acct chapter 2 smartbook
The term used for the relative proportion in which a company's products are sold is:
sales mix
The break-even point is the level of sales at which the profit equals
zero
The break-even point calculation is affected by
sales mix costs per unit selling price per unit
To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to
zero
The amount by which sales can drop before losses are incurred is the
margin of safety
When using the high low method, the change in cost divided by the change in units equals __
the variable cost per unit
When a company only produces a single product, the total variable cost can be calculated with the equation:
variable cost per unit multiplied by quantity of units sold
The break-even point can be affected by:
sales mix total fixed costs contribution margin per unit
Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.
net operating income
Which of the following statements are true?
Scattergraphs are a way to diagnose cost behavior. Plotting data on a scattergraph is an important diagnostic step.
calculate the dollar sales needed
Target contribution margin=Fixed cost+Target profit =(31800+9600)=$41400 Hence target sales=Target contribution margin/contribution margin ratio
Variable expenses/Sales is the calculation for the
variable expense ratio
Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by:
$0.35
Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is
780
A company sold 20,000 units of its product at a selling price of $20. The variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is:
Contribution margin = 20,000 x ($20-$11) = $180,000.
Which of the following is needed to calculate profit?
Unit contribution margin, unit sales, and total fixed costs
Contribution margin:
becomes profit after fixed expenses are covered
High-low or least squares regression analysis should only be done if a(n) ___plot depicts linear cost behavior.
scattergraph
The contribution margin is equal to sales minus:
variable expenses
Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals:
$244,068 Reason: Sales =$144,000/ 0.59 = $244,068
Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals:
$909,677 Reason: $564,000/0.62 = $909,677
Profit equals
(P x Q) - (V x Q) - fixed expenses
If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by
20% Reason: Increase in net operating income = 5% x 4 = 20%.
A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?
Company B
A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be
Net operating income = (26,000 - 17,000) x $22 = $198,000.
Cost behavior is considered linear whenever
a straight line approximates the relationship between cost and activity
Direct materials would be classified as variable and an equipment lease would be classified as fixed because of the nature of these costs when using
account analysis
When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity:
choose the periods with the highest and lowest level of activity and their associated costs.
The calculation of contribution margin (CM) ratio is:
contribution margin/sales
A change in sales mix:
from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales
The degree of operating leverage
is not a constant is greatest at sales levels near the break-even point decreases as sales and profits rise
A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called
least-squares regression method
The relative proportions in which a company's products are sold is referred to as
sales mix
When a company produces and sells multiple products:
each product most likely has a unique contribution margin. each product most likely creates a unique total of fixed costs. a change in the sales mix will most likely change the break-even point
CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.
false
Total contribution margin equals
fixed expenses plus net operating income
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
profits = $875 total variable costs = $350 total sales = $1,925
An income statement constructed under the ______ approach allows users to easily judge the impact on profits of changes in selling price, cost or volume
contribution margin
Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.
decrease
A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating
leverage
Place the following items in the correct order in which they appear on the contribution margin format income statement.
sales variable expenses contr. margin fixed expenses net operating income
Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total:
$1,800,000 Reason: Sales = ($975,000 + $195,000)/0.65 = $1,800,000.
Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by the end of the year, net operating income for the year will increase by:
$137,500 Reason: Net operating income change = $250,000 x 55% = $137,500 increase.
Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals:
$2,200,000 Reason: Sales =($564,000 + $800,000)/0.62 = $2,200,000
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
$200,800 = ($90-$28) x Q - $320,000; $200,800 + 320,000 = $62Q; $520,800/$62 = 8,400 units
Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ratio of 72%, Chrissy's profit (loss) is:
$334,040 Reason: Profit = CM ratio x Sales - Fixed expenses = 72% x $832,000 - $265,000 = $334,040.
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:
$42,750 Reason: Total sales = $95 x 450 = $42,750
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:
$520,000 = $21 x Q - $320,000; $520,000 + 320,000 = $21xQ; $840,000/$21 = 40,000 blankets
A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be
20
CVP analysis is based on some ________that may be violated in practice, but the tool is still generally useful
assumptions
Multiplying unit selling price times the number of units required to break-even is one way to calculate
break-even sales dollar
Margin of safety in dollars is:
budgeted (or actual) sales minus break-even sales
When a company sells one unit above the number required to break-even, the company's net operating income will:
change from zero to a net operating profit
The variable cost per unit using the high-low method is calculated as _
change in cost divided by change in units (activity)
When making a decision using incremental analysis consider the
change in sales dollars resulting specifically from the decision change in cost resulting specifically from the decision
Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, what is the margin of safety percentage?
16% Reason: Margin of safety = $272,000/(100,000 x $17) = 16%.
Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is
40,000 units and $400,000 Reason: $200,000/5 = 40,000 units x $10 each = $400,000
Gifts Galore had $189,000 of Sales Revenue from wrapping paper sales last year. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was:
Contribution margin ratio = $100,170/$189,000 = 53%.
The contribution margin statement is primarily used for
internal decision making
Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is
$168,000 Reason: Profit = 200,000 x $4 - $632,000 = $168,000.
Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is
$982,000 - $932,000 = $49,800
Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is:
($1,452,000 - $958,320)/$1,452,000 = 34%.
Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit =
40,000
True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.
False
True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.
False
True or false: When a company sells multiple products, an increase in total sales always results in an increase in total profits
false
Contribution margin is first used to cover ___ expenses. Once the break-even point has been reached, contribution margin becomes____
fixed expenses, profits
CVP analysis focuses on how profits are affected by
1. selling prices 2. sales volume 3. unit variable costs 4. total fixed costs 5. mix of products sold
Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be
30
A company's current sales are $300,000 and fixed expenses total $225,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will
increase by $6,000 Reason: Change in net operating income = $70,000 x 30% - $15,000 = $6,000 increase.
The high-low method ____
uses only two data points is based on periods where the activity tends to be unusual
A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred.
y = $1,450 + $2.50x. Reason: 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.
The margin of safety percentage is:
margin of safety in dollars divided by total budgeted (or actual) sales in dollars
At the break-even point
net operating income is zero. total revenue equals total cost.
A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on net income would be a
$450 increase Reason: The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units x $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units x $35), an increase of $450. $2,450 increase
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?
$98,000/($50 - $15) = 2,800
If a company has a variable expense ratio of 35%, its CM ratio must be
65
Plush & Cushy sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Plush & Cushy's chairs is
45
A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the BREAK-EVEN point in unit sales?
Break-even point = $305,000/$40 = 7,625.
A change in profits that occurs due to a change in sales and fixed expenses may be calculated as:
CM ratio x Change in sales - Change in fixed expenses
Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs
CVP analysis
Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,000. If Tommy sells an additional 5,000 trains, profits will:
Change in profits = 5,000 x ($50 - $26) = $120,000.
If a company has sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000 the company has a
Contribution margin of $40,000 - fixed expenses of $50,000 = a $10,000 loss
Which of the following are assumptions of cost-volume-profit analysis
Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant.
A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units, net profit will be
For each unit sold above break-even, profit increases by the contribution margin per unit which is ($100,000 - $80,000)/200 or $100.
A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is
Net operating income = (750 - 450) x $120 = $36,000
Which of the following items are found above the contribution margin on a contribution margin format income statement
Sales Variable expenses
Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is:
Sales volume = ($470,000 + $222,640)/$32 = 21,645 fans.
True or false: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.
This is the engineering approach
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
Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is
Unit contribution margin= $90 -$35 = $55.
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 x ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.
According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):
decrease in the unit variable cost
Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) ______ ,of _______ $
decrease, 3000
Estimating the fixed and variable components of a mixed cost using the _____ approach involves a detailed analysis of what cost behavior should be.
engineering
Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information:
the contribution margin per putter is $65. the sale of 12,000 putters results in net operating income of $380,000 Reason: 12,000 units x $65 contribution margin = $780,000 - $400,000 = $380,000.
Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales
total contribution margin will increase by $0.70 net operating income will increase by $0.70
The break-even point is reached when the contribution margin is equal to
total fixed expenses
Candle Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units
total variable cost is $1,200 the variable cost per unit is $2.40
Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is
Sales volume = ($4,000 + $3,200)/($15.00 - $13.50) = 4,800 bottles.
Which of the following represents the equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales?
Selling price per unit = Variable cost per unit + Desired profit per unit Reason: A special order bulk sale will not increase fixed costs and therefore they should not be considered in setting a price. Variable costs are what will be incurred to complete the order.
Which of the following statements is correct?
The higher the margin of safety, the lower the risk of incurring a loss.
The first step in the high-low method is to identify the periods with the lowest and highest __
level or activity
After reaching the break-even point, a company's net operating income will increase by the ____ per unit for each additional unit sold
contribution margin
To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the:
contribution margin per unit
The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit.
cost volume selling price
CVP analysis allows companies to easily identify the change in profit due to changes in
costs, selling price, volume
A company has reached its break-even point when the contribution margin_____ fixed expenses
covers
Fantastic Frames sells its frames for $15 per unit. Variable costs total $6 per unit, and fixed costs total $90,000. If the number of units being sold increases by 2,000 frames, net operating income will:
increase $18,000 Reason: Change in net operating income = 2,000 x ($15 - $6) = $18,000.
When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using
incremental analysis
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:
Change in net operating income = ($735,000-$700,000) x 45% - $8,000 = $7,750.
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
