Accounting for Planning and Control Chapter 7

If fixed expenses increase with no other change, the break-even point will

increase

If the selling prices decrease with no other change, the break-even point will

increase

If variable cost increase with no other change, the break-even point will

increase

Assuming no change in sales volume, an increase in company's per-unit contribution margin would:

increase income.

Operating leverage for managerial accountants refers to an organization's ability to

increase net income with changes in sales

An analysis that focuses only on the different in the total contribution margin between two alternatives is called the

incremental approach

As the result of changes in sales revenue, a company with a high operating leverage factor will have a

large change in net income

The area between the total revenue and total cost lines but below their intersection is called the

loss area

A firm with a relatively high operating level will have a relatively ______ safety margin.

low

The effect of an increase in sales revenue for a company with a cost structure largely dependent upon variable expenses will have a

low contribution margin rate and therefore a low percentage increase in net income

When the break-even point is calculated for a company with multiple products, the break-even is valid

only if the quantity of each product sold is proportionate to the sales mix used in calculating the contribution margin

The extent to which an organization uses fixed costs in its cost structure is measured by:

operating leverage.

On the CVP graph, the fixed-expense line is

parallel to the horizontal axis

The area between the total revenue and total cost lines but above their intersection is called the

profit area

The break-even point can

provide management information related to profitability and capacity

When nonprofit organizations receive donations, it is equivalent to a(n)

reduction in fixed expenses

Difference between budgeted sales revenue and break-even sales revenue.

safety margin

Operating leverage predicts the effects fixed costs have on changes in operating income when:

sales volume changes.

A technique for determining what would happen in a decision analysis if a key prediction or assumption proves to be wrong.

sensitivity analysis

The required before-tax income needed to achieve an after-tax profit of $28,000 when the tax rate is 30% is

$28,000/(1 − 30%) = $40,000.

A change in selling price can affect

- total sales revenue - sales volume

After-tax net income is

-calculated as: (before-tax income) − tax rate (before-tax income) -the amount of income remaining after subtracting the firm's income tax expense -calculated as: (before-tax income) × (1 − tax rate)

CVP analysis can be used to study the effect of:

-changes in selling prices on a company's profitability. -changes in variable costs on a company's profitability. -changes in fixed costs on a company's profitability. -changes in product sales mix on a company's profitability.

Cost structure

-has a significant effect of the sensitivity of profits to changes in volume -is the relative proportion of fixed and variable costs

The trade-off of a high operating leverage is the risk of having

-large committed fixed costs -high break-even points

A company with a low operating leverage will have

-low break-even point -low fixed costs -high safety margin

When companies are subject to income tax, the CVP target profit calculation

-must include the effect of income taxes -requires a second calculation to determine how much -more before-tax income is needed to meet the target profit

The safety margin

-provides information about how close operations are to the break-even point -tells management how much sales revenue can be lost before the company moves from a net income to a net loss -is the difference between budgeted sales revenue and break-even sales revenue

Operating managers frequently prefer the contribution income statement because it

-separates fixed and variable expenses -highlights CVP relationships

When applying ABC to a CVP analysis,

-some costs considered fixed under traditional costing will be considered variable under ABC -multiple cost drivers are recognized

For cost-volume-profit analysis to be valid, within the relevant range,

-the sales mix remains constant -total fixed expenses will remain constant -the price of the product will not change as sales volume changes -the number of units produced and sold is equal

The assumption that the behavior of total expenses is a straight-line over the relevant range implies that

-total fixed cost remains constant -the variable cost per unit remains unchanged -the number of units produced equals the number of units sold -total revenue is a straight-line

If the operating leverage for Company A is 6 and sales increase by 3%, there is a _________% change in net income.

6x3%=18%

Given the following information, calculate the break-even point in sales dollars. Total Per unit % Sales $4.00 Variable costs $3.00 Contribution margin $1.00 Fixed costs 72,000

72000/1.00=72000x4.00=288000

Food Mart produces gourmet cookies, which sell for $16 a basket. Variable costs per basket are $6 and fixed costs are $5,000 per month. If Food Mart expects to sell 1,500 baskets of cookies, what is the margin of safety in number of baskets?

Cont. Margin per unit = $16 − $6 = $10 cont. margin per unit; ($5,000 + $0) ÷ $10 = 500 units required sales in units; Expected sales − Breakeven sales = 1,500 − 500 = 1,000 margin of safety.

