Managerial Accounting Chapter 5

Contribution Margin Ratio is equal to ______________________ ______________________ divided by _______________________.

- contribution margin - sales

True or False: Cost structure refers to the relative proportion of product and period costs in an organization

False

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by: $0.65 OR $0.35

$0.35

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ration is 65%, and fixed sots are $195,000. Sales dollars needed to earn the target profit total: A. $1,200,000 B. $1,170,000 C. $1,800,000 D. $760,500

(975,000 + 195,000) / 0.65 = 1,800,000

A company with a high ration of fixed costs: - will not be concerned about fluctuation sales - will be able to avoid some of the fixed costs when sales decreases by lowering production - 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

- 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 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

Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ration of 72%, Chrissy's profit (loss) is: A. $334,040 B. $(32,040) C. $567,000 D. $599,040

832,000 x (1-0.72) = 232,960 832,000 - 232,960 = 599,040 599,040 - 265,000 = 334,040

Plush & Cushy sells high-end desk chairs. The variable expense per char is $85.05 and the chairs sell for $189.00 each. The variable expense ration for Plush & Cushy is ________%.

85.05 / 189.00 = 0.45 = 45%

Which of the following represents the 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? A. selling price/unit = CM per unit + Fixed cost per unit B. selling price/unit = Variable cost per unit + Fixed cost per unit C. selling price/unit = Variable cost per unit + Desired profit per unit

C. selling price/unit = Variable cost per unit + Desired profit per unit - a special order bulk sale will not increase fixed costs and therefore they should not be considered in setting a price. Variable costs are what will be incurred to complete the order.

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in a net income for Company B. Based on this, which company has a greater operating leverage? - Company A - Company B

Company B

Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to: A. have sales equal fixed costs B. break-even C. reach a profit level of 100% of sales

break-even

The measure of how a percentage change in sales affects profits at any given level of sales is the: - contribution margin ration - margin of safety - degree of operating leverage

degree of operating leverage

When constructing a CVP graph, the vertical axis represents: A. fixed costs B. dollars C. unit volume D. variable costs

dollars

The single point where the total revenue line crosses the total expense line on the CVP graph indicates: - profit equals zero - profit is less than zero - profit is greater than zero - the break-even point

- profit equals zero - the break-even point

Which of the following items are found above the contribution margin on a contribution margin format income statement? - net operation income - sales - variable expenses - fixed expenses

- sales - variable expenses

The profit graph allows users to easily identify: - total expenses incurred at any given sales volume - the profit at any given sales volume - the sales volume required to reach the break even point

- the profit at any given sales volume - the sales volume required to reach the break even point

Variable expenses/Sales is the calculation for the ______________________ ________________________ ratio.

- variable expense

Given sales of $1,452,000, variable expenses of $958,320, and fixed expenses of $354,000, the contribution margin ratio is: A. 24% B. 66% C. 90% D. 34%

1,452,000 - 958,320 = 493,680 493,680 / 1,452,000 = 0.34 = 34%

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: A. 5,787 B. 18,600 C. 5,162 D. 8,400

200,800 + 320,000 / 62 = 8,400

Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals: A. $69,730 B. $42,750 C. $26,980

95 x 450 = 42,750

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? A. 1,960 B. 2,800 C. 3,600 D. 6,400

98,000 / 35 = 2,800

The amount by which sales can drop before losses are incurred is the _________________ of ____________________.

Margin of Safety

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals: A. $564,000 B. $1,484,211 C. $920,211 D. $909,677

564,000 / 0.62 = 909,677

Operating Leverage is a measure of how sensitive ___________________ is to a given percentage change in sales dollars. A. net operating income B. total gross margin C. selling price per unit D. total variable expense

net operating income

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ration of 62%, sales dollars needed to reach the target profit equals: A. $2,200,000 B. $3,000,000 C. $913,880 D. $1,364,000

564,000 + 800,000 / 0.62 = 2,200,000

Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses for $200,000, the break even point in units and dollars is: A. 40,000 units and $400,000 B. 13,333 units and $133,330 C. 50,000 units and $500,000 D. 20,000 units and $200,000

10 - 5 = 5 200,000 / 5 = 40,000 40,000 x 10 = 400,000

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ration is 59%. The sales dollars to break-even rounded to the nearest dollar equals: A. $351,220 B. $203,040 C. $228,960 D. $244,068

144,000/0.59 = 244,068

Orange You Going to Smile? sells oranges for $20 per crate. If the company's margin fo safety is $180,000, the margin of safety in units is _________________ crates.

180,000 / 20 = 9,000

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: A. 7,730 B. 6,958 C. 21, 645 D. 14,688

470,000 + 222,640 / 32 = 21,645

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by: A. 9% B. 20% C. 1% D. 0.25%

5% x 4 = 20

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: A. 9,524 B. 40,000 C. 24,762 D. 15,200

520,000 + 320,000 / 21 = 40,000