ACC 202 Ch. 6

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Wayhaven, Inc. has provided the following information regarding its costs. Knowledge Check 02 If Wayhaven wants to earn a target profit of $40,000, what is the target sales amount in dollars? Use the contribution margin ratio method.

$225,000 Target sales in dollars = (Total fixed costs + Target profit) ÷ Contribution margin ratio; ($50,000 + $40,000) ÷ ($2 ÷ $5) = $90,000 ÷ 40% = $225,000.

Coral Reef Footwear has provided the following contribution margin income statement. Knowledge Check 01 If 2/3 two-thirds of all units sold are sandals and 1/3 one-third are shoes, what is the weighted-average unit contribution margin?

$30 The weighted-average unit contribution margin is $30 (2/3 × $15 + 1/3 × $60).

Knowledge Check 01 Shorebridge Repair's current sales revenue is $150,000 and its break-even sales point is $120,000. It incurs fixed costs of $100,000. What is its margin of safety?

$30,000 Margin of safety = Actual or budgeted sales - Break-even sales = $150,000 − $120,000 = $30,000.

Coral Reef Footwear has provided the following contribution margin income statement. Knowledge Check 02 If 2/3 (two-thirds) of all units sold are sandals and 1/3 (one-third) are shoes, of the break-even units, how many units of sandals must be sold?

1,600 units The weighted-average unit contribution margin is $30 (2/3 × $15 + 1/3 × $60). The number of break-even units is 2,400 units ($72,000 ÷ $30). Of these 2,400 units, 1,600 units, or two-thirds, will have to be from sandals.

Westerwheat, Inc. has provided the following cost information. Knowledge Check 01 What is Westerwheat's degree of operating leverage?

1.875 The degree of operating leverage is contribution margin divided by net operating income. So, Westerwheat's degree of operating leverage is 1.875 ($750,000 ÷ $400,000).

Burger Kitchen Foods sells a burger for $5. The variable cost per burger is $3. The total fixed cost is $30,000. What is the number of break-even units?

15,000 units explanation: Profit Equation method: (Unit sales price × Q) − (Unit variable costs × Q) − Total fixed costs = Profit; $5 × Q − $3 × Q − $30,000 = $0; Q = 15, 000 units.

Knowledge Check 02 Shorebridge Repair's current sales revenue is $150,000 and its break-even sales point is $120,000. It incurs fixed costs of $100,000. What is its margin of safety as a percentage of sales?

20% Margin of safety as a percentage of sales = Margin of safety (which was calculated in question #1) ÷ Current sales = ($150,000 − $120,000) ÷ $150,000 = 20%.

Fayville Office Supplies has provided the following contribution margin income statement. Knowledge Check 01 If the per-unit sales revenue is reduced to $14, how many units must be sold to earn the same net operating income of $110,000?

35,000 units New contribution margin = ($15 − $1 − $8) = $6; Target unit sales = (Fixed costs + Target profit) ÷ Contribution margin; ($100,000 + $110,000) ÷ $6 = 35,000 units.

Coral Reef Footwear has provided the following contribution margin income statement. What is the weighted-average contribution margin ratio?

36.00% explanation: The weighted-average contribution margin ratio is 36.00% ($90,000 ÷ $250,000).

Westerwheat, Inc. has provided the following cost information. Knowledge Check 02 A 20 percent increase in sales revenue will increase net operating income by

37.50% Westerwheat's degree of operating leverage is 1.875 ($750,000 ÷ $400,000). A 20 percent increase in sales revenue will increase net operating income by 37.50 percent (20% × 1.875).

Wayhaven, Inc. has provided the following information regarding its costs. Knowledge Check 01 If Wayhaven wants to earn a profit of $30,000, how many units should it sell?

40,000 units Profit Equation method: ($5 × Q) − ($3 × Q) − $50,000 = $30,000; Q = 40,000 units. Unit Contribution Margin method: ($50,000 + $30,000) ÷ (Unit sales price of $5 − Unit variable cost of $3) = 40,000 units. Contribution Margin Ratio method: Contribution margin ratio = (Unit sales price of $5 − Unit variable cost of $3) ÷ Unit sales price of $5 = 40%; (Total fixed costs + Target profit) ÷ Contribution margin ratio = Target sales; ($50,000 + $30,000) ÷ 40% = $200,000; Q = Sales of $200,000 ÷ Unit sales price of $5 = 40,000 units.

