ACCT: Chapter 6

Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivian's Violins net operating income is ______.

$99,000 Reason: Net operating income = $184,000 - $85,000 = $99,000

Net operating income equals ______.

(unit sales - unit sales to break even) × unit contribution margin

Total contribution margin equals ______.

fixed expenses plus net operating income

Contribution margin is first used to cover _______ expenses. Once the break-even point has been reached, contribution margin becomes _______.

fixed; profit

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

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the ______.

degree of operating leverage

The contribution margin as a percentage of sales is referred to as the contribution margin or CM _______.

ratio

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

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

contribution margin ÷ sales

CVP analysis allows companies to easily identify the change in profit due to changes in ______.

volume selling price costs

Seth's Speakers had actual sales of $1,630,000 If break-even sales equals $935,000, Seth's margin of safety in dollars is ______.

$695,000 $1,630,000 - $935,000 = $695,000

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

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

The degree of operating leverage = ______.

Contribution Margin / Net Operating Income

Which of the following statements is correct?

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

Contribution margin ______.

becomes profit after fixed expenses are covered Reason: Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses.

A company's current sales are $300,000 and fixed expenses total $85,000. 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 ($70,000 × 30%) - $15,000 = $6,000 increase

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 ______.

increase by $7,750 (($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase

A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is ______.

$180,000 Contribution margin = 20,000 × ($20 - $11) = $180,000.

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 ______.

$198,000 Net operating income = (26,000 - 17,000) × $22 = $198,000.

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.

$380,000 Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000

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 contribution margin would be a ______.

$450 increase The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.

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 ______.

21,645 ($470,000 + $222,640) ÷ $32 = 21,645 fans

Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is ______.

27% $2.43 ÷ $9.00

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is ______.

34% ($1,452,000 - $958,320) ÷ $1,452,000 = 34%

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is for Adams, Inc. and for Baron, Inc.

3; 2

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 ______.

4,800 ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

Adams has a higher degree of operating leverage than Baron. Baron's net income grows twice as fast as its sales.

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

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

decrease

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

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating _______.

leverage

The amount by which sales can drop before losses are incurred is the _______ of _______.

margin of safety

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

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

sales mix

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

sales mix

The contribution margin equals sales minus all ______ expenses.

variable

The contribution margin is equal to sales minus ______.

variable expenses

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 units $98,000 ÷ ($50 - $15) = 2,800

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ______.

40,000 ($520,000 + $320,000) ÷ $21 = 40,000

Seating Galore 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 Seating Galore's _______ chairs is %

45%

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $_______.

5,000

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was ______.

53% $100,170 ÷ $189,000 = 53%

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

False

Terry's Trees has reached its break-even point and has a contribution margin ratio of 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

At the break-even point ______.

total revenue equals total cost net operating income is zero

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 expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) _______(increase/decrease)_______of $ .

decrease; 3,000