Ch 6 SB ACCT 252

The amount by which sales can drop before losses are incurred is the ?

Margin of Safety

At the break-even point? Select all that apply:

Net operating income is zero Total revenue equals total cost

Select all that apply: At the break-even point

Net operating income is zero Total revenue equals total cost

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

$0.35

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: ($975,000 + $195,000) ÷ 0.65 = $1,800,000

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

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

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was _______?

$2,200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

Company A has fixed costs of $564,000 and has set a target profit of $800,000. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals

$2,200,000 Reason: ($564,000 + $800,000) ÷ 0.62 = $2,200,000

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 to break-even. 6,400 units are needed to earn the target profit.

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 Reason: ($100 - $70 = $30) For every unit above break-even, profit increases by the contribution margin per unit.

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

$36,000 Reason: Net operating income = (750 - 450) × $120 = $36,000.

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

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by ?

20% Reason: 5% × 4 = 20%

Select all that apply: Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has

A contribution margin equal to fixed costs. Reached the break-even point.

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?

Baron Inc.'s net income grows twice as fast as its sales. Reason: The operating level of $44,000 ÷ 22,000 = 2 for Baron indicates that the company's net operating income grows twice as fast as sales. Adams has a higher degree of operating leverage than Baron. Reason: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron. (Reason: Operating leverage: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron. This means Adams will experience a greater decrease if sales fall. )

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 Cost Volume Profit Analysis

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

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

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 60% increase in net income for Company B.

Once the break-even point has been reached, net operating income will increase by the amount of the unit ________, _______________for each additional unit sold.

Contribution margin.

CVP is the acronym for __-__-__

Cost Volume Profit

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

Decrease Reason: Sales - variable cost = contribution margin so an increase in variable cost per unit decreases contribution margin per unit.

When a company produces and sells multiple products:

Each product most likely has different costs A change in the sales mix will most likely change the break-even point Each product most likely has a unique contribution margin

The term "cost structure" refers to the relative proportion of _______ & _______costs in an organization.

Fixed variable

The contribution margin as a percentage of sales is referred to as the contribution margin or CM ______?

Ration contribution margin ratio

The break-even point calculation is affected by___________

Selling price per unit Sales mix Costs per unit

Which of the following statements is correct?

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

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 sale of 12,000 putters results in net operating income of $380,000. The contribution margin per putter is $65.

The break-even point is reached when the contribution margin is equal to:

Total fixed expenses

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.

Variable expenses ÷ Sales is the calculation for the ________,___________ ratio.

Variable Expense

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

Variable expenses Sales

Contribution Margin

becomes profit after fixed expenses are covered

The degree of operating leverage =

contribution margin ÷ net operating income

The calculation of contribution margin (CM) ratio is:

contribution margin ÷ sales

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 $3000

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 $3000

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

A company is currently selling 10,000 units per month of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will ?

increase by $24,000 Reason: An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

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 Reason: ($70,000 × 30%) - $15,000 = $6,000 increase

Operating leverage is a measure of how sensitive ________

net operating income is to a given percentage change in sales dollars.

The variable expense ratio is the ratio of variable expense to

sales

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?

$49,800 Reason: $982,000 - $932,200 = $49,800.

Profit equals

(P × Q - V × Q) - fixed expenses.

CVP (Cost Volume Profit) analysis focuses on how profits are affected by

1. Mix of products sold 2. Sales Volume 3. Unit variable cost 4. Selling price 5. Total fixed costs

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

1. Product mix 2. Selling price 3. Volume

Place the following items in the correct order in which they appear on the contribution margin format income statement.

1. Sales 2. Variables Expenses 3. Contribution Margin 4. Fixed Expenses 5. Net operating income

A company with a high ratio of fixed costs:

1.) Is more likely to experience a loss when sales are down than a company with mostly variable costs. 2.) Is more likely to experience greater profits when sales are up than a company with mostly variable costs.

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 Reason: Sales volume = ($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% Reason: Variable expense ratio = Variable cost per unit ÷ Selling price per unit = $2.43 ÷ $9.00 or 27%

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

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

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: Unit sales to break-even = Fixed expenses ÷ Contribution margin per unit = $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.

If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by________?

90%

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to ?

Decrease by $16,000 Reason: Total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease.

Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False Reason: Incremental analysis only requires information about the change in sales, not the previous ones.

Cost structure refers to the relative portion of product and period costs in an organization. True false question.

False Reason: Cost structure refers to the relative portion of fixed and variable costs in an organization.

Contribution margin

It becomes profit after fixed expenses are covered. Reason: Contribution margin equals sales minus variable expenses. Reason: Because contribution margin is a variable amount, it is affected by changes in activity. Reason: The contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses.

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

Operating leverage

True or False Question Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

True: Reason: This is true. Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs. Both have advantages and disadvantages.

True or false: Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

True: Reason: This is true. Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs. Both have advantages and disadvantages.

The contribution margin equals = sales minus (-) all ______ expenses.

Variable expenses.

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

Volume Selling price Product mix

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

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.

three two

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 Reason: means that for each dollar increase in sales, total contribution margin will increase by 70 cents ($1 sales × CM ratio of 70%). Net operating income will also increase by 70 cents, assuming that fixed costs are not affected by the increase in sales.

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 Reason: 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.

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 Reason: ($10 - $6) * 10,000 - $35,000 = $5,000

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 $___________

$5000 Reason: ($10 - $6) * 10,000 - $35,000 = $5,000.

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

$55 Reason: Unit contribution margin= $90 -$35 = $55.

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

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) x unit contribution margin.

A company with a high ratio of fixed costs:

- Is more likely to experience greater profits when sales are up than a company with mostly variable costs. - Is more likely to experience a loss when sales are down than a company with mostly variable costs

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by?

20% Reason: 5% × 4 = 20%

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% 85.05 / 189

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 expenses 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.

If operating leverage is high, a small percentage increase in sales produces a _____

higher percentage increase in net operating income than if operating leverage is low