ACG 2071 Ch 4 Study Guide Questions

For several years, Bellagio's Restaurant has offered a lunch special for $7.00. Monthly fixed expenses have been $4,200. The variable cost of a meal has been $2.10. Anthony Bellagio, the owner, believes that by remodeling the restaurant and upgrading the food services, he can increase the price of the lunch special to $7.40. Monthly fixed expenses would increase to $4,800 and the variable expenses would increase to $2.96 per meal. What recommendation would you make to Anthony Bellagio concerning remodeling the restaurant?

Don't Anthony should not remodel the restaurant building. At the present time, he needs to have monthly revenue of only $6,000 to break even. However, with the remodeling, he would need monthly revenue of $8,000 to break-even.

Costs that contain both variable and fixed elements. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

E Mixed cost

Profit Equation

Equation that states the profit is equal to revenue (selling price times quantity) minus variable cost (variable cost per unit times quantity) minus total fixed costs

High-Low Method Equation

Estimate of Variable Cost = Change in cost / Change in activity Estimate of Variable Cost = Cost at highest level of activity - Cost at lowest level of activity / Highest level of activity - Lowest level of activity

Two common fixed costs are rent and sales commissions. T/F

F A common fixed cost is rent and a common variable cost is sales commissions.

The difference between the expected level of sales and break-even sales. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

F Margin of safety

Mixed costs contain elements of both direct material and direct labor. T/F

F Mixed costs contain elements of both fixed cost and variable cost.

The contribution margin is equal to the difference in the selling price per unit and fixed cost per unit. T/F

F The contribution margin is equal to the difference in the selling price per unit and variable cost per unit.

To calculate the break-even point, the profit equation is set to $1, and then the appropriate selling price, variable cost, and fixed cost information are inserted into the equation. T/F

F To calculate the break-even point, the profit equation is set to zero, and then insert the appropriate selling price, variable cost, and fixed cost information.

Variable costs, in total, change inversely with changes in activity. T/F

F Variable costs in total change proportionately with changes in activity.

Committed Fixed Costs

Fixed costs that cannot be easily changed in the short run

Discretionary Fixed Costs

Fixed costs that management can easily change in the short run

Profit Equation (equation)

Profit = SP(x) - VC(x) - TFC Where x = Quantity of units produced and sold SP = Selling price per unit VC = Variable cost per unit TFC = Total fixed cost

Contribution Margin Income Statement

Revenue Less Variable Cost = Contribution Margin Less Fixed Costs = Net Income

Semivariable Costs

See mixed costs

Firms that have relatively high levels of fixed cost are said to have high operating leverage. T/F

T

Fixed costs do not affect the incremental profit associated with selling an additional unit because fixed costs are not affected by changes in volume. T/F

T

One of the primary uses of CVP analysis is to calculate the break-even point. T/F

T

The account analysis method is subjective in that different managers using the same set of facts may reach different conclusions regarding the classification of costs into fixed and variable components. T/F

T

The contribution margin per unit measures the amount of incremental profit generated by selling an additional unit. T/F

T

The level of operating leverage is important because it affects the change in profit when sales change. T/F

T

Using the high-low method to classify costs as fixed or variable, the slope of the line is the estimate of variable cost. T/F

T

Cost-Volume-Profit (CVP) Analysis

The analysis of how costs and profit change when volume changes

During a recent six-month period, Connie's Wholesale Cupcakes had the following monthly volume of cupcakes sold and total monthly utilities expense: Month Number of Cupcakes Utilities Expense January 3,500 $ 900 February 5,400 1,320 March 4,900 1,800 April 9,000 2,110 May 7,800 2,000 June 6,300 2,600 Compute the estimated variable cost per cupcake for utilities expense.

$0.22 per cupcake High level of activity 9,000 $2,110 Low level of activity 3,500 900 Change 5,500 $1,210 Estimate of Variable cost = Change in cost/Change in activity $1,210/5,500 cupcakes = $0.22 per cupcake

During a recent six-month period, Connie's Wholesale Cupcakes had the following monthly volume of cupcakes sold and total monthly utilities expense: Month Number of Cupcakes Utilities Expense January 3,500 $ 900 February 5,400 1,320 March 4,900 1,800 April 9,000 2,110 May 7,800 2,000 June 6,300 2,600 Compute the total estimated fixed cost per month for utilities expense.

