Smartbook 6
True or false: Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.
True
When using the high-low method, fixed costs are calculated after variable costs are determined.
True
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 Because selling prices, costs, and contribution margins of the products differ, the sales mix is assumed to be constant when doing break-even calculations.
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
A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating
leverage
When making a decision using incremental analysis consider the
change in cost resulting specifically from the decision change in sales dollars resulting specifically from the decision
The variable cost per unit using the high-low method is calculated as
change in cost ÷ change in units (activity)
Using the contribution margin ratio, the impact on net income for a change in sales dollars is
change in sales dollars × contribution margin ratio
To prepare a scattergraph plot in Excel, highlight the data and select the "Scatter" subgroup from the ______ group within the Insert tab
charts
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
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
Once the break-even point has been reached, net operating income will increase by the amount of the unit ______ _______ for each additional unit sold.
contribution margin
To calculate profit, multiply the ______ per unit by sales volume and subtract total fixed cost.
contribution margin
To calculate the degree of operating leverage, divide _______ _______ by net operating income.
contribution margin
To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit
contribution margin
Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ______ approach.
contribution margin
The break-even point can be affected by
contribution margin per unit sales mix total fixed costs
The margin of safety percentage is
margin of safety in dollars / total budgeted (or actual) sales in dollars
If the total contribution margin is less than the total fixed expenses, a ______ occurs.
net loss
Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by
$0.35
Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was
53% Reason: $100,170 ÷ $189,000 = 53%
If a company has a variable expense ratio of 35%, its CM ratio must be
65%
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
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 Reason: Unit sales to break-even = Fixed expenses ÷ Contribution margin per unit = $305,000 ÷ $40 = 7,625
Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is
780
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 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.
A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?
Company B
The calculation of contribution margin (CM) ratio is ______.
Contribution Margin / Sales
Which of the following statements is correct?
The higher the margin of safety, the lower the risk of incurring a loss.
A simpler form of the CVP graph is called the ______ graph.
profit
The single point where the total revenue line crosses the total expense line on the CVP graph indicates
profit equals zero the break-even point
The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total
profit or loss
When using the high-low method, the slope of the line equals the ______ cost per unit of activity.
variable
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 is: selling price per unit = Blank______.
variable cost per unit + desired profit per unit
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
CM ratio is equal to 1 - ______ ______ ratio.
variable expense
Variable expenses ÷ Sales is the calculation for the ______ _____ ratio
variable expense
Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be
$1,520,000 Reason: ($240,400 + $930,000) ÷ 0.77= $1,520,000
Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a ______.
$10,000 net operating loss
A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be ______.
$100 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.
Ceramic Creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If Ceramic Creations sells 25,000 pots, net operating income will be:
$130,000 Reason: Net income = (25,000 - 15,000) × ($25 - $12) = $130,000.
Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by year-end, net operating income will increase by
$137,500 Reason: $250,000 × 55% = $137,500 increase
A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be ______.
$198,000 Net operating income = (26,000 - 17,000) x $22 = $198,000
Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was
$2,200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.
Company A has fixed costs of $564,000 and has set a target profit of $800,000. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals ______.
$2,200,000 Reason: ($564,000 + $800,000) ÷ 0.62 = $2,200,000
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
$244,068 Reason: Sales =$144,000 / 0.59 = $244,068
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
Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______.
$3,800 (95 x 40 = 3800)
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:
$301,100 Reason: (67% × $1,430,000) - $657,000 = $301,100
Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.
$380,000 Reason: Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000
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
$42,750
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 contribution margin would be a ______.
$450 increase Reason: The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.
Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is ______
$49,800 ( $982,000 - $932,200 = $49,800 )
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
$55
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
$909,677 $564,000/0.62
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 Reason: Net operating income = $184,000 - $85,000 = $99,000
Profit equals
(P × Q - V × Q) - fixed expenses
Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $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 ______ per month.
- increase by $7,000 Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month
The profit graph allows users to easily identify
-the profit at any given sales volume. -the sales volume required to reach the break-even point
Candle Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units _
-the variable cost per unit is $2.40 -total variable cost is $1,200 Reason: 1,440 ÷ 600 = $2.40 per unit × 500 units = $1,200 total variable cost.
CVP analysis focuses on how profits are affected by
1. selling prices 2. sales volume 3. unit variable costs 4. total fixed costs 5. mix of products sold
Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is $
168,000
Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is
19%
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 Reason: $98,000 ÷ ($50 - $15) = 2,800
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 $
20
If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by
20%
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
20,000 x (20-11) = 180,000
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
21,645 Reason: Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans.
A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $_____.
2250 Reason: Estimated fixed maintenance costs = Total cost - Variable cost element = $14,250 - [($2,250/1,500) x 8,000] = $2,250
Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is
27% Reason: Variable expense ratio = Variable cost per unit ÷ Selling price per unit = $2.43 ÷ $9.00 or 27%
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% Reason: $245,050 ÷ $845,000 or 29%
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 _______ for Adams, Inc. and ________ for Baron, Inc.
3, 2
Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is
34%
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 Reason: ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.
Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ______.
40,000
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 $
5,000
If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by
90
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.
9000
Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $
=($500,000 x .68) - $300,000 =$40,000
The slope of the regression line represents the ______ cost per unit of activity.
variable
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?
