs to change.

When Carter, Inc. sells 48,000 units, its total variable cost is $115,200. What is its total variable cost when it sells 54,000 units?

$129,600 - Variable costs change in direct proportion to changes in activity. The per-unit variable cost is $2.40 ($115,200/48,000), and that amount multiplied by the increased activity level is $129,600. ($2.40 × 54,000 = $129,600)

Crystal has received a special order for 2,000 units of its product. The product normally sells for $200 and has the following manufacturing costs: Direct materials $60 Direct labor 40 Variable manufacturing overhead 30 Fixed manufacturing overhead 20 Unit cost $150 Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales. What minimum price should Crystal charge to earn an incremental profit of $50,000?

$225 - Crystal needs an additional $50,000/2,000 = $25/unit, so Crystal should charge $200 + $25 = $225.

Frontier Corp. has a contribution margin of $450,000 and profit of $150,000. What is its degree of operating leverage?

3.00 - Contribution margin is ($50 − $20) × 15,000 = $450,000. Profit is $450,000 − $300,000 = $150,000. Degree of operating leverage is $450,000/$150,000 = 3.

Be cautious of __________ expressed on a per-unit basis when weighing make-or-buy decisions. The total value (instead of the per unit value) is relevant to the decision.

fixed costs - Total fixed costs (and whether or not they change based on the decision) are relevant, not necessarily fixed costs per unit.

The contribution margin ratio is:

the contribution margin stated as a percentage of sales. - The formula for contribution margin ratio expresses the contribution margin as a percentage of sales.

Total contribution margin is defined as:

total sales revenues less total variable costs. - Total contribution margin is total sales revenue less total variable costs.

cost behavior

the way in which costs change when the activity level changes. - Cost behavior is the way in which costs change when activity levels change.

Booble, Inc. has a contribution margin ratio of 45%. This month, sales revenue was $200,000, and profit was $40,000. How much are Booble's fixed costs?

$50,000 - Contribution margin is $90,000. ($200,000 × 45% = $90,000) Fixed costs are $50,000. ($90,000 − $40,000 = $50,000)

Rose Corp. has contribution margin of $65,000, variable costs of $10 per unit, and fixed costs of $25,000. If Rose sells 13,000 units, what was the selling price per unit?

$15.00 - Contribution margin = Sales revenue − Variable costs = (SR × 13,000) − ($10 × 13,000) = $65,000. SR = $195,000/13,000 = $15.

Dragon, Inc. has actual sales of $400,000 and a margin of safety of $150,000. What is Dragon's break-even point in sales?

$250,000 - Actual sales less margin of safety equals the break-even point. $400,000 - $150,000 = $250,000

Quail, Inc., has a contribution margin of 40% and fixed costs of $130,000. What is the break-even point in sales dollars?

$325,000 - Calculate the break-even point in sales dollars by dividing fixed costs by the contribution margin ratio. $130,000/0.40 = $325,000

Idaho Corp. has fixed costs of $20,000 and a contribution margin ratio of 50%. Currently, sales are $75,000. What is Idaho's margin of safety?

$35,000 - Sales less fixed costs divided by contribution margin ratio equals margin of safety. $75,000 - ($20,000/0.50) = $35,000

Harvest Corp. has a contribution margin ratio of 30%, fixed costs of $45,000, and a profit of $60,000. What are total sales?

$350,000 - Contribution margin is $60,000 + $45,000 = $105,000 = Sales × 30%. Sales = $350,000.

Maple Corp. has a selling price of $20, variable costs of $15 per unit, and fixed costs of $25,000. Maple expects profit of $300,000 at its anticipated level of production. What is Maple's unit contribution margin?

$5.00 - Unit contribution margin is selling price per unit, less variable costs per unit. ($20.00 − $15.00 = $5.00)

Belle Corp. has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of $100,000. What sales revenue is needed to break-even?

