Quarles Lecture: Ch 2

Generally which of the following is the most accurate for managers to use to estimate the fixed and variable components of mixed cost?

least-squares regression

The measure of how sensitive net operating income is to a given percentage change in dollar sales is called _______.

operating leverage

The following explains contribution margin ________.

sales minus variable cost

Break-even point is the level of sales at which ______.

total revenue equals total costs

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

unit contribution margin

Direct Labor-Hours Maintenance Cost Incurred January 5,000 $2,900 February 4,000 $2,500 March 7,000 $3,200 April 8,000 $3,400 May 3,000 $2,100 June 9,000 $4,000 July 6,000 $3,100 August 2,000 $1,900 Using the high-low method, what is the variable cost?

$0.30 per direct-labor hour.

What is the amount of the break-even sales for Grace Food Company?

$1.5 million

What does the green line in the CVP graph indicate?

Total expenses

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales?

Unit CM = Selling price of $80 − Variable expense of $30 = $50. Unit sales to break-even = Fixed expenses of $5,000 ÷ $50 = 100 units.

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle?

Unit Contribution Margin = Sales price per unit - Variable costs per unit. = $200

Target profit $120,000 Unit contribution margin $40 Fixed expenses $40,000 Contribution margin ratio (CM ratio) 0.40 Selling price $100 What are the unit sales required to attain a target profit of $120,000?

Unit sales to attain the target profit = (Target profit + Fixed expenses)/Unit Contribution margin. Substituting the values, unit sales = ($120,000 + $40,000)/$40 = 4,000 units.

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio?

Variable expense ratio = Variable expenses/Sales = $20/$50 = 40%

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.

decrease

Total Per Unit Percent of Sales Selling price $110,000 $110 100% Variable expenses $60,000 $60 55% Contribution margin $50,000 $50 45% Fixed expenses $30,000 Net operating income$20,000 Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes?

$25,000

What is represented on the X axis of a cost-volume-profit (CVP) graph?

Sales volume

Income Statement of Base Corporation Sales Volume Present Sales $100,000 Variable expenses $50,000 Contribution margin $50,000 Fixed expenses $20,000 Net Operating income $30,000 If sales increase by $50,000, what will be the net operating income for the company?

Contribution margin = $50,000/$100,000= .50 Profit = (CM Ratio × Sales) − Fixed Expenses = (50% × $150,000) − $20,000

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit$114 x 300 units = $34,200Less increase in fixed costs -$20,000 Change in net operating income = Increase of $14,200

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio?

Contribution margin ratio = Contribution margin/Sales = ($50 − $20)/$50 = 60%

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage?

Degree of operating leverage = Contribution margin/Net operating income = $300,000/$100,000 = 3.

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars?

Dollar sales to break-even = Fixed expenses of $10,000 ÷ CM Ratio of 0.40 = $25,000.

What is usually plotted as a horizontal line on the CVP graph?

Fixed expenses

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100 and decrease fixed expenses by $20,000. What is the net operating income after the changes?

Increase of $21,500 New contribution margin per unit = $175 − $100 = $75New contribution margin = $75 × 1,300 units = $97,500New fixed cost = $96,000 − 20,000 = $76,000New net operating income = $97,500 − 76,000 = $21,500 INCREASE of $21,500

What is Ralph Corporation's margin of safety in percentage?

Margin of Safety Percentage = Margin of Safety in dollars/Total budgeted (or actual) sales in dollars = ($5,000,000 − $4,000,000)/$5,000,000 = 20%.

Summarized data for Ralph Corporation: Selling price $200 per unit Variable expenses $150 per unit Fixed expenses $1,000,000 per year Unit sales $25,000 per year What is Ralph Corporation's margin of safety in dollars?

Margin of Safety in dollars = Total budgeted (or actual) sales − Break-even sales = $5,000,000 ($200 per unit × 25,000 units) − $4,000,000 ($1,000,000/($50/$200)) = $1,000,000.

The current sales of Trent, Inc., are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Inc.?

Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 2 × 30% = 60%.

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. Compute the profit from the sale of 100 bicycles ________.

Profit = Contribution margin of $20,000 (or 100 units × Unit contribution margin of $200 per unit) − Fixed expenses of $8,000 = $12,000.

The profit graph is based on the following linear equation:

Profit = Unit CM x Q - Fixed Expenses.

Target profit $120,000 Unit contribution margin $40 Fixed expenses $40,000 Contribution margin ratio (CM ratio) 0.40 Selling price $100 What are the sales dollars required to attain a target profit of $120,000?

Sales dollars to attain the target profit = (Target profit + Fixed expenses)/Contribution margin ratio. Substituting the values, sales required = ($120,000 + $40,000)/0.40 = $400,000.