A company sells two products. Product A sales total $28,000 and Product B sales total $12,000. Total contribution margin is $18,000 for Product A and $9,000 for Product B. The weighted average contribution margin ratio is

67.5% MATH PART: (18,000+9,000)/(28,000+12,000) = 27,000/40,000 = 0.675 x 100 = 67.5%

Methods that can be used to model the relationship between revenues, costs, profit and volume include the _________ contribution margin method and the contribution______________ _______________ method.

Blank 1: unit Blank 2: margin Blank 3: ratio

The term cost structure refers to how a company uses__________ costs versus ____________ costs in its operations.

Blank 1: variable Blank 2: fixed

Which of the following is NOT a method used for basic CVP analysis?

Break-even analysis Reason: This is a form of CVP, not a method.

Fayville Office Supplies has provided the following contribution margin income statement. Knowledge Check 02 Which of the following statements will be true, assuming that the per-unit variable costs decrease by $2, and all other variables remain constant?

Contribution margin ratio will increase by 13.33 percentage points New contribution margin = $15 − ($8 − $2) = $9; if the per-unit variable costs decrease by $2 and everything else remains constant, the contribution margin ratio will increase by 13.33 percentage points, calculated as ($9 ÷ $15) − 46.67%.

Which of the following is not an assumption of CVP:

Costs must be mixed. explanation: The key assumptions for CVP are; a straight line can be used to approximate the relationship between total costs and sales, all costs can be classified as either variable or fixed, production and sales are equal and only sales volume affects total costs and revenue.

Westerwheat, Inc. has provided the following cost information. Knowledge Check 03 Decreasing fixed costs by $100,000 will

Decrease the degree of operating leverage by 0.375 Decreasing fixed costs by $100,000 will increase net operating income to $500,000. This will decrease the degree of operating leverage to 1.5 ($750,000 ÷ $500,000). The current DOL is 1.875 ($750,000 ÷ $400,000). As such, this change will decrease the DOL by 0.375 (1.875 − 1.5).

True or false: CVP analysis is only used for break-even and target profit analysis.

FALSE

True or false: Cost structure refers to how a company uses product and period costs in an organization.

FALSE

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

FALSE

Which of the following are assumptions of cost volume profit analysis?

In multi-product companies, the sales mix is constant. Production volume is equal to sales volume. All costs can be classified as either fixed or variable.

A company has calculated its indifference point to be 100,000 units for deciding on whether to automate its manufacturing process. What will happen to profits if the company does automate and sales volume is only 90,000 units?

Profits will decrease explanation: Sales must be above 100,000 for automation to increase profits.

Break-even is indicated on the CVP graph by:

The point where the total revenue line and the total cost line intersect. explanation: The break-even point is where the total revenue line and the total cost line intersect on the CVP graph.

Solving for the sales level needed to achieve a profit of zero is ______ analysis.

break-even

CVP ______.

can be used to make many different decisions allows managers to see how changing one variable can impact another can be used for "what-if" analysis

How much contribution margin is generated per dollar of sales revenue is the

contribution margin ratio

The contribution margin stated as a percentage of sales dollars is the ______.

contribution margin ratio

Contribution margin ______.

covers fixed cost and profit

When constructing a CVP graph, the vertical axis represents ______.

dollars

CVP analysis can help answer the question of _____.

how net income can be increased

The weighted average unit contribution margin ______.

is used instead of the single product contribution margin in multi-product break-even analysis assumes that the percentage of each product sold is constant is based on the relative percentage of each unit sold

The excess of the budgeted (or actual) sales dollars over break-even sales is called the

margin of safety

Decisions about whether to use fixed or variable costs to run a business affects a company's _________________ leverage.

operating

Decisions about whether to use fixed or variable costs to run a business impact a company's ______.

operating leverage

According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases.

price

When multiple products are sold, the break-even point depends on the _________ mix.

product or sales mix

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.

sales mix

The weighted-average contribution margin ratio is calculated using the ______.

total sales mix

The weighted average unit contribution margin is the average unit contribution margin of multiple products weighted according to ______.

units sold

When preparing a CVP graph, the slope of the total cost line represents ______.

variable cost per unit

Contribution margin equals sales minus ______.

variable selling and administrative costs variable manufacturing costs

CVP analysis can be useful in deciding ______.

which services to offer what marketing strategy to use what price to charge for goods or services what cost structure to implement which products to offer

The goal of break-even analysis is to find the level of sales where profit is equal to ______.

zero


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