Chapter 9 Cost Management Smart Book

In a given period, sales = $100, total cost of good sold (CGS) = $30, selling and administrative expenses (i.e., operating expenses) = $20. Of the $50 total costs, $40 are classified as variable costs and the remaining costs ($10) as fixed. The total contribution margin for the period is ______.

$60 Reason: Total CM = Sales - Variable costs = $100 - $40 = $60

Given the choice of two options, one with high fixed cost and low unit variable cost (high-fixed-cost option) and the other with low fixed cost and high unit variable cost (low-fixed-cost option), the best choice for sales levels ABOVE the indifference point is the ______ fixed cost option.

high

The ______ the operating leverage, the greater the sensitivity of operating income to changes in sales volume.

higher

CVP analysis ______.

is a model of the short-term profit structure of an organization

CVP analysis _______

is a model of the short-term profit structure of an organization

In a conventional CVP model of profit behavior, total revenues are depicted as a ______.

linear function of sales volume, Q.

The break-even point is defined as the point where ______.

operating profit is zero

In CVP analysis, the term operating profit refers to ______. Multiple choice question. profit exclusive of unusual or non-recurring items before tax profit after tax but before financing costs profit exclusive of unusual or non-recurring items after tax net income before tax but after financing costs

profit exclusive of unusual or non-recurring items before tax

A graph that depicts (operating) profit as a function of changes in volume (units sold) is referred to as a ______.

profit-volume graph

By definition, a firm with high operating leverage has ______.

relatively high fixed costs

At the break-even point total ______.

revenue equals total cost

At the break-even point total ______. -contribution margin equals total sales -contribution margin equals total cost -revenue equals total fixed cost -revenue equals total cost

revenue equals total cost

If a multiproduct company cannot reasonably allocate fixed costs to each product, then a constant ___________ , _____________ must be assumed in order to build a single CVP model for profit-planning purposes.

sales mix

The level of short-term profitability of an organization is a function of: sales volume, selling price per unit, variable cost per unit, total fixed costs, and ______.

sales mix

Total contribution margin for a given accounting period equals ______.

sales volume (in units) × contribution margin per unit

On a CVP graph, the slope of the total revenue line equals ______ per unit.

selling price

The name given to a variety of approaches that examine how a given variable of interest (e.g., profit) changes in response to changes in one or more factors used to predict that variable is ______.

sensitivity analysis

Cost-volume-profit analysis is best described as a ______. short-term profit-planning tool model used for estimating cost behavior mechanism for smoothing out fixed and variable costs tool for long-term decision making

short-term profit-planning tool

Cost-volume-profit analysis is best described as a ______. short-term profit-planning tool model used for estimating cost behavior tool for long-term decision making mechanism for smoothing out fixed and variable costs

short-term profit-planning tool

A CVP graph ______.

shows how costs, revenues, and profits change in response to changes in volume (output)

The break-even point in dollars equals ______.

the break-even point in units x the selling price per unit

The concept that is relied upon to justify linear cost and revenue functions in a conventional CVP model is ______.

the relevant range

The calculation of an amount given different levels of a fact that influences that amount is ______ analysis.

what - if

The calculation of an amount given different levels of a fact that influences that amount is called ___________ - ____________ analysis.

what - if

In a contribution income statement ______.

costs are classified (i.e., grouped) by behavior (i.e., fixed vs. variable).

Margin of safety (MOS) is ______.

equal to sales above the break-even point

If the degree of operating leverage (DOL) at a given output level (Q) is 10, this means that ______.

from that output level (Q), each % change in sales leads to a 10% change in operating income

Given a sales price of $250 per unit, variable cost of $100 per unit, and fixed costs of $60,000, the breakeven in dollars is $

$100,000 Calculation : $60,000/( 250-100) = 400 units x 250= $100,000

The amount of pretax profit, πB, that is the equivalent of an after-tax profit, πA, of $100 if the tax rate is 20% is ______.

$125 Reason: $125 = $100÷(1 - 0.20)

Given a sales price of $300 per unit, variable cost of $180 per unit, and fixed costs of 150,000, the breakeven point in units is ___________ ?

$150,000/(300-180)= 1,250 units

Given a sales price of $100 per unit, variable costs of $60 per unit and $24,000 in fixed cost, calculate the operating profit if 650 units are sold.

$2,000 Reason: $24,000÷($100 - $60) = 600 units to break-even. If sales are 50 units above break-even, operating profit is $2,000 ($40 × 50).

The required sales volume in units, Q, needed to generate a given amount of pre-tax profit, πB, is ______.

(F + πB)÷(contribution margin per unit) or (F+ pre-tax profit)/ contribution margin per unit

Select all that apply CVP analysis ______.