$130 Total cost at the high level of activity $2,110 Less variable cost (9,000 x $0.22) = 1,980 Fixed cost= 2110-1980= $130

Hogan Manufacturing Company makes and sells a single product. The company's sales and expenses for the most recent month are given below: Total Sales $500,000 Less variable expenses 340,000 Contribution margin $160,000 Less fixed expenses 80,000 Net income $ 80,000 Per Unit $ % Sales 25 100 Variable Costs 17 68 Cont Margin 8 32 Assuming Hogan increases sales by 10%, how much will net income increase?

$16,000 $160,000 x .10 = $16,000

Warren, Inc. has a selling price of $800 per unit for its products.. Variable costs per unit are $600 and fixed costs total $150,000 What is the contribution margin per unit?

$200 Revenue $800 Variable cost (600) Contribution margin = $200

For several years, Bellagio's Restaurant has offered a lunch special for $7.00. Monthly fixed expenses have been $4,200. The variable cost of a meal has been $2.10. Anthony Bellagio, the owner, believes that by remodeling the restaurant and upgrading the food services, he can increase the price of the lunch special to $7.40. Monthly fixed expenses would increase to $4,800 and the variable expenses would increase to $2.96 per meal. Compute Bellagio's monthly break-even sales in dollars before remodeling.

$6,000 Sales $7.00 100% Variable costs 2.10 30% Cont Mar $4.90 70% Fixed costs / CM ratio = BEP in $ volume $4,200 / .70 = $6,000

Warren, Inc. has a selling price of $800 per unit for its products.. Variable costs per unit are $600 and fixed costs total $150,000 Compute the break-even point in dollar volume of revenue.

$600,000 TFC $150,000 CM Ratio / .25 = $600,000

During a recent six-month period, Connie's Wholesale Cupcakes had the following monthly volume of cupcakes sold and total monthly utilities expense: Month Number of Cupcakes Utilities Expense January 3,500 $ 900 February 5,400 1,320 March 4,900 1,800 April 9,000 2,110 May 7,800 2,000 June 6,300 2,600 Compute the total amount of utilities expense that would be incurred at a level of 2,200 cupcakes.

$614 Variable cost at a level of 2,200 cupcakes= $484 Fixed cost at a level of 2,200 cupcakes= 130 Total utility cost at a level of 2,200 cupcakes 484+130= $614

For several years, Bellagio's Restaurant has offered a lunch special for $7.00. Monthly fixed expenses have been $4,200. The variable cost of a meal has been $2.10. Anthony Bellagio, the owner, believes that by remodeling the restaurant and upgrading the food services, he can increase the price of the lunch special to $7.40. Monthly fixed expenses would increase to $4,800 and the variable expenses would increase to $2.96 per meal. Compute Bellagio's monthly break-even sales in dollars after remodeling.

$8,000 Sales $7.40 100% Variable costs 2.96 40% Cont Mar $4.44 60% Fixed costs / CM ratio = BEP in $ volume $4,800 / .60 = $8,000

Hogan Manufacturing Company makes and sells a single product. The company's sales and expenses for the most recent month are given below: Total Sales $500,000 Less variable expenses 340,000 Contribution margin $160,000 Less fixed expenses 80,000 Net income $ 80,000 Per Unit $ % Sales 25 100 Variable Costs 17 68 Cont Margin 8 32 Without resorting to computations, what is the total contribution margin at the break-even point?

$80,000 $80,000 - At the breakeven point, contribution margin is always equal to fixed costs.

Hogan Manufacturing Company makes and sells a single product. The company's sales and expenses for the most recent month are given below: Total Sales $500,000 Less variable expenses 340,000 Contribution margin $160,000 Less fixed expenses 80,000 Net income $ 80,000 Per Unit $ % Sales 25 100 Variable Costs 17 68 Cont Margin 8 32 What is the monthly break-even point in units and in sales dollars?

