Chapter 5

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

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

1. sales 2. variable expenses 3. contribution margin 4. fixed expenses 5. net operating income

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating (1). (Enter only one word per blank.)

1. leverage

The amount by which sales can drop before losses are incurred is the (1) of (2). (Enter only one word per blank).

1. margin 2. safety

The relative proportions in which a company's products are sold is referred to as (1) (2). (Enter only one word per blank.)

1. sales 2. mix

Variable expenses ÷ Sales is the calculation for the (1) (2) ratio. (Enter only one word per blank.)

1. variable 2. expenses

Profit = (selling price per unit × quantity sold) - ( (1) expense per unit × quantity sold) - (2) expenses. (Enter only one word per blank.)

1. variable 2. fixed

The term "cost structure" refers to the relative proportion of (1) and (2) costs in an organization. (Enter only one word per blank.)

1. variable 2. fixed

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%

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.

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

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

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

decrease

Total contribution margin equals ______.

fixed expenses plus net operating income

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

net operating income

The variable expense ratio is the ratio of variable expense to ______.

sales

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

sales mix

When preparing a CVP graph, the horizontal axis represents ______.

sales volume

Select all that apply The break-even point calculation is affected by ______.

selling price per unit costs per unit sales mix

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

Select all that apply 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

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

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

total fixed expenses

Select all that apply At the break-even point ______.

total revenue equals total cost net operating income is zero

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

$0.35

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:

$100

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is ______.

$380,000

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

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

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

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 (1) for Adams, Inc. and (2) for Baron, Inc. (Enter your answers as whole numbers.)

1. 3 2. 2

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 %. (Enter your answer as a whole number.)

1. 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 $(1). (Enter your answer as a whole number.)

1. 5,000

Contribution margin ratio is equal to (1) (2) divided by (3). (Enter only one word per blank)

1. contribution 2. margin 3. 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 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) (1) (increase/decrease) of $(2). (Enter either increase or decrease and the dollar amount as a whole number.)

1. decrease 2. 3,000

Contribution margin is first used to cover (1) expenses. Once the break-even point has been reached, contribution margin becomes (2). (Enter only one word per blank.)

1. fixed 2. profit

The break-even point is the level of sales at which the profit equals (1). (Enter only one word per blank.)

1. zero

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

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

Spice sells paprika for $9.00 per bottle. Each bottle incurs $2.43 in variable cost. Spice incurs annual fixed costs of $825,000. The variable expense ratio for paprika is:

27%

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

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

Select all that apply 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.

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

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

False

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

Sales Variable expenses

The contribution margin equals sales minus ______.

all variable costs

Contribution margin ______.

becomes profit after fixed expenses are covered

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

When constructing a CVP graph, the vertical axis represents ______.

dollars

Select all that apply When a company produces and sells multiple products ______.

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 each product most likely has a unique contribution margin.

Once the break-even point has been reached, the sale of an additional unit will lead to an increase in contribution margin that is ______ the increase in net operating income.

equal to

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

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

Select all that apply A company with a high ratio of fixed costs ______.

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

Select all that apply 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 sales = $1,925 total variable costs = $350 profits = $875

The contribution margin is equal to sales minus ______.

variable expenses