accounting 2: CH 5
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
When constructing a CVP graph, the vertical axis represents:
dollars/profit
Estimating the fixed and variable components of a mixed cost using the __________ approach involves a detailed analysis of what cost behavior should be.
engineering
t/f: Cost structure refers to the relative portion of product and period costs in an organization.
false Cost structure refers to the relative portion of fixed and variable costs in an organization
t/f: 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.
t/f: Without knowing the future, it is best to have a cost structure with high variable costs.
false Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.
t/f: 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.
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
The contribution margin is equal to sales minus __________
variable expenses
The break-even point is the level of sales at which the profit equals
zero
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 ________.
$180,000 (20 x 20,000) - (20,000 x 11)
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 (30000 x 40) - (30000 x 19) -250000
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 (10 x 10,000) - (6 x 10,000) - 35,000
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 184000-85000
Profit equals:
(P × Q - V × Q) - fixed 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.
When a company produces and sells multiple products
- a change in the sales mix will most likely change the break-even point - each product most likely has different costs - each product most likely has a unique contribution margin
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.
CVP analysis focuses on how profits are affected by
- selling price - total fixed costs - sales volume - mix of products sold - unit variable cost
At the break-even point
- total revenue equals total cost - net operating income is zero
Contribution margin is first used to cover _________ expenses. Once the break-even point has been reached, contribution margin becomes _________.
1. fixed 2. profit/income
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% $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%
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 ($520,000 + $320,000) ÷ $21 = 40,000
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 Break-even point = $305,000 ÷ $40 = 7,625.
Which of the following statements is correct?
The higher the margin of safety, the lower the risk of incurring a loss.
Cost behavior is considered linear whenever
a straight line approximates the relationship between cost and activity
The degree of operating leverage =
contribution margin ÷ net operating income
The calculation of contribution margin (CM) ratio is
contribution margin ÷ sales
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
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
increase by $7,750 (($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase
The best fitting line minimizes the sum of the squared errors when using ______.
least squares 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
It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals
linear cost behavior
The amount by which sales can drop before losses are incurred is the
margin of safety
Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.
net operating income
A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as
operating leverage
The rise-over-run formula for the slope of a straight line is the basis of
the high low method
The break-even point is reached when the contribution margin is equal to:
total fixed expenses.
The term "cost structure" refers to the relative proportion of _________ and __________ costs in an organization.
1. fixed 2. variable
Profit = (selling price per unit × quantity sold) - (________ expense per unit × quantity sold) - ___________ expenses.
1. variable 2. fixed
VL 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 $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
8,400 ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units
Place the following items in the correct order in which they appear on the contribution margin format income statement.
SALES - VAR EXP = CONT MARGIN - FIXED EXP = NOI
Contribution margin:
becomes profit after fixed expenses are covered.
t/f: 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
When preparing a CVP graph, the horizontal axis represents:
unit volume
The contribution margin equals sales minus all ______ expenses.
variable
When using the high-low method, the slope of the line equals the cost per unit of activity
variable
t/f: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.
false this is the engineering approach
