Accounting Chapter 5

ratio

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

Behavior

How total costs changes as some level of activity changes is called cost __________

695,000

Seth's Speakers had actual sales of $1,630,000. If break-even sales equals $935,000, Seth's margin of safety in dollars is $___________

Indifference point

Setting two profit equations so that they yield the same profit allows managers to calculate the

(Total Fixed Costs + Target Profit)/ Unit contribution Margin

How do you find target profit analysis using total contribution margin?

difference in total cost divided by difference in activity

The formula to calculate the variable cost per unit using the high-low method is _________

(Target profit + Fixed expenses) ÷ Unit contribution margin

The formula used to calculate the sales volume needed to achieve a target profit is __________

Zero

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

covers fixed cost and profit

Contribution margin ______. Multiple choice question. -equals sales minus fixed expenses -is first used to cover variable expenses -covers fixed cost and profit

all variable costs

Contribution margin equals sales minus _________.

variable

Costs that remain constant on a per unit basis are called __________ costs

3

Given net operating income of $50,000, contribution margin of $150,000 and sales of $300,000, the degree of operating leverage of _________

(total Fixed Costs + Target Profit)/ Contribution Margin Ratio

How do we find Target Profit Analysis with the contribution margin ratio?

Total Fixed costs/Contribution margin ratio= Break - Even sales

How do we find the break-even point in sales revenue with the contribution margin ration?

Contribution margin ÷ Net operating income

Degree of operating leverage equals ______.

250

Desks by Daisy sells a student desk for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell __________ desks per month in order to break even

(Total Fixed Costs + Target Profit)/Contribution Margin Ratio (%)

How do you find target saless using CVP?

$2,200,000 Reason: ($564,000 + $800,000) ÷ 0.62 = $2,200,000

A company has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals ___________.

9,500 Reason: ($174,000 + $30,000 + $100,000) ÷ ($27 + $5 increase in sales price) = 9,500

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27 and fixed costs are $174,000. The company believes that spending $30,000 on advertising will allow them to increase the selling price to $45. If these changes are made, how many units will have to be sold to earn $100,000 per year?

44%

A company sells 15,000 units of product per month. The sales price per unit is $5.00, variable costs are $2.80 per unit and and total fixed costs equal $3,000. The contribution margin ratio is __________

-can assist with management decision making -separates costs into their fixed and variable components

A contribution margin income statement Blank______. Multiple select question. -reports both gross margin and net income -can assist with management decision making -separates costs into their fixed and variable components -is prepared primarily for external reporting purposes

Comitted

A fixed cost, such as a long-term lease, that is difficult for a manager to change in the short-run is called a(n) ______ fixed cost

Behavior

A shift from product costing to a focus on cost _____________ is the key to making most managerial decisions.

the high-low method

A simple approach that uses the two most extreme activity observations is ______.

Least-squares regression

A statistical technique for finding the best fitting line based on historical data is called ____________

setting up a scattergraph

A useful first step in analyzing cost behavior is ______.

calculates contribution margin, while the absorption costing income statement calculates gross margin focuses on fixed and variable expenses, while an absorption costing income statement focuses on period and product costs

A variable costing income statement ______.

price

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

Contribution Margin

After fixed costs have been covered ____________becomes net operating income.

Degree of operating level

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the ___________.

-total expenses equal zero -total revenue equals total cost -profit is zero

At the break-even point, ______. Multiple select question. -the company is experiencing a loss -total expenses equal zero -total revenue equals total cost -profit is zero

-what investments to make -which products to offer -which services to offer

CVP analysis can be useful in deciding ______. Multiple select question. -what investments to make -which products to offer -which services to offer -how to change the sick leave policy for employees

$1,800,000 Reason: ($975,000 + $195,000) ÷ 0.65 = $1,800,000.

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total _________.

