Chapter 6 Learn Smart

net operating income equals

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

when using excel, the intercept (a), slope (b) and R^2 is determined by selecting any data point in the scattergraph plot and selecting Add

Trendline

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

contribution margin

he equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales: selling price per unit=

selling price per unit= variable cost per unit + desired profit per unit

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:

Variable expense ratio= variable expenses/sales 2.43/9=.27

true or false: account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation

false

Which of the following are assumption of CVP analysis?

in multi product companies, the sales mix is constant costs are linear and can be accurately divided into variable and fixed elements

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, what is the margin of safety percentage?

margin of safety in percent = margin of safety in dollars/total budgeted sales 272,000/(100000 x 17) = 16%

true or false: when using the high-low method, fixed costs are calculated after variable costs are determined.

true

the high-low method

uses only two data points is based on periods where the activity tends to be unusual

The term "cost structure• refers to the relative proportion of _____and ____costs in an

variable fixed

The single point where the total revenue line crosses the total expense line on the CVP graph indicates: (Check all that apply.)

the break-even point profit equals zero

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

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

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total

the total amount of either profit or loss

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 $_____

(10-6)x10000 - 35000 = 5000

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:

(100,000 - 80,000) / 200 = 100

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:

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

which statements regarding the high-low method are true?

. The high-low method should only be used if a scattergraph plot indicates a linear relationship between cost and activityc. It only uses two data points

If a company has a variable expense ratio of 35%, its CM ratio must be

1-.35=65

place the following items in the correct order in which they appear on the contribution

1.Sales 2.Variable Expenses 3.Contribution margin '4.Fixed Expenses 5.Net Operating Income

A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be $_____.

11+(4500/500)=20

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals:

144,000 / 0.59 = 244,608

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

20%= 5%*4

a company needs to sell 90,000 units to reach the target profit of $180,000. if each unit sells for $7.50, the total sales dollars needed to reach the target profit is

675,000 90000 x 7.5 =

CVP analysis is based on some ____ that may be violated in practice, but the tool is still generally useful

Assumptions

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

calculation of contribution margin (CM) ratio is

Contribution Margin / Sales

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 $110,000. If Tommy sells an additional 5,000 trains profit will...

Increase $120,000[change in profits= 5,000 x (50-26)]

a company with a high ratio of fixed costs

Is more likely to experience greater profits one sales are up in a company with mostly variable costs, is more likely to experience a loss when sales are down then I company with mostly variable costs

the percentage of the variation in cost that is explained by activity is

R^2

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. Which of the following statements is true?

The company should accept the idea because profit will increase by $24,000.

. Given sales of $1,452,000, variable expenses of $958,320, and fixed expenses of $354,000, the CM ratio is?

[(1,452,000-958,320)/145200] 34% CM ratio = (contribution margin)/sales

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...

[net operating income= 30,000 x (40-19) - 25,000] 380,000

If company has sale of $100,000, a contribution margin of $40,000 and a fixed expenses of $50,000.. the company has?

a $10,000 net operating loss

CVP analysis focuses on how profits are affected by:

a. mix of products sold b. unit variable cost c. total fixed costs e. sales volume f. selling price

in the formula: profit = unit CM x Q - fixed expenses, setting profit to zero can be used to calculate the _____-______ points

break-even

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

The contribution margin income statement allows users to easily judge the impact of a change in __ on profit

cost selling price volume

CVP is the acronym for ___________ - ____________ - ____________

cost - volume - profit

estimating the fixed and variable components of a mixed cost using the ____ approach involves a detailed analysis of what cost behavior should be.

engineering

true or false: when a company sells multiple products, an increase in total sales results in an increase in total profits

false a shift from high margin items to low margin items may cause total sales to increase at the same time s causing total profit to decrease

in a least-squares regression line, the vertical intercept of the line represents the total ___

fixed

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

fixed, profit

a change in sales mix

from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales. from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales.

