A306 Chapter 2 Smart Book

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 ____-_

$250,000 × 55% = $137,500 increase

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 // Net operating income =30,000 × ($40 - $19) - $250,000

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, net operating income will increase by

$600,000 × 29% = $174,000

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'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 ___

($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units

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

($520,000 + $320,000) ÷ $21 = 40,000

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 $

2,250

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be $

30

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If the current net loss is $3,000, selling one additional unit will decrease the loss by $_____

4

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

65

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 ____

Break-even point = $305,000 ÷ $40 = 7,625

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

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a ____

Contribution margin of $40,000 - fixed expenses of $50,000 = a $10,000 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 ____

For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.

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 _____

Net operating income = $184,000 - $85,000 = $99,000

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is

Profit = 200,000 × $4 - $632,000 = $168,000.

Which of the following is needed to calculate profit?

Unit contribution margin, unit sales, and total fixed costs

Contribution margin:

becomes profit after fixed expenses are covered

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

The calculation of contribution margin (CM) ratio is _____

contribution margin ÷ sales

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

cost, selling price, volume

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.

Cost structure refers to the relative portion of product and period costs in an organization.

false

If a company with $40,000 of fixed expenses is operating at a loss, each additional unit sold will decrease that loss by the selling price per unit.

false - Each additional unit sold will decrease the loss by the contribution margin, not the selling price per unit

The term "cost structure" refers to the relative proportion of _____ and _____ costs in an organization.

fixed & variable

The rise-over-run formula for the slope of a straight line is the basis of ____

high low method

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 best fitting line minimizes the sum of the squared errors when using ___

least-square regression

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

When compared to a company with higher fixed costs and lower variable costs, a company with lower fixed costs and higher variable costs, has ____

lower net income in good years greater profit stability better protection from loss in bad years

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

margin of safety

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

margin of safety

The contribution margin as a percentage of sales is referred to as the contribution margin or CM ____

ratio

The variable expense ratio equals variable expenses divided by____

sales

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

CVP analysis allows companies to easily identify the change in profit due to changes in:

selling price volume costs

The break-even point is reached when the contribution margin is equal to:

total fixed expenses.

The contribution margin equals sales minus all ____ expenses.

variable

The contribution margin equals sales minus all ______ expenses.

variable

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ____

(($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase

If the total contribution margin is less than the total fixed expenses, a ______ occurs.

net loss

At the break-even point ______.

net operating income is zero total revenue equals total cost

A company's current sales are $300,000 and fixed expenses total $85,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will

($70,000 × 30%) - $15,000 = $6,000 increase

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 ____

(67% × $1,430,000) - $657,000 = $301,100

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

(72% × $832,000) - $265,000 = $334,040