ACCTG 231 - Ch6 McGrawHill

The break-even point is the level of sales at which the profit equals ______________.

zero

What is usually plotted as a horizontal line on the CVP graph? a) Fixed expenses b) Variable costs c) Sales revenues d) Break-even volume

a) Fixed expenses

Profit = (selling price per unit x quantity sold) - (___________ expense per unit x quantity sold) - ______________ expenses.

variable fixed

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold. a) unit contribution margin b) unit selling price c) variable expense per unit d) fixed expense per unit

a) unit contribution margin

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 ______. a) $630,000 b) $380,000 c) $(249,979) d) $1,520,000

b) $380,000 Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000

With regards to interpreation, what are the important areas that appear on a CVP graph? a) Excess of variable costs over fixed costs b) Break-even point, loss area, and profit area c) Contribution margin d) Year-to-year sales volumes and dollars

b) Break-even point, loss area, and profit area

The measure of how a percentage change in sales affects profits at any given level of sales is the ______. a) margin of safety b) degree of operating leverage c) contribution margin ratio

b) degree of operating leverage

When preparing a CVP graph, the horizontal axis represents ______. a) total costs b) sales volume c) sales dollars d) variable costs

b) sales volume

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. What is the profit from the sale of 100 bicycles? a) $12,000 b) $10,000 c) $20,000 d) $8,000

a) $12,000

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100, and decrease fixed expenses by $20,000. What is the net operating income after the changes? a) $21,500 b) $30,000 c) $24,500 d) $22,000

a) $21,500 New contribution margin per unit = $175 − $100 = $75 New contribution margin = $75 × 1,300 units = $97,500 New fixed cost = $96,000 − 20,000 = $76,000 New net operating income = $97,500 − 76,000 = $21,500 INCREASE of $21,500

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars? a) $25,000 b) $2,500 c) $250 d) $16,667

a) $25,000 CM ratio = (Sales − Variable expenses) ÷ Sales = ($100 − $60) ÷ $100 = $40 ÷ $100 = 40% or 0.40 Dollar sales to break-even = Fixed expenses ÷ CM Ratio = $10,000 ÷ 0.40 = $25,000

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 (10-6)x10000 - 35000 = 5000

Walton Corporation is currently selling 104 units of its product. The company is deciding the price that it should charge for a bulk order of 40 units. The variable cost per unit is $200. This order will not involve any additional fixed costs and the company's current sales will not be affected. The company targets a profit of $4,000 on the bulk order. What selling price per unit should the company quote for the bulk order? (Round your answer to the nearest whole dollar.) Selling Price Per Unit =

$300 Variable cost per unit $200Profit Required Per unit 4000/40 = $100selling price to be quoted = $300

Place the following items in the correct order in which they appear on the contribution margin format income statement. 1) Fixed expenses 2) Contribution margin 3) Net operating income 4) Variable expenses 5) Sales

1.Sales 2.Variable Expenses 3.Contribution margin 4.Fixed Expenses 5.Net Operating Income

True or false: Cost structure refers to the relative portion of product and period costs in an organization.

False

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False

True or false: 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

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 ______. a) $150,000 b) $180,000 c) $130,000 d) $30,000

b) $180,000 Contribution margin = 20,000 × ($20 - $11) = $180,000.

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 ______. a) 12,725 b) 7,625 c) 5,100

b) 7,625 Break-even point = $305,000 ÷ $40 = 7,625

To calculate the degree of operating leverage, divide _________ ____________ by net operating income.

contribution margin

Contribution margin ratio is equal to ____________ ______________ divided by ______________.

contribution margin sales

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales? a) 63 units b) 167 units c) 50 units d) 100 units

d) 100 units Unit CM = Selling price of $80 − Variable expense of $30 = $50 Unit sales to break-even = Fixed expenses of $5,000 ÷ Unit CM of $50 = 100 units.