Absorption costing - Fixed manufacturing overhead is treated as part of the per unit product cost and expensed as units are soldVariable costing - Fixed manufacturing overhead is treated as a period cost and expensed in full each period.

Contrast the way fixed manufacturing overhead costs are treated in absorption costing versus variable costing.

it may make managers believe they can reduce costs by producing more

Fixed costs should not be expressed on a per-unit basis because ______.

$49,800 Reason: $982,000 - $932,200 = $49,800.

Given budgeted sales of $982,000, break-even sales of $932,200, and fixed expenses of $429,000, the budgeted margin of safety in dollars is _________

6000

Given fixed costs of $30,000, variable costs of $2.00 per unit, and a contribution margin of $5.00 unit, ______________ units have to be sold in order to break even.

2.5 Reason: $75,000 ÷ $30,000 = 2.5

Given sales of $110,000, a contribution margin of $75,000 and net operating income of $30,000, operating leverage is __________.

55

Given sales of 10,000 units per month, sales price per unit of $4.00, variable costs of $1.80 per unit and and total fixed costs of $5,000, the contribution margin ratio is __________ %

87500

Given total fixed costs of $35,000 and a contribution margin ratio of 40%, $_____________ of revenue must be earned to break even.

3,200 Reason: $5,300 - ($1.40 × 2,500) = $1,800 of fixed costs. $1,800 + (1,000 x $1.40) = $3,200 of total cost at the low level of activity.

Given: Calculated variable cost per unit of $1.40 High level of activity: 2,500 units and $5,300 total cost The low level of activity was 1,000 units. Total cost at the low level of activity equals Blank______.

Managers can use it to manage prices, buy materials from a different supplier, pay employees a salary, investing in advertising, or automated equipment. As well as perform what if scenarios.

How can CVP be used for decision making?

margin of safety/actual or budgeted sales

How do you calculate margin of safety as a percentage?

both increase Reason: An increase in selling price increases contribution margin.

If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ratio will ______.

one Reason: If fixed costs are zero, the degree of operating leverage (DOL) will be exactly one, meaning there is a one-to-one relationship between contribution margin and net income.

If fixed costs are zero, the degree of operating leverage will be ______.

Higher

If operating leverage is high, a small percentage increase in sales produces a(n) ______ percentage increase in net operating income than if operating leverage is low.

20% Reason: 5% × 4 = 20%.

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by _________.

intercept total fixed cost

In the equation Y = a + bX, a denotes the _________.

slope of the line variable cost per unit of activity

In the equation Y = a + bX, b denotes the __________

total cost

In the equation Y= a + bX, Y is the Blank______. Multiple choice question.

Sales revenue Variable Costs

In the profit equation, total ______ is a function of the number of units sold (Q). Multiple select question.

2800 Reason: $98,000 ÷ ($50 - $15) = 2,800. 6,400 units are needed to earn the target profit.

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?

$39.20 Reason: Costs + Target Profit = ($28 x 12,500 + $80,000 + $60,000) = $490,000 ÷ 12,500 sales in units or $39.20 per set.

Jacki's Jewels sells 10,000 necklace & earring sets per year. Fixed costs are $80,000 and variable costs are $20 per set. Jacki is planning to increase the quality of the stones, which will increase variable costs by $8 per set and increase sales by 25%. If Jacki increases the quality of the stones, what price will she need to charge to attain her target profit of $60,000 per year?

16% Reason: $272,000 ÷ (100,000 × $17) = 16%.