$500,000 - Break-even point in units is $100,000/($50 − $40) = 10,000. Revenue = 10,000 × $50 = $500,000. Alternatively, break-even point in sales dollars is fixed costs divided by contribution margin ratio. ($100,000/($10/$50) = $500,000)

Almond has received a special order for 6,000 units of its product at a special price of $90. The product normally sells for $120 and has the following manufacturing costs: Direct materials $36 Direct labor 24 Variable manufacturing overhead 18 Fixed manufacturing overhead 12 Unit cost $90 Assume that Almond has sufficient capacity to fill the order. If Almond accepts the order, what effect will the order have on the company's short-term profit?

$72,000 increase - ($90 − $36 − $24 − $18) × 6,000 = $72,000 increase. Fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis.

Market Inc. has two divisions, Talbot and Heather. Following is the income statement for the past month: Talbot Heather TotalSales $280,000 $168,000 $448,000 Variable Costs 168,000 67,000 235,000 Contribution Margin 112,000 101,000 213,000 Fixed Costs (allocated) 112,500 67,500 180,000 Profit Margin $(500) $33,500 $33,000 What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable?

$79,000 loss - Contribution margin $101,000 − Fixed costs $180,000 = ($79,000). Since all the fixed costs are unavoidable, the other remaining division would have to absorb them if the Talbot division was dropped.`

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: Direct materials $12 Direct labor 8 Variable manufacturing overhead 12 Fixed manufacturing overhead 8 Total unit cost $40 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp. accepts the outside offer, what will be the effect on short-term profits?

$80,000 decrease - $36 − ($12 + $8 + $12) × 20,000 = $80,000 decrease. Fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis.

Potter has received a special order for 10,000 units of its product at a special price of $24. The product normally sells for $32 and has the following manufacturing costs: Direct materials $9.60 Direct labor 4.80 Variable manufacturing overhead 3.20 Fixed manufacturing overhead 9.60 Unit cost $27.20 Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Potter accepts the order, what effect will the order have on the company's short-term profit?

$80,000 decrease - ($32 − $24) × 10,000 = $80,000 decrease. When capacity is constrained the company will have to give up an $8 per unit difference in price due to lost sales to regular customers. This equates to an $80,000 decrease in short term profit.

Ross has received a special order for 10,000 units of its product at a special price of $30. The product normally sells for $40 and has the following manufacturing costs: Direct materials $12 Direct labor 6 Variable manufacturing overhead 4 Fixed manufacturing overhead 12 Unit cost $34 Assume that Ross has sufficient capacity to fill the order. If Ross accepts the order, what effect will the order have on the company's short-term profit?

$80,000 increase - ($30 − $12 - $6 − $4) × 10,000 = $80,000 increase. Fixed manufacturing overhead is not relevant to this decision, so it is excluded from the analysis.

Elk Corp. has sales of $300,000, a contribution margin ratio of 40%, and a target profit of $30,000. If 20,000 units were sold, what is the variable cost per unit?

$9.00 - Contribution margin is $300,000 × 40% = $120,000. Total variable costs are $300,000 − $120,000 = $180,000. Variable cost per unit is $180,000/20,000 = $9.00. Alternatively, if contribution margin ratio is 40%, then variable cost ratio is 60%, so sales multiplied by the variable cost ratio divided by units is the variable cost per unit. ($300,000 × 60% = $180,000/20,000 = 9 per unit)

Presidio, Inc., produces one model of mountain bike. Partial information for the company follows:Required:1. Complete Presidio's cost data table.2. Calculate Presidio's contribution margin ratio and its total contribution margin at each sales level indicated in the cost data table assuming the company sells each bike for $650.3. Calculate net operating income at each of the sales levels assuming a sales price of $650.