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 ______. a) 5,787 b) 18,600 c) 5,162 d) 8,400

d) 8,400 (320,000+200,800) / (90-28)= 8,400 units

Contribution margin ___________. a) equals sales minus fixed expenses b) is not affected by changes in activity c) is first used to cover variable expenses d) becomes profit after fixed expenses are covered

d) becomes profit after fixed expenses are covered

The calculation of contribution margin (CM) ratio is ______. a) net operating income ÷ total contribution margin b) contribution margin ÷ total expenses c) variable expenses ÷ contribution margin d) contribution margin ÷ sales

d) contribution margin ÷ sales

The amount by which sales can drop before losses are incurred is the ________ of __________.

margin of safety

The relative proportions in which a company's products are sold is referred to as ____________ _____________.

sales mix

When a company produces and sells multiple products ______. (select all that apply) a) each product most likely has different costs b) the sales mix has no effect on the company's profit c) a change in the sales mix will most likely change the break-even point d) each product most likely has a unique contribution margin

a) each product most likely has different costs c) a change in the sales mix will most likely change the break-even point d) each product most likely has a unique contribution margin

The break-even point is reached when the contribution margin is equal to ______. a) total fixed expenses b) total sales c) profit d) total variable expenses

a) total fixed expenses

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio? a) 40% b) 60% c) 100% d) 20%

b) 60% CM ratio = Unit CM ÷ Unit selling price = ($50 − $20) ÷ $50 = 60%

CVP analysis allows companies to easily identify the change in profit due to changes in ______. (select all that apply) a) management b) costs c) volume d) selling price e) location

b) costs c) volume d) selling price

Johnson Corporation: Target profit $120,000 Unit contribution margin $40 Fixed expenses $40,000 Contribution margin ratio 0.40 Selling price $100 What are the unit sales required to attain a target profit of $120,000? a) 400,000 units b) 400 units c) 1,600 units d) 4,000 units

d) 4,000 units Unit sales to attain the target profit = (Target profit + Fixed Expenses) ÷ Unit CM Unit sales to achieve the target profit = ($120,000 + $40,000) ÷ $40 = 4,000 units.

Contribution margin equals ________. a) sales minus fixed cost b) fixed cost minus variable cost c) sales minus variable cost minus fixed cost d) sales minus variable cost

d) sales minus variable cost

The term used for the relative proportion in which a company's products are sold is ______. a) sales price b) operating leverage c) break-even d) sales mix

d) sales mix

Contribution margin is first used to cover ________________ expenses. Once the break-even point has been reached, contribution margin becomes _________________.

fixed profit or income

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______. a) $0.35 b) $0.65

a) $0.35

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________. a) decrease b) increase c) remain the same

a) decrease

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______. (select all that apply) a) net operating income will increase by $0.30 b) total contribution margin will increase by $0.70 c) net operating income will increase by $0.70 d) total contribution margin will increase by $0.30

b) total contribution margin will increase by $0.70 c) net operating income will increase by $0.70

Ralph Corporation: Selling price $200/unit Variable expenses $150/unit Fixed expenses $1,000,000/yr Unit sales 25,000/yr What is Ralph Corporations' margin of safety in dollars? a) $4 million b) $5 million c) $1 million d) $2.2 million

c) $1,000,000 Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales Total budgeted (or actual sales) = $200 per unit x 25,000 units = $5,000,000 CM Ratio = (Sales − Variable expenses) ÷ Sales = ($200 − $150) ÷ $200 = $50 ÷ $200 = 25% or 0.25 Break-even sales = Fixed expenses ÷ CM ratio = $1,000,000 ÷ 0.25 = $4,000,000 Margin of safety in dollars = $5,000,000 − $4,000,000 = $1,000,000

Johnson Corporation: Target profit $120,000 Unit contribution margin $40 Fixed expenses $40,000 Contribution margin ratio 0.40 Selling price $100 What are the sales dollars required to attain a target profit of $120,000? a) $400,000 b) $300,000 c) $10,000 d) $60,000

a) $400,000 Dollar sales to attain the target profit = (Target profit + Fixed expenses) ÷ CM ratio Dollar sales to achieve the target profit = ($120,000 + $40,000) ÷ 0.40 = $400,000

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 ______. a) $99,000 b) $57,000 c) $241,000

a) $99,000 Net operating income = $184,000 - $85,000 = $99,000

Ralph Corporation: Selling price $200/unit Variable expenses $150/unit Fixed expenses $1,000,000/yr Unit sales 25,000/yr What is Ralph Corporation's margin of safety in percentage? a) 20% b) 100% c) 80% d) 50%

a) 20% Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales Total budgeted (or actual sales) = $200 per unit x 25,000 units = $5,000,000 CM Ratio = (Sales − Variable expenses) ÷ Sales = ($200 − $150) ÷ $200 = $50 ÷ $200 = 25% or 0.25 Break-even sales = Fixed expenses ÷ CM ratio = $1,000,000 ÷ 0.25 = $4,000,000 Margin of safety Percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales in dollars = ($5,000,000 − $4,000,000) ÷ $5,000,000 = 20%