10,000 units $250,000 $80,000 ÷$8 = 10,000 units $80,000 ÷ .32 = $250,000

Hogan Manufacturing Company makes and sells a single product. The company's sales and expenses for the most recent month are given below: Total Sales $500,000 Less variable expenses 340,000 Contribution margin $160,000 Less fixed expenses 80,000 Net income $ 80,000 Per Unit $ % Sales 25 100 Variable Costs 17 68 Cont Margin 8 32 How many units would have to be sold each month to earn a minimum target net income of $100,000? Prove your answer by preparing a contribution income statement at the target level of sales.

22500 units ($80,000 + $100,000) ÷ $8 = 22,500 units Sales (22,500 x 25) $562,500 VC (22,500 x $17) 382,500 Cont Marg 180,000 Less Fixed cost 80,000 Net income $100,000

Warren, Inc. has a selling price of $800 per unit for its products.. Variable costs per unit are $600 and fixed costs total $150,000 What is the contribution margin ratio?

25% Revenue $800 100% Variable costs 600 75% Cont Marin $200 25% $200/$800 = 25%

Warren, Inc. has a selling price of $800 per unit for its products.. Variable costs per unit are $600 and fixed costs total $150,000 Compute the break-even point in units.

750 units TFC $150,000 Cont Marg /$200 = 750 units

Contribution Margin Ratio Equation

= CM(x) / SP

Break Even Units Equation

= Profit + TFC / CM(x)

Break Even Sales Dollars Equation

= Profit = TFC / CM ratio

A method of estimating cost behavior which requires professional judgment to classify costs as either fixed or variable. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

A Account analysis

An example of a discretionary fixed cost is: a. advertising. b. indirect labor. c. rent. d. depreciation.

A advertising

The contribution margin ratio provides a measure of: a. the contribution of every sales dollar to covering fixed cost and generating a profit. b. the contribution of every sales dollar to covering variable cost and generating a profit. c. the contribution of every sales dollar to covering variable and fixed costs and generating a profit. d. none of the above.

A the contribution of every sales dollar to covering fixed cost and generating a profit

Scattergraph

A graph of costs at various activity levels

Account Analysis

A method of estimating cost behavior that requires professional judgement to classify costs as either fixed or variable. The total of the costs classified as variable are divided by a measure of activity to calculate the variable cost per unit of activity. The total of the costs classified as fixed provides the estimate of fixed costs

High-Low Method

A method of estimating fixed and variable cost components in which a straight line is fitted to the data points representing the highest and lowest levels of activity

R Square

A statistical measure of how well the regression line fits the data Range of: Low of 0, indicating no linear relation between cost and production High of 1, indicating there is a perfect linear relation between cost and production

Regression Analysis

A statistical technique that can be used to estimate the intercept (an estimate of fixed cost) and the slope (an estimate of variable cost) of a cost equation

Step Fixed Costs

A step cost for which the range of activity is relatively large before there is an increase in cost

Step Variable Costs

A step cost for which the range of activity is relatively small before there is an increase in cost

"What If" Analysis

An examination of the results of various courses of action

The number of units a company must sell to earn a zero profit. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

B Break-even point

Dalton Company can produce Product A and Product B using the same equipment. The contribution margin for A is $200 while the contribution margin for B is $150. Dalton has only 1,000 hours of machine time available. Product A requires 1 machine hour to produce one unit while Product B requires 1/2 machine hour to produce one unit. Which of the following units should Dalton produce? a. Product A because the contribution margin of $200 is greater than the contribution margin of $150 for Product B. b. Product B because the contribution margin per constraint of $300 is greater than the contribution margin per constraint of $200 for Product A. c. Product A and Product B proportionately according to their respective contribution margins. d. Product A and Product B equally.

B Product B because the contribution margin per constraint of $300 is greater than the contribution margin per constraint of $200 for Product A.

Vick Company produces boat motors. The selling price per motor is $1,200. The variable cost per motor is $500 and the fixed cost per period is $8,700. Vick expects to sell 25 motors during the period The margin of safety is: a. $8,700. b. $14,400. c. $18,000. d. $30,000.