1.Supporting Calculations (in order they must be made):Variable cost per unit = $125,000 / 625 units = $200.00 (Since variable costs per unit are constant, this number is the same for all three columns.) Fixed cost per unit = $543.75 − $200.00 = $343.75 Total fixed cost = $343.75 × 800 units = $275,000 (Since total fixed costs are constant, this number is the same for all three columns). 800 units × $200 variable cost per unit = $160,000 1,050 units × $200 variable cost per unit = $210,000 $275,000 / 625 units = $440.00 $275,000 / 1,050 units = $261.90 2. Bikes Produced and Sold 625 Units 800 Units 1,050 Units Total Revenue ($650 × Units Sold) $406,250 $520,000 $682,500 Variable Costs ($200 × Units Sold) 125,000 160,000 210,000 Contribution Margin $281,250 $360,000 $472,500 Contribution Margin Ratio (Contribution Margin / Total Revenue) 69.23% 69.23% 69.23% 3. Bikes Produced and Sold 625 Units 800 Units 1,050 Units Total Revenue ($650 × Units Sold) $406,250 $520,000 $682,500 Variable Costs ($200 × Units Sold) 125,000 160,000 210,000 Contribution Margin $281,250 $360,000 $472,500 Fixed Cost 275,000 275,000 275,000 Net Operating Income $6,250 85,000 197,500

Merlot, Inc. has fixed costs of $200,000, sales price of $50, and variable cost of $30 per unit. How many units must be sold to earn profit of $80,000?

14,000 - Calculate target profit by adding fixed costs to target profit, and dividing the result by the per unit contribution margin. ($200,000 + $80,000)/($50 − $30) = 14,000

Jasmine Corp. has a selling price of $15, variable costs of $10 per unit, and fixed costs of $25,000. Contribution margin is $85,000. How many units did Jasmine sell?

17,000 - Contribution margin = Sales revenue − Variable costs = $15X − $10X = $85,000. X = $85,000/$5 = 17,000.

A company's normal operating activity is to produce 500 units per month. During its first two months of operations, it produced 100 units per month. Following a great article about the product, product sales spiked to 1,000 units per month, but the spike only lasted for one month. Which of the following best approximates the company's relevant range?

450 - 510 units - Relevant range is a company's "normal" operating range. In this case, the relevant range is close to 500 units per month, even though historically production has been both considerably higher and lower than that.

Jasper Corp. has a selling price of $30, and variable costs of $20 per unit. When 12,000 units are sold, profits equaled $70,000. How many units must be sold to break-even?

5,000 - Fixed costs are [($30 − $20) × 12,000] − $70,000 = $50,000. Break-even point is $50,000/($30 − $20) = 5,000.

Mira Corp. has a selling price of $50 per unit, variable costs of $40 per unit, and fixed costs of $90,000. How many units must be sold to break-even?

9,000 - Calculate break-even point by dividing fixed costs by the unit contribution margin. $90,000/($50 - $40) = 9,000

Which of the following is a variable cost? A cost that is $26,000 when production is 65,000, and $26,000 when production is 91,000. A cost that is $26,000 when production is 65,000, and $36,400 when production is 91,000. A cost that is $26,000 when production is 65,000, and $52,000 when production is 91,000. A cost that is $52,000 when production is 65,000, and $52,000 when production is 91,000.

A cost that is $26,000 when production is 65,000, and $36,400 when production is 91,000. - A variable cost increases in total when activity increases, but stays the same per unit. ($26,000/65,000 = $0.40 per unit; $0.40 × 91,000 = $36,400)

Which of the following statements is not correct about cost-volume-profit analysis? CVP analysis is a decision-making tool for managers. CVP analysis focuses on the relationship among volume and mix of units sold, prices, variable costs, fixed costs, and profit. CVP analysis works best when all variables are changed concurrently. Managers use CVP analysis to evaluate how changing one key variable will impact profitability, while holding everything else constant.

CVP analysis works best when all variables are changed concurrently. - CVP analysis works best when managers change one key variable to determine the impact on profitability, while holding everything else constant (not while changing all variables concurrently).

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. Costs/BenefitsCollege CourseCommunity CourseCost$3,000$1,000Distance to course0.25 miles (walking distance)15 miles (driving distance)Timing of courseWeekdayWeekendNumber of meetings168Qualitative considerationsConvenience, quality of instructionFlexibility, brief duration If you earn a scholarship that covers 95% of your tuition costs at the college (but cannot be applied to other learning opportunities), which option would you choose (based on net enrollment cost)?

College course - The net cost of the college course is $150 [$3,000 × (1 − 0.95) = $150], making it considerably less expensive than the community course.