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is _______

-never reported as inventory

Nonmanufacturing costs are ______. Multiple choice question. -always reported as inventory -never reported as inventory -only reported as inventory under full absorption costing -only reported as inventory under variable costing

4800

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 _________

21,645

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 that must be sold to meet the company's goal is ________

-may be either step-fixed or step-variable -are fixed over some range of activity

Step costs ______. Multiple select question. -may be either step-fixed or step-variable -are always treated like variable costs when doing cost analysis -are fixed over some range of activity

$27.25 Reason: Costs + Target Profit: ($19 × 20,000 + $90,000 + $75,000) = $545,000 ÷ 20,000 units = $27.25

Sweet Dreams sells 15,000 pillows per year for $25 per unit. Variable cost per unit is $14. Sweet Dreams wants to improve customer satisfaction by using higher quality direct materials which will increase the variable cost per unit to $19. Fixed costs per year total $90,000. If sales increase by 5,000 units per year, what price will Sweet Dreams have to charge to earn the same profit it is earning now ($75,000 per year)?

decrease by $16,000 Reason: If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Additional contribution margin of $44,000 - $60,000 in new fixed costs = a net operating income decrease of $16,000.

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 increase advertising which will increase fixed costs by $60,000. Management believes the advertising along with a $2 reduction in the selling price per box 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 ___________..

Contribution Margin

The amount each unit sold contributes towards fixed costs and profit is the unit __________

unit contribution margin

The amount that each unit sold contributes to fixed costs and profit is __________

Equal to

The break-even point is reached when total revenue is ______ total costs.

may produce inaccurate results is easy to apply

The high-low method ______. Multiple select question. -may produce inaccurate results -always uses data points that represent normal levels of activity -is preferable to least-squares regression -is easy to apply

Relevant Range

The level of activity over which cost behavior assumptions are true is known as the _________

a straight line approximates the relationship between cost and activity

The linearity assumption states Blank______.

margin of safety in dollars ÷ total budgeted (or actual) sales in dollars

The margin of safety percentage is ___________.

profit equals zero the break-even point

The single point where the total revenue line crosses the total expense line on the CVP graph indicates _____.

tells how much each additional unit contributes to profit

The unit contribution margin Blank______.

tells how much each additional unit contributes to profit

The unit contribution margin tells ___________

False

True or False: At the indifference point, both options under consideration will have the same break-even point.

False

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.

True

True or false: Presenting fixed costs on an average per unit basis makes them look like they change with activity changes.

False

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

When managers control the level of spending. They can choose how much to spend within a certain range, like on employee training programs or advertising. They can choose to pay less then what the fixed cost is

What are discretionary fixed costs?

Costs that remain the same in total no matter the activity level. However, per unit level they will change when the activity increases, since that singular fixed activity level cost has to be spread out over multiple different costs.

What are fixed costs?

Difference between actual or budget sales and the break even point. It shows how much sales can drop before a loss happens. Mostly worried about in startups. Ex) Actual or Budget Sales - Break-Even Sales = Margin of safety

What is the margin of safety?

Total Sales Revenue - Total Variable costs - Total Fixed Costs = Profit Or (Unit Price, x, Q( Quantity of Units sold)) - (Unit Variable Costs, X, Q) - Total Fixed Costs = Profit

What is the profit equation method?

A cost that changes with the activity of a company as a whole (or in total). However, cost per unit will still stay the same (So while the cost of an entire activity may change, the cost of singular items will stay pretty much the same)

What is the variable cost?

fixed

When constructing a CVP graph, the place where the total cost line intercepts the y-axis represents total _________ costs

dollars

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

variable cost per unit

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

the variable cost per unit

When using the high low method, the difference in cost divided by the difference in activity is __________

choose the periods with the highest and lowest levels of activity and their associated costs

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity ___________

Activity

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 ______.

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

Which of the following are assumptions of cost volume profit analysis? Multiple select question. -All costs can be classified as either fixed or variable. -In multi-product companies, the sales mix is constant. -Production volume is equal to sales volume. -Total cost and total revenue are affected by both volume and price changes.

-The equation for a straight line can be used to express the relationship between mixed costs and the level of activity. -Both the total cost and the per-unit cost of mixed costs change with changes in the level of activity. -Mixed costs contain both fixed and variable cost elements.

