ACCTG 202 Ch. 5 Learn smart

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

$0.35

Place the following items in the correct order in which they appear on the CM format income statement:

1. Sales 2. Variable expenses 3. CM 4. Fixed expenses 5. NOI

The break-even pint calculation is affected by:

Sales mix, Costs per unit, Selling price per unit

A company needs to sell 90,000 units to reach the target profit of $1800,000. If each unit sells fro $7.50, the total sales dollars needed to reach the target profit is:

$675,000 (90,000 x 7.50 = 675,000)

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 (564,000/0.62 = 909,677)

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

CM ratio x Change in sales - Change in fixed expenses.

To calculate the degree of operating leverage, divide _______ _________ by NOI.

Contribution margin

The CM income statement allows users to easily judge the impact of a change in ________, _____ _______, ________ on profit

Cost, selling price, volume

True or False: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.

False

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:

Net operating income will increase by $0.70 Total contribution margin will increase by $0.70

Variable expenses/Sales is the calculation of the _____ ______ ratio.

Variable expense

Profit = (selling price per unit x quantity sold) - (_________ expense per unit x quantity sold) - ________ expenses.

Variable; Fixed

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 company has reached its break-even point when the contribution margin __________ fixed expenses.

equals

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% (85.05/189 = 45%)

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total:

Sales

Company A sod 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unity, and the fixed expenses total $632,000. Company A's profit (loss) is:

$168,000 (Profit = 200,000 x 4 - 632,000 = 168,000)

Place the following items in the order in which sales dollars are applied on a CM income statement.

1. Variable costs 2. Fixed expenses 3. Net income

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs toatl $30,000. A move to a larger facility would increase rent expense by $8000 and allow the company to meet its demand for an addition 1000 units. If the move is made, profits will:

decrease by $2000 (6000(1000x(10-4)) - 8000 new cost = <2000>)

Anne's Antique store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by:

$174,000 (600,000 x 29% = 174,000)

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = ______.

$40,000 (500,000 x 68% - 300,000 = 40,000

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

$99,000 (184,000 - 85,000 = 99,000)

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)

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:

7,625 units (305,000/40 = 7625)

The calculation of contribution margin (CM) ratio is:

contribution margin/sales

CVP analysis focuses on how profits are affected by:

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

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was:

$3,800 (95 x 40 = 3800)

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is:

19% (559,740/2,946,000 = 19%)

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 (200,000/5 = 40 units x 10 = 400,000)

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials whcih will increase variable costs to $19. The company currently sells 1200 pillows per month and expects that the improved materials would increase sales to 1500 per month. The impact of this change on total CM would be a(n) _______ of ________.

Decrease; $3,000 (1500 x (25 - 19) - 1200 (25-25) = 3000)

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 $110,00. If Tommy sells an additional 5000 trains, profits will:

Increase $120,000 (5000 x 950-26) = 120,000)

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

Operating leverage

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on the information:

The sale of 12,000 putters results in net operating income of $380,000. (12,000 x 65 = 780,000 - 400,000 = 380,000) The contribution margin per putter is $65

Candie 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 Candie Central sells 500 units:

Total variable cost is $1,3200 (1440/600 = 2.4 x 500 = 1,220) The variable cost per unit is $2.40 (1440/600 = 2.4)

The contribution margin is equal to sales minus:

variable expenses.

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 (520,000 + 320,000 / 21 = 40,000)

When a company produces and sells multiple products:

A change in the sales mis will most likely change the break-even pint Each product cost likely creates a unique total of fixed costs. Each product most likely has a unique CM.

A company is currently selling 10,000 units of a product. The selling price is $40 per unit and the CM is $27 per unit. The company thinks spending $50,000 on advertising will increase sales by 750 units per month and allow them to increase the selling price to $45 per nit. If this is correct the company should:

Accept the idea because profit will increase by $24,000 (An increase in selling price of $5 will increase the CM $5 (from $27 to $32). The increased CM of $74000 ((10,750 x 32) - (10000 x 27)) - the additional fixed costs of $50,000 = a profit increase of $24,000)

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:

53% (100,170/189,000 = 53%)

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:

In crease by $7,750 (Change in NOI = 735,000 - 700,000 x 45% - 8,000 = 7,750.)

A company's current sales are $300,000 and fixed expenses toatl $225,000. The CM 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 $6000 (70,000 x 30% - 15000 = 6000)

Net operating income can be estimated for any sales volume above the break-even point by ___________ the number of units sold above the point by the unit CM.

Multiplying