If operating leverage is high, a small percentage increase in sales can produce a ____percentage increase in net operating income.

higher

a method that uses all the available data points to divide a mixed cost into its fixed and variable components is called

least squares regression

which method(s) use all the available data points to divide a mixed cost into its fixed and variable components

least squares regression only

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

margin of safety

Citrus fruits sells oranges for $20 per crate. If the company's margin of safety is $180,000, the margin of safety in units is ________ crates

margin of safety in dollars/ selling price = 9000

when preparing a CVP graph, the horizontal axis represents

sales volume

To simplify CVP calculations, which of the following is assumed to remain constant?

selling price

The break-even point calculation is affected by which of the following items? (Check all that apply.)

selling price per unit sales mix costs per unit

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For every $1 increase in sales____.

total contribution margin will increase by $0.70 net operating income will increase by $0.70

the break-even point can be affected by

total fixed cost contribution margin per unit sales mix

in the equation, y=a+bx, a represents the

vertical intercept of the line total fixed cost

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred.

y= $1,450 + $2.50x the high low method uses the highest and lowest level of activity, not costs, february (1,700 meals and $5700) and April (1100 and $4200) are the high and low activity months

to convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to ?

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?

98,000/(50-15) = 2,800

a company with a high ratio of fixed costs ____

Is more likely to experience greater profits one sales are up in a company with mostly variable costs, is more likely to experience a loss when sales are down then I company with mostly variable costs

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, how will these additional sales affect net operating income?

Net operating income will increase by $174,000 (Net operating income change = $600,000 X 29% = $174,000)

Chrissy's cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ratio of 72%, Chrissy's profit (loss) is____

Profit=CM ratio x Sales - Fixed Expenses = 72% x $832,000 - $265,000= $334,040

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 Elle sells 35 elephants this month, ____

Profits = $875Total Sales = $1,925Total Variable Costs = $350

Chitter Chatter sells phones and has set a target profit $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total:

Sales = (975,000/ 195000)/0.65 1,800,000

run like the wind sells ceiling fans. Target profit is $470,000. If each fans contribution margin is $32 and fixed costs are $222,640, the number of fans required to meet the companys goal is:

Sales volume= (470,000+222,640)/32 21,645

when using the high-low method, if the high or low levels of cost do not match the high or low levels of activity

choose the periods with the highest and lowest level of activity and their associated costs

the degree of operating leverage___

decreases at sales and profits rise is greatest at sales levels near the break-even point is not constant

The profit graph allows users to easily identify: (Check all that apply.)

the sales volume required t o reach the break-even point. the profit at any given sales volume.

Water World sells wake boards and water skis a111d pays commissions to their salespeople based on each product's sales price. Although the wake boards sell for a higher price than the skis, the skis have a higher contribution margin per unit than t he wake boards. Which of the following are true in reference to sales commissions? (Check all that apply.)

Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them. The company would rather see more skis sold as it creates the higher profit per unit for the company.

Which of the following statements are true?

Scattergraphs are a way to diagnose cost behavior plotting data on a scattergraph is an important diagnostic step

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) ___________ (increase/decrease) of $__________.

decrease 3000 1500 x (25 - 19) - (1200 x (25-15)) = 3000

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 being made using

incremental

The contribution margin statement is primarily used for: (Check all that apply.)

internal decision making.

Seth's Speakers has actual sales of $1,630,000. Before the beginning of the year, the company determined that Its break-even point was $935,000. What is Seth's Speakers' margin of safety in dollars?

total budgeted sales- break even sales= 695,000

At the break even point

total revenue = total cost net operating income is zero

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $___________.

26,980 total sales = 95 x 284

whenever a straight-line is a reasonable approximately for the relation between cost and activity, ___ cost behavior exists

linear

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 has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is

profit=CM ratio x sales - fixed expenses = 67% x 1,430,000- 657000

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

net operating income

Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying her $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit If Bluin switches the compensation and sales grow as expected:

net operating income will increase by $7,000 per month Current net operating income= ($100 x.250) - $5,750= $19,250. With the change net operafin income would be: ($:100 - ~30) x 250x1.50%= $26,250, an increase of $7,000_permonth.

lance, inc has sales of 9000 units. The contribution margin per unit is $32 and fixed costs total $120,000 Lance's profit is $168,000.

(9000 x 32) - 120000

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

sales

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the _____ will not change.

sales mix

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

sales mix

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...

unit

Using the high-low method, the fixed cost is calculated

using either the high or low end of activity, after the variable cost is calculated

When using the high-low method, the slope of the line equals the ________ cost per unit of activity.

variable

When a company only produces a single product, the total variable cost can be calculated with the equation:

variable cost per unit multiplied by quantity of units sold