Which of the following statements are true? Multiple select question. -The equation for a straight line can be used to express the relationship between mixed costs and the level of activity. -Mixed costs are also commonly known as step-fixed or step-variable costs. -Both the total cost and the per-unit cost of mixed costs change with changes in the level of activity. -Mixed costs contain both fixed and variable cost elements.

CVP analysis

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?

-only uses two data points -provides a reasonable estimate as long as the data points are within the relevant range -calculates the line based on the most extreme activity data points

he high-low method Blank______. Multiple select question. -only uses two data points -provides a reasonable estimate as long as the data points are within the relevant range -uses the highest and lowest level of total cost -calculates the line based on the most extreme activity data points

$400,000

A company sells a product for $80 per unit and has a contribution margin ratio of 45%. Fixed costs total $180,000. Sales dollar to break even equals _________

5000

A company sells its product for $40 per unit. Variable costs are $12 per unit. Total fixed costs are $50,000. In order to reach the profit goal of $90,000 the company must sell

variable

A cost that changes in direct proportion to changes in the activity level is a ______ cost.

fixed costs

A degree of operating leverage greater than one means that managers are using ______ to create operating leverage.

in total

A fixed cost remains fixed ______ within the relevant range of activity.

You must find the number of units it takes to reach the fixed cost. Ex) Cost per unit X Number of units = Fixed cost or Total Fixed Costs/Unit Contribution Margin= Break-Even Units (Q)

How do you find break-even cost using total contribution margin?

Sales Revenue - Variable Costs = Contribution Margin

How do you find contribution margin?

9375

Larson's Ltd. sells its product for $12.00 per unit. The contribution margin per unit is $8.00 and fixed costs are $75,000. Larson has to sell to ______ units to break even

-change both in total and per unit as activity changes

Mixed costs Blank______. Multiple choice question. -cannot be analyzed using scattergraphs -are the same as step costs -change both in total and per unit as activity changes -have a fixed component that is based on activity

equal to

The break-even point is reached when total revenue is ______ total costs.

amount that profit is set to

The difference between break-even analysis and target profit analysis is the Blank______.

total amount of either profit or loss

The distance between the total revenue line and the total cost line a on a cost-volume-profit graph represents the ______.

Total Sales Revenue - Total Variable Costs - Total Fixed Costs = Profit

The equation for the profit equation method is ______.

Margin of Safety

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

Cost Structure

The extent to which a company uses fixed costs (as opposed to variable costs) in its operations is called __________

Variable Expenses

The format used to prepare a contribution income statement is Sales - ______.

True

True or false: When using the high-low method, fixed costs are calculated after variable costs are determined.

after the variable cost per unit is calculated using either the high or low level of activity

Using the high-low method, the fixed cost is calculated ______.

45

Webster, LLC sells its product for $20 per unit. Variable costs are $11 per unit and total fixed costs are $35,000. The company sells 8,000 units per year. Webster's contribution margin ratio is ___________%

Costs that are fixed over some range of activity and then increase in a step-like fashion when a capacity limit is reached.

What are step costs?

1. Linear cost and revenue functions (Using a straight line to summarize total cost, sales volume, and total revenue.) 2. All costs can be classified as either fixed or variable 3. Only volume affects total cost and total revenue (We ignore other factors) 4. Production volume is equal to sales volume (Allows for simplicity) 5. Constant product mix (We assume that each product remains constant)

What are the assumptions of cost-voulme- profit (CVP)?

How much each unit sold contributes towards the fixed costs and profit

What does the unit contribution margin tell us?

Analyzing the CVP and determining what amount of units sold would result in the break-even point. This is normally found by setting the profit in the profit equation to zero. This also normally means that Q has not been solved yet. Ex) (Unit Price x Q) - (Variable Costs x Q) = 0

What is Break-even analysis?

A form of analysis that allows managers to analyze the relationship between the volume and mix of units sold, prices, variable costs, fixed costs, and profit. As well as how a change in one of these affects the others.