Operating leverage formula

Contribution Margin / Net Income

Flower Depot, Inc. sells a single product for $10. Variable costs are $3 per unit and fixed costs total $80,000 at a volume level of 7,200 units. What dollar sales level would Flower Depot have to achieve to earn a target profit of $235,000?

Contribution margin Percentage = ($10 − $3)/ $10 = 70%; (Total Fixed cost + Target profit) ÷ Contribution Margin percentage = Total Sales; ($80,000 + $235,000) ÷ 70% = $450,000.

At a volume of 35,000 units, Almount Industries reported sales revenues of $1,925,000, variable costs of $350,000, and fixed costs of $261,000. The company's contribution margin per unit is:

Contribution margin per unit = (Total Sales − Total variable costs) ÷ Number of units; ($1,925,000 − $350,000) ÷ 35,000 = $45 per unit.

Target before tax income =

Target after tax net income ÷ (1 − tax rate)

Multiple cost drivers are recognized when using _____ CVP analysis.

activity-based costing

To calculate the sales dollars or units needed to achieve a target profit, the break-even contribution margin formulas can be modified by

adding the target profit to fixed expenses

The weighted-average unit contribution margin is

an average of the contribution margin per unit times the relative sales proportion

Necessary first step in any cost-volume-profit (CVP) analysis

analyzing organizations cost behavior, fixed or variable

A company has no profit or loss at the

break-even point

The intersection of the total cost line and total revenue line in a CVP graph is the

break-even point

The volume of activity at which an organization's revenues and expenses are equal. May be measured either in units or in sales dollars.

break-even point

Break-even point in units × selling price per unit is the calculation for

break-even sales

As the operating leverage factor increases,

break-even sales revenue will increase and margin of safety will decrease

The break-even point in sales dollars may be calculated as

break-even units × sales price per unit

Cost-volume-profit analysis can be extended to determine the effect on profit of other changes, such as

changes in income tax rates

An income statement on which fixed and variable expenses are separated.

contribution income statement

Sales revenue minus variable expenses is called

contribution margin

The unit contribution margin divided by the sales price per unit. Also may be expressed in percentage form; then it is called the contribution-margin percentage.

contribution-margin ratio

The relative proportions of an organization's fixed and variable costs.

cost structure

A study of the relationships between sales volume, expenses, revenue, and profit.

cost-volume-profit (CVP) analysis

A graphical expression of the relationships between sales volume, expenses, revenue, and profit.

cost-volume-profit (CVP) graph

If fixed expenses decrease with no other change, the break-even point will

decrease

If the selling prices increase with no other change, the break-even point will

decrease

Break-even volume of service revenue =

fixed expenses ÷ contribution margin ratio

If a charitable organization with revenues of $250,000, fixed expenses of $125,000, and a unit contribution margin of $12 receives donations of $9,500, the organization's new break-even point in units is ______.

fixed expenses-donations/unit contribution margin 125,000-9,500/12= 9625

When highly automated material-handling and production equipment is used to make a variety of similar products, a(n)

flexible manufacturing system is in use

Sales minus cost of goods sold equals

gross margin

Operating leverage is greatest in firms with

high proportion of fixed costs and low proportion of variable costs

When compared to companies with low operating leverage, companies with a higher operating leverage will have

higher fixed costs and higher break-even sales revenue

Advanced manufacturing systems are more fixed cost intensive, resulting in

higher operating leverage, higher break-even point and lower safety margin

When firms introduce advanced manufacturing systems,

the break-even point tends to increase and the number of sales units required to earn a target profit tends to decrease

In a traditional CVP graph, the total revenue line intercepts the vertical axis at

the origin

Sales mix is

the relative proportion of each type of product sold

The difference between total sales revenue and total variable expenses is

total contribution margin

Total sales revenue less total variable expenses.

total contribution margin

In a traditional CVP graph, the total cost line intercepts the vertical axis at

total fixed expenses

A statement that shows the gross margin for a company is an example of a(n)

traditional income statement

Sales price minus the unit variable cost.

unit contribution margin

Fixed expenses divided by unit contribution margin is the formula for break-even in

units

intercepts at the amount equal to fixed expenses at the zero activity level

vertical axis

Average of a firm's several products' unit contribution margins, weighted by the relative sales proportion of each product.

weighted-average unit contribution margin

The break-even point is the level of sales needed to earn a target profit of

zero

To use the profit equation to find the break-even point, profit must be set to equal

zero