-can help a firm execute its strategy -identifies risks in increasing fixed costs if volume falls

given a sales price of $250 per unit, variable cost of $110 per unit, and a break even point of 800 units, the estimated profit if 810 units are sold is

1400 Calculations : 250-110= 140 contribution margin x 10 units sold above break even = 1,400

Assume a selling price per unit of $10, and a variable cost per unit of $6. If sales increases by $4000, what is the increase in operating profit

1600 Calculation : The contribution margin ratio is 40%(10-6)/ 10. if sales increase by 4000 profit increase by $1600 (4,000 x 40%)

The cost of operating two machines is as follows: Machine A: $22,000 per year of fixed cost plus $6 per unit produced. Machine 2: $8,000 per year of fixed cost plus $13 per unit produced. When deciding which machine to purchase, the indifference point is _____________ units per year.

2000 units per year Calculations: 22000+(6xQ)=8000+(13XQ) 22000-8000 = 13Q - 6Q 14000 = 7Q Q = 14000 / 7 Q = 2000

The cost of operating two machines is as follows: Machine 1: $25,000 per year of fixed cost plus $8 per unit produced. Machine 2: $10,000 per year of fixed cost plus $14 per unit produced. When deciding which machine to purchase, the indifference point is _________ , Correct Unavailable units per year.

2500

The required sales volume in units, Q, needed to generate an after-tax income of $10,000, given a combined tax rate, t, of 20%, fixed costs, F, of $5,000, and a contribution margin per unit of $50 is ______ units.

350 Reason: Q = $5,000 + ($10,000÷(1 - 0.20))÷$50 per unit = 350 units

Given fixed costs, F, of $10,000, a selling price per unit, p, of $25, and variable cost per unit, v, of $10, how many units, Q, must be sold to generate a pretax profit of $50,000?

4,000 Reason: ($10,000 + $50,000)÷($25 - $10) per unit = 4,000 units

Given a sales price of $375 per unit, variable cost of $125 per unit, and fixed costs of $100,000, the breakeven point in units is

400

At a given volume level, Q, total sales revenue = $100, total variable cost = $40, and total fixed cost = $20. At this volume level, the degree of operating leverage (DOL) is ______.

60/40 = 1.50

If selling price per unit is $10, variable cost per unit is $4, and fixed cost per unit is $1, the ______. -contribution margin ratio is 40% -contribution margin per unit is $5 -total contribution margin = $10,000 -contribution margin per unit is $6

contribution margin per unit is $6 Reason: Contribution margin per unit = selling price per unit - variable cost per unit = $10 - $4.

The term that refers to the proportion of each sales dollar available for the recovery of fixed costs is ______. -total contribution margin -1 minus the contribution margin ratio -the break-even point, expressed in dollars -contribution margin ratio

contribution margin ratio

Which of the following is NOT one of the five strategic decision making steps for CVP analysis?

Choose the option that has the lowest variable costs.

The income statement used in conjunction with CVP (cost-volume-profit) analysis is called the ____________ income statement.

Contribution

T/F: When doing a CVP analysis there is no need to distinguish between variable and fixed cost

False

True or false: Facility-level costs are treated differently under CVP analysis using an activity-based costing (ABC) approach than they are under the conventional approach to CVP.

False

Given the choice of two options, one with high fixed cost and low unit variable cost (high-fixed-cost option) and the other with low fixed cost and high unit variable cost (low-fixed-cost option), the sales level where managers would be equally satisfied with either option is called the _____________ , ______________ .

Indifference point

Given the choice of two options, one with high fixed cost and low unit variable cost (high-fixed-cost option) and the other with low fixed cost and high unit variable cost (low-fixed-cost option), the sales level where managers would be equally satisfied with either option is called the _______________ , __________ .

Indifference point

When comparing two products, the product with a relatively ______ margin of safety (MOS) ratio is the riskier of the two.

Low

The margin of safety ratio is calculated as ______.

Margin of safety in units / planned sales in units

The planned or actual sales above the break-even point, measured in dollars or units is referred to as the _____________ of ______________ .

Margin; safety

The profit equation depicted in Profit-Volume (PV) graph, is:

Q x (p-v) -F

The name for a variety of methods that examine how an amount changes in response to changes in one or more factors used to predict that amount is ______________ , ________________ .

SensIndifference pointitivity analysis

True or false: An important component of strategic decision making for CVP analysis is an ongoing evaluation of the effectiveness of implementation of the desired alternative.

True

The primary difference in a CVP model that incorporates ABC data, compared to a conventional CVP profit-planning model, is the inclusion of ______.

activity-based costs (e.g., batch-level costs) rather than solely volume-related costs

Separate CVP models can be developed for individual products/services as long as there are no significant demand dependencies across products/services and ______.

all fixed costs are traceable to, or can reasonably be allocated to, individual products/services

Break-even point in units multiplied by the selling price per unit equals ______.

break-even in sales dollars

The amount by which operating profit changes for each unit change in sales is the ______.

contribution margin per unit