Accounting Chp 3- Cost-Volume-Profit Analysis and Pricing Decisions

Cost-volume-profit analysis or CVP

helps managers assess the impact of various business decisions on company profits.

Required sales volume units (pretax income)

(FC+Target Income) /(CM in units)

Required sales dollars (pretax income)

(FC-Target Income) /CM Ratio

Cost-plus pricing (markup pricing)

(Sales price-Cost)/Cost=Mark up

Target Operating Income: Sales dollars required to meet target OI

(Total FC + Target OI) / CM Ratio

Target Operating Income: Units required to meet target OI

(Total FC + Target OI) / CM per unit

Target pricing

(sales price-cost)/sales price

Companies should use target costing ________ introducing a new A before; product. B after; product. C after; cost. D before; cost.

A before; product.

A company produces and sells soccer balls for $15 each. The variable cost per soccer ball is $7 and the company has monthly fixed costs of $160,000. If the company increases the sales price to $23 each, which of the following will occur? A The breakeven point will decrease. B The breakeven point will increase. C Fixed costs will increase. D Fixed costs will decrease.

A The breakeven point will decrease.

RS Corporation has a current breakeven point of 375,000 units. Which of the following actions would increase their breakeven point? A either decreasing sales revenue or increasing the fixed costs B increasing the selling price C increasing the contribution margin D increasing both the selling price and the fixed costs

A either decreasing sales revenue or increasing the fixed costs

An increase in activity level will ________ unit variable cost and ________ unit fixed cost. A not change; decrease B not change; not change C decrease; increase D increase; decrease

A not change; decrease

Target costing starts with the A price customers are willing to pay. B company's product cost. C profit a company wants to make. D product's markup price. You selected A :price customers are willing to pay.got it correct

A price customers are willing to pay.

Using a breakeven graph for what-if analysis, if fixed expenses increase, the fixed expense line would A shift upward. B shift downward. C shift to the right. D shift to the left.

A shift upward.

degree of operating leverage.

Another way to compute the expected change in operating income due to a change in sales volume at a given level of sales Cm/NOI

If a company has a degree of operating leverage of 5, a 10% increase in sales volume will result in a A 50% increase in fixed costs. B 50% increase in operating income. C 10% increase in operating income. D 10% decrease in contribution margin.

B 50% increase in operating income.

Connie's Candy Company makes and sells both chocolate and peanut butter fudge. The chocolate fudge has a contribution margin of $4 and the peanut butter fudge's contribution margin is $2. Connie's fixed costs are $3,000; she sold 500 lbs. of chocolate and 100 lbs. of peanut butter fudge. Which formula will Connie use if she wants to find out her operating income? A Contribution Margin product 1 + Contribution Margin product 2 + FC = OI B Contribution Margin product 1 + Contribution Margin product 2 - FC = OI C Contribution Margin product 1 + Contribution Margin product 2 = OI D Contribution Margin product 1 + Contribution Margin product 2 + FC = 0

B Contribution Margin product 1 + Contribution Margin product 2 - FC = OI

Which of the following best describes sales mix? A It is the comparison of your company's sales to a competitor. B It is the sales of each product relative to total sales. C It is the mix of variable and fixed costs for a product. D It is a measure of operating leverage. You selected B : It is the sales of each product relative to total sales. got it correct

B It is the sales of each product relative to total sales.

What is the degree of operating leverage? A The total contribution margin relative to a company's sales. B The change in operating income relative to the change in sales. C The total change in sales relative to the change in variable costs. D The change in fixed costs divided by the change in net income.

B The change in operating income relative to the change in sales.

March Jewelers sells bracelets that have a cost of $32. March Jewelers should use ________ to determine the sales price required to cover the cost of each bracelet and contribute to the store's profit. A the contribution margin B cost-plus pricing C target costing D fixed costs

B cost-plus pricing

Which of the following is an assumption of Cost-Volume-Profit (CVP) analysis? A Inventory is sold during a different period from when it is purchased or produced. B The costs cannot be easily and accurately separated into fixed and variable cost categories. C A linear relationship exists between total variable expense and sales activity over the relevant range. D Total fixed expenses and variable costs per unit differ across all sales levels.

C A linear relationship exists between total variable expense and sales activity over the relevant range.

Which of the following statements describes a flaw of cost-plus pricing? A Cost-plus pricing burdens the seller with operational inefficiencies. B Cost-plus pricing does not represent a return to the seller. C Cost-plus pricing does not represent a product's value to the customer. D Cost-plus pricing represents the return of investment to the customer.

C Cost-plus pricing does not represent a product's value to the customer.

Which of the following is an additional Cost-Value-Profit (CVP) assumption in a multiproduct environment? A All costs are easily separated into fixed and variable categories. B Total fixed expenses and variable costs per unit remain constant across all sales levels. C The sales mix can be determined and will remain constant. D Inventory is sold during the same period it is purchased or produced.

C The sales mix can be determined and will remain constant.

