Chap 5 smartbook

To calculate the degree of operating leverage, divide __________ by __________ net operating income.

contribution; margin

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

$0.35

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be

$1,520,000

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

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

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

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

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

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

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

Profit equals:

(P × Q - V × Q) - fixed 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

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

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

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

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

Which of the following statements is correct? Multiple choice question. 1. The higher the margin of safety, the higher the risk of incurring a loss. 2. The risk of loss is not impacted by the margin of safety. 3. The higher the margin of safety, the lower the risk of incurring a loss.

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

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

When making a decision using incremental analysis consider the

change in cost resulting specifically from the decision change in sales dollars resulting specifically from the decision

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

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

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

false

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

false

f operating leverage is high, a small percentage increase in sales produces a __________ (higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

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

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 ________ analysis.

incremental

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.

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

leverage

At the break-even point ______.

net operating income is zero, total revenue equals total cost

The variable expense ratio equals variable expenses divided by

sales

The variable expense ratio is the ratio of variable expense to

sales

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

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, ______.

total variable costs = $350 total sales = $1,925 profits = $875

CVP analysis focuses on how profits are affected by ______.

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

When preparing a CVP graph, the horizontal axis represents:

unit volume.

The term "cost structure" refers to the relative proportion of __________ and __________ costs in an organization.

variable; fixed

A company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 per month on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. The company should ______ the idea because profit will ______.

accept; increase by $24,000

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

sales mix

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

sales; mix

The break-even point is the level of sales at which the profit equals

zero

When constructing a CVP graph, the vertical axis represents:

dollars.

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

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

degree of operating leverage

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

ratio

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

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is

29%

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

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%

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

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

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.

The break-even point calculation is affected by ______.

selling price per unit costs per unit sales mix

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

Ceramic Creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If Ceramic Creations sells 25,000 pots, net operating income will be:

$130,000.

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

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

net operating income

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be

$100

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

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

false

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