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage? a) 3.00 b) 0.60 c) 2.00 d) 1.67

a) 3.00 Degree of operating leverage = Contribution margin ÷ Net operating income Degree of operating leverage = $300,000 ÷ $100,000 = 3.00

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio? a) 40% b) 60% c) 100% d) 20%

a) 40% Variable expense ratio = Variable expense ÷ Sales = $20 ÷ $50 = 40%

Which of the following statements is correct? a) The higher the margin of safety, the lower the risk of incurring a loss. b) The higher the margin of safety, the higher the risk of incurring a loss. c) The risk of loss is not impacted by the margin of safety.

a) The higher the margin of safety, the lower the risk of incurring a loss.

A company with a high ratio of fixed costs ______. (select all that apply) a) is more likely to experience greater profits when sales are up than a company with mostly variable costs. b) will not be concerned about fluctuating sales c) will be able to avoid some of the fixed costs when sales decrease by lowering production d) is more likely to experience a loss when sales are down than a company with mostly variable costs

a) is more likely to experience greater profits when sales are up than a company with mostly variable costs. d) is more likely to experience a loss when sales are down than a company with mostly variable costs

CVP analysis focuses on how profits are affected by ______. (select all that apply) a) selling price b) unit variable cost c) mix of products sold d) break-even point e) sales volume f) total fixed costs

a) selling price b) unit variable cost c) mix of products sold e) sales volume f) total fixed costs

To prepare a CVP graph, lines must be drawn representing total revenue, ______. a) total expense, and total fixed expense b) total expense, and profit c) break-even point, and profit d) total variable expenses, and total fixed expense

a) total expense, and total fixed expense

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month, ______. (select all that apply) a) total sales = $1,925 b) profits = $875 c) total costs = $1,250 d) total variable costs = $350

a) total sales = $1,925 (Total sales = 35 × $55 = $1,925) b) profits = $875 (Profits = 35 × ($55 - $10) - $700 = $875) d) total variable costs = $350 (Total variable costs = (35 × $10) = $350)

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle? a) $500 b) $300 c) $200 d) $20,200

c) $200

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? a) 6,400 b) 3,600 c) 2,800 d) 1,960

c) 2,800 $98,000 ÷ ($50 - $15) = 2,800

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is ______. a) 9,524 b) 24,762 c) 40,000 d) 15,238

c) 40,000 (520,000 + 320,000) / 21 = 40,000

The current sales of Trent, Incorporated, are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Incorporated? a) 24% b) 30% c) 60% d) 25%

c) 60% Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 2 × 30% = 60%.

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes? a) Increase of $20,000 b) Decrease of $20,000 c) Increase of $14,200 d) Decrease of $12,000

c) Increase of $14,200 Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit$114 x 300 units = $34,200Less increase in fixed costs -$20,000Change in net operating income = $14,200

What is represented on the X axis of a cost-volume-profit (CVP) graph? a) Sales revenue b) Fixed cost c) Unit volume d) Variable cost

c) Unit volume

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______. a) change in sales - change in fixed expenses b) cm ratio × change in sales + change in fixed expenses c) cm ratio × change in sales - change in fixed expenses

c) cm ratio × change in sales - change in fixed expenses

Total contribution margin equals ______. a) total sales minus net operating income b) total sales minus fixed expenses c) fixed expenses plus net operating income d) variable expenses plus net operating income

c) fixed expenses plus net operating income

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 ______. a) decrease by $8,000 b) decrease by $12,250 c) increase by $7,750 d) increase by $15,750

c) increase by $7,750 (Change in NOI = 735,000 - 700,000 x 45% - 8,000 = 7,750)

Break-even point is the level of sales at which ______. a) total profits equals total costs b) total profits exceed total costs c) total revenue equals total costs d) total sales equal total projections

c) total revenue equals total costs

The term "cost structure" refers to the relative proportion of _____________ and _____________ costs in an organization.

fixed variable