The Sipsey Company sells skateboards and bicycles. The contribution margin for skateboards is $20, and $10 for bicycles. Last year, the company sold 60,000 skateboards and 30,000 bicycles. Their fixed costs are $75,000. Sipsey will need to calculate the ________ in order to find the breakeven point for skateboards and bicycles. A target net income B target operating income C sales mix D variable costs

C sales mix

Degree of Operating Leverage

Contribution Margin / Net Operating Income higher fixed cost means more risk

Contribution Margin Ratio

Contribution Margin / Sales = %

Which occurs at the breakeven point? A Sales revenue is exactly equal to variable expenses. B Sales revenue is exactly equal to fixed expenses. C Sales revenue is greater than total expenses. D Sales revenue is exactly equal to total expenses.

D Sales revenue is exactly equal to total expenses.

Which statement best describes target costing? A a strategy used to set the sales price of a product B a strategy based upon the fixed costs to produce a product C a strategy based upon the variable costs to produce a product D a strategy based upon the market price of a product

D a strategy based upon the market price of a product

Mandy's Treasures shop sells custom rings. The rings have a contribution margin of $12 per ring and fixed costs are $7,000. If Mandy's Treasures sells 1,500 rings and has a target operating income of $11,000, the company will A not reach its target operating income. B need to increase the sales price. C exceed its target operating income. D obtain its target operating income.

D obtain its target operating income.

JR's Department Store needs to know how many coats to sell to earn $30,000 in net income. If the store's income taxes are 40% of operating income, what does JR need to calculate in order to determine how many coats will need to be sold? A contribution margin B operating leverage C total fixed costs D operating income

D operating income

Under cost-plus pricing, the price a company charges for its products will change if there is a change in A customer demand. B competitors' prices. C product quality. D product cost.

D product cost.

Net income- Required sales volume (units) formular

FC+(X)/ cm per unit x= target net income/ (1-Tax Rate

At the breakeven point, sales revenue and total contribution margin are equal. True or False?

False

Target Net Income: Operating income

Net Income / (1 - Tax Rate)

operating leverage

One measure that is directly affected by the company's cost structure, or the change in operating income relative to a change in sales. A company with high operating leverage will experience a large percentage change in operating income as a result of a small percentage change in sales.

Cost-volume-profit Formula

Quantity to be sold = (Total Fixed costs + Profit)/(cm)

Profit Equation

Sales revenue−Variable expenses−Fixed expenses=Operating income SPx−VCx−FC=$0

Breakeven Point in Sales Dollars

Total Fixed Expenses / Contribution Margin Ratio

Conrad Steel sells bridge supports. Currently, the company's sales revenue is $5,000,000. If Conrad's controller has calculated the company's breakeven point to be $3,975,000, what is the company's margin of safety? a.$1,025,000 b.$2,950,000 c.$3,975,000 d.$5,000,000

a.$1,025,000 CMS= $5,000,000- $3,975,000= A

Jordan Graft Images sells framed prints of various college landmarks. Jordan purchases the prints from his supplier for $30 and sells them through his website for $65. Jordan's fixed expenses are $89,250. What is Jordan's breakeven point in units? a.940 b.1,373 c.2,550 d.2,975

c.2,550 $89,250/ ($65-$30)

Net Operating Income Formula

contribution margin - fixed expenses

Calculatig price using mark up

cost+(cost*markup %)=price

margin of safety formula

current sales - break even sales Example: (1) Margin of safety in units=51,975 jerseys−42,000 jerseys=9,975 jerseys (2) Margin of safety in sales dollars=$1,039,500−$840,000=$199,500

Deaton, Inc. sells computer backpacks. The company purchases the backpacks from its supplier for $15 and sells them to office supply stores for $25. Deaton's fixed expenses are $100,000. What is Deaton's breakeven point in sales dollars? a.$100,000 b.$166,667 c.$175,000 d.$250,000

d.$250,000 CMR=( $10 (cm) / $25 (sales) )= 0.4 Breakeven Point in sales $'s= ( $100,000 (T.fixed) / 0.40 (CMR) )= D

Reese Manufacturing has a current breakeven point of 475,642 units. To reduce the breakeven point, Reese Manufacturing should a.reduce the contribution margin. b.increase fixed expenses. c.reduce the sales price per unit. d.increase the contribution margin.

d.increase the contribution margin.

Breakeven Graph

illustrates this relationship between sales revenue and expenses, allowing managers to view a range of results at a single glance. when expenses go down, operating profit goes up.

margin of safety

is the difference between current sales and breakeven sales. It represents the volume of sales that can be lost before the company begins to lose money and can be measured in units or sales dollars.

Break Even Point

sales revenue is exactly equal to total expenses, and there is no profit or loss. There is only one level of sales at which this relationship is true. Thus, the breakeven point can be calculated using the profit equation.

Breakeven Point In Units=

total fixed costs / contribution margin per unit

What-if Analysis (Watch Out): When volume changes

total sales revenue, total variable expenses, and total contribution margin all change. Students typically change total sales revenue but forget to change total variable expenses. The safest bet is to start with contribution margin per unit × sales volume to be sure to capture the change in total sales and variable expenses.