The law firm of Regal and Porter is examining its client base to determine how profitable its regular clients are. Its analysis indicates that Hawthorne, Inc. paid $179,200 in fees last year, but cost the firm $208,600 ($168,000 in billable labor, supplies, and copying, and $40,600 in allocated common fixed costs). If Regal and Porter dropped Hawthorne, Inc. as a client, and all fixed costs are unavoidable, how would profit be affected?

Decrease $11,200 - $179,200 − $168,000 = $11,200 in lost profit. Included in the cost is $40,600 in allocated fixed costs, which are unavoidable, so these would be excluded from the analysis.

Which of the following steps in the managerial decision-making process involves differential analysis?

Evaluate the costs and benefits of the alternatives. - A decision-maker evaluates only the costs and benefits that differ across alternatives. This is called differential analysis.

Which of the following statements is true? Fixed costs are constant on a per unit basis. Variable costs per unit decrease as activity volume increases. Variable costs are constant in total dollars. Fixed costs are constant in total dollars.

Fixed costs are constant in total dollars. - Fixed costs remain the same in total, and decrease per unit, as volume increases. Variable costs increase in total, and stay the same per unit, as volume increases.

Which of the following is not a step in the managerial decision-making process? Identify the activity cost drivers. Review the results of the decision-making process. Determine the alternatives. Evaluate the costs and benefits of the alternatives.

Identify the activity cost drivers. - The five steps are: identify the decision problem, determine the decision alternatives, evaluate the costs and benefits of the alternatives, make the decision, and review the results of the decision.

Which of the following is true of a firm that has reached the limit on its resources?

Opportunity costs are now relevant. - A firm that has reached the limit on its resources must give up regular production to fill special orders, and therefore opportunity costs become relevant.

Dundee Company currently produces three products from a joint process. The joint process has total costs of $250,000 per month. All three products, A, B & C, are immediately saleable as they come out of the joint process. Alternatively, any of the products could continue on with additional processing and be sold as a more complete product. The following information is available: Units - Immediate Sales Price - Later Sales Price - Unit Cost of Further Processing A. 50,000 $5 $10 $6 B. 75,000 $10 $15 $4 C. 100,000 $15 $20 $3 Which of the products should be sold after further processing?

Products B and C - The incremental revenue from A, $5, is less than the additional cost, $6, so A should not be processed further. The incremental revenue from B, $5, is more than the additional cost, $4. The incremental revenue from C, $5, is more than the additional cost, $3. Since products B and C have higher incremental revenues when compared to the immediate sales prices, they should be processed further.

It costs Camp, Inc. $35 per unit to manufacture 1,000 units per month of a product that it can sell for $50 each. Alternatively, Camp could process the units further into a more complex product, which would cost an additional $30 per unit. Camp could sell the more complex product for $75 each. How would processing the product further affect Camp's profit?

Profit would decrease by $5,000. - Incremental revenue $25,000 − Incremental cost $30,000 = ($5,000)

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales?

Special-order - A special-order decision involves deciding whether to accept or reject an order that is outside the scope of normal sales.

The formula for break-even point in terms of units is:

Total fixed costs/Unit contribution margin - The formula for break-even units is total fixed costs divided by the unit contribution margin.

The margin of safety is the difference between:

actual sales and break-even sales. - Margin of safety = Actual sales or budgeted sales - break-even sales.

All else being equal, if sales revenue doubles, fixed costs will:

decrease on a per unit basis. - Fixed costs decrease on a per unit basis when activity levels increase, but they remain the same in total.

Mohave, Inc. produces approximately 4,000 units per month, and it places a quality assurance logo on each of its units. To use this logo, it must pay the quality assurance firm $5,000 per month plus $1 per unit. The cost to Mohave of using the quality assurance logo would be a:

mixed cost. - This cost has both a fixed and a variable component, which makes it a mixed cost.

Profit is indicated on a cost-volume-profit graph by:

the vertical difference between the revenue line and the cost line. - The vertical difference between the revenue line and the cost line is revenue minus cost, which equals profit. The horizontal difference between these lines is the change in volume, which isn't equal to profit. The distance between zero and the break-even point (horizontally or vertically) does not indicate profit, since it would be less than the break-even point (indicating a loss).