Adams has a higher degree of operating leverage than Baron. Baron's net income grows twice as fast as its sales.
Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?
CVP analysis
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 expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) (increase/decrease) of $_______
Decrease 3000
Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.
False
Cost structure refers to the relative portion of product and period costs in an organization.
False
Operating leverage is the smallest at sales levels near the break-even point and increases as sales and profits rise.
False
True or false: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.
False
When a company sells multiple products, an increase in total sales always results in an increase in total profits.
False
True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.
False The margin of safety is the excess of the budgeted (or actual) sales dollars over break-even sales dollars.
Simple CVP analysis can be relied on for changes in volume outside the relevant range.
False Reason: The CVP model must be adjusted for activity levels outside the relevant range.
Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.
Net operating income
Which of the following items are found above the contribution margin on a contribution margin format income statement?
Sales - Variable Expenses
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.
The best fitting line minimizes the sum of the squared errors when using
least-square regression
Cost behavior is considered linear whenever ______.
a straight line is a reasonable approximation for the relation between cost and activity
CVP analysis is based on some _____ that may be violated in practice, but the tool is still generally useful.
assumptions
CVP analysis is based on some _______ that may be violated in practice, but the tool is still generally useful.
assumptions
Contribution margin:
becomes profit after fixed expenses are covered
Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to
break even
Multiplying unit selling price times the number of units required to break-even is one way to calculate
break-even sales dollars
To calculate the variable cost per unit using the high-low method, the change in ______ is divided by the change in
cost/activity
Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.
decrease
Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to
decrease by $16,000 Reason: Total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease.
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 Reason: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.-
According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):
decrease in the unit variable cost
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
When constructing a CVP graph, the vertical axis represents:
dollars
When a company produces and sells multiple products
each product most likely has a unique contribution margin a change in the sales mix will most likely change the break-even point each product most likely has different costs
Estimating the fixed and variable components of a mixed cost using the __________ approach involves a detailed analysis of what cost behavior should be.
engineering
A company has reached its break-even point when the contribution margin _______ fixed expenses.
equals
The term "cost structure" refers to the relative proportion of _______________ and ____________ costs in an organization.
fixed and variable
In a least-squares regression line, the vertical intercept (a) of the line represents the total
fixed cost
Total contribution margin equals ______.
fixed expenses plus net operating income
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
The rise-over-run formula for the slope of a straight line is the basis of
high-low method
If operating leverage is high, a small percentage increase in sales produces a (higher/lower) percentage increase in net operating income than if operating leverage is low.
higher
Fantastic Frames sells units for $15 each. Variable costs total $6 per unit, and fixed costs total $90,000. If the number of units being sold increases by 2,000, net operating income will ______.
increase by $18,000 Reason: Change in net operating income = 2,000 × ($15 - $6) = $18,000.
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 increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will
increase by $24,000 Reason: An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.
Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will
increase by $4,000 Reason: Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 125% = $15,000, an increase of $4,000 per month.
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 is being made using _______ analysis
incremental
The contribution margin statement is ordinarily used by those ______.
inside the company only
In a least-squares regression equation, a represents the _______ and b represents the _______.
intercept and slope
The contribution margin statement is primarily used for ______.
internal decision making
The statistic R²
is a measure of goodness of fit
The degree of operating leverage
is greatest at sales levels near the break even point is not constant decreases as sales and profits rise
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.
The percentage of the variation in cost that is explained by activity is ______.
r^2
The contribution margin as a percentage of sales is referred to as the contribution margin or CM
ratio
Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ______.
reached the break-even point a contribution margin equal to fixed costs
The variable expense ratio is the ratio of variable expense to ______.
sales
The relative proportions in which a company's products are sold is referred to as
sales mix
The term used for the relative proportion in which a company's products are sold is ______.
sales mix
When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.
sales mix
To convert the margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the
sales price per unit
To simplify CVP calculations, it is assumed that ______ will remain constant.
selling price
CVP analysis allows companies to easily identify the change in profit due to changes in
selling price product mix volume
The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit.
selling price, cost, volume
Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information
the contribution margin per putter is $65. the sale of 12,000 putters results in net operating income of $380,000
Margin of safety in dollars is
total budgeted (or actual) sales - break even sales
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
The break-even point is reached when the contribution margin is equal to:
total fixed expenses
At the break-even point ______.
total revenue equals total cost net operating income is zero
When using Excel, the intercept (a), slope (b) and R² is determined by selecting any data point in the scattergraph plot and selecting Add
trendline
When preparing a CVP graph, the horizontal axis represents:
unit of volume
The high-low method
uses only two data points, is based on periods where the activity tends to be unusual.
Using the high-low method, the fixed cost is calculated
using either the high or low level of activity after the variable cost per unit is calculated
The contribution margin equals sales minus all ______ expenses.
variable
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. Month. Meals. Costs January. 1,500. $5,200 February. 1,700. $5,700 March. 1,200. $4,100 April. 1,100. $4,200 May. 1,150. $4,250 June. 1,650. $5,550 The cost equation using the high-low method is ______.
y = $1,450 + $2.50x. Reason: The high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) 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