What is Cost-volume-profit (CVP) analysis?

Statistical method used to estimate cost behavior. It defines the best fitting line as the one that minimizes the sum of squared error. It uses historical data to provide estimates for fixed and variable costs.

What is Least-squares regression?

An extension of break-even analysis used to figure out how many units would need to be sold to make a certain profit. This would normally be done by placing the profit as a specific number Ex) (Unit Price x Q) - (Units Variable Costs x Q) = 30,000 (Target profit)

What is Target Profit Analysis?

A graph used to represent total revenue, total costs, volume, and profit. There are two main lines -Total revenue (Units Sold x Unit Sales price) -Total Cost (Total fixed + Total Variable) which starts from the fixed cost point, so its what would be incurred no matter what The slope of total cost line represents the variable cost per unit The price is on the Y plane, while units are on the x plane

What is a CVP graph?

This is an internal income statement which focuses on cost behavior and whether a cost is fixed or variable. It is used to find contribution margin as well as the net operating income (the profit before taxes, interest, and more are deducted.

What is a Contribution Margin Income Statement

A cost that is required to be paid at a specific level, such as paying for the lease on an office building, plant, or other resources.

What is a committed fixed cost?

Graph of the relationship between two variables, such as total cost (y) and activity level (x). Determines the relationship between cost and activity.

What is a scatter graph?

The extent a company uses fixed costs instead of variable costs in its operations.

What is cost structure?

Also known as "semivariable" cost, it is a cost that has a fixed cost that has to be paid, as well as a variable cost that will change in level depending on the activity. Because part of the cost is variable, the TOTAL cost will rise with an increase in activity. But, because it is also fixed, the PER UNIT cost will decrease.

What is mixed cost?

Step cost with relatively wide steps; typically treated as fixed within a relevant range. Once it leaves that range, it goes up by a wide step.

What is step-fixed cost?

It is a cost that remains constant for a small range, and then slightly increases once that range is reached. This repeats over and over, with it looking like a stare case on the graph. Ex). employee wages. The more customers come in (or units sold) the more employees need to be brought and paid. This is a gradual rise.

What is step-variable costs?

Point where the total revenue and total cost lines cross (Zero profit is earned). After this point is where a profit is made

What is the break-even point?

It is a percentage that tells us how much contribution margin is generated with each dollar. Unit Contribution Margin/Unit Sales Price= Contribution Margin Ratio

What is the contribution margin ratio and how do you find it?

Contribution margin states as a percentage of sales dollars. It shows how much contribution margin is generated as a percentage of sales revenue Ex) Contribution margin/Sales Price

What is the contribution margin ratio?

Measures the extent a percentage change in sales revenue will translate into a percentage change in net operating income Ex) DOL= Contribution Margin/ Net operating income

What is the degree of operating leverage?

Fixed costs. If fixed costs are zero, then the DOL is 1.

What is the difference between contribution margin and net operating income in a DOL eqution?

Method of estimating cost behavior using the two most extreme activity levels (x values) to estimate fixed and variable costs.

What is the high-low method?

The idea that the total cost and activity can be represented by a straight line. On graphs it is represented by total cost (y), activity (x), fixed cost (a), and variable per unit (b)

What is the linearity assumpiton?

Decrease

When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will _______.

-The relevant range of activity is approximated by a straight line. -Within the relevant range of activity, fixed costs remain constant in total. -Outside of the relevant range, cost behavior conclusions may not be valid.

Which of the following statements are true? Multiple select question. -The relevant range of activity is approximated by a straight line. -Within the relevant range of activity, fixed costs remain constant in total. -Outside of the relevant range, cost behavior conclusions may not be valid. -Within the relevant range of activity, total variable costs do not change.

-Managers need to know how much of a cost is variable and how much is fixed. -To make decisions, managers need to know how costs change.

Why is it important to analyze mixed costs?