B $14,400

Vick Company produces boat motors. The selling price per motor is $1,200. The variable cost per motor is $500 and the fixed cost per period is $8,700. Vick expects to sell 25 motors during the period The break-even point in dollars is: a. $12,000. b. $15,600. c. $21,600. d. $30,000.

B $15,600

Vick Company produces boat motors. The selling price per motor is $1,200. The variable cost per motor is $500 and the fixed cost per period is $8,700. Vick expects to sell 25 motors during the period The break-even point in units is: a. 10. b. 13. c. 18. d. 25.

B 13 units

Which of the following methods uses a statistical technique to estimate fixed and variable costs? a. Scattergraph. b. Regression analysis. c. Account analysis. d. High-low method.

B regression analysis

Which of the following assumptions made when using CVP analysis might affect the validity of the analysis? a. Costs can be accurately separated into their fixed and variable components. b. Fixed costs remain fixed and variable costs per unit do not change over the activity levels of interest. c. Both a and b. d. Neither a nor b.

C Both a and b

The difference between sales and variable costs. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

C Contribution margin

Vick Company produces boat motors. The selling price per motor is $1,200. The variable cost per motor is $500 and the fixed cost per period is $8,700. Vick expects to sell 25 motors during the period The contribution margin per unit is: a. $348. b. $500. c. $700. d. $852.

C $700

Vick Company produces boat motors. The selling price per motor is $1,200. The variable cost per motor is $500 and the fixed cost per period is $8,700. Vick expects to sell 25 motors during the period The contribution margin ratio is: a. 29.0%. b. 41.7%. c. 58.3%. d. 70.8%.

C 58.3%

The three elements of the profit equation are: a. selling price per unit, variable cost per unit, and fixed cost per unit. b. total revenue, variable costs per unit, and total fixed cost. c. selling price per unit, variable cost per unit, and total fixed costs. d. selling price per unit, total variable costs, and fixed cost per unit.

C selling price per unit, variable cost per unit, and total fixed costs

Contribution Margin Equation

CM(x) = SP(x) - VC(x)

P-Values

Corresponding to the intercept and slope, measures the probability of observing values as large as the estimated coefficients when the true values are zero

Step Costs

Costs that are fixed for a range of volume but increase to a higher level when the upper bound of the range is exceeded

Mixed Costs

Costs that contain both variable and fixed cost elements

Fixed Costs

Costs that do not change when there is a change in business activity

A method of estimating fixed and variable cost components in which a straight line is fitted to the data points representing the highest and lowest levels of activity. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

D High-low method

Mixed costs are also referred to as: a. double costs. b. assorted costs. c. sundry costs. d. semivariable costs.

D semivariable costs

Level of fixed versus variable costs in a firm's cost structure. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

G Operating leverage

Equation that states that profit is equal to revenue (selling price times quantity) minus variable cost (variable cost per unit times quantity) minus total fixed cost. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

H Profit equation

A statistical technique used to estimate the intercept (an estimate of fixed cost) and the slope (an estimate of variable cost) of a cost equation. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

I Regression analysis

The Plot

Indicate the data will line up close to the regression line Suggests the straight line fit to the data will be successful

Intercept of the Regression Line

Interpreted as the estimate of fixed costs

Slope of the Regression Line

Interpreted as the variable cost per unit

A graph of costs at various activity levels. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

J Scattergraph

Those costs that are fixed for a range of value but increase to a higher level when the upper bound of the range is exceeded. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

K Step costs

An examination of the results of various courses of action. a. Account analysis b. Break-even point c. Contribution margin d. High-low method e. Mixed cost f. Margin of safety g. Operating leverage h. Profit equation i. Regression analysis j. Scattergraph k. Step costs l. "What if" analysis

L "What if" analysis

Operating Leverage

Level of fixed versus variable costs in a firm's cost structure. Firms that have relatively high levels of fixed cost are said to have high operating leverage

Margin of Safety Equation

Margin of Safety = Expected sales - Break-even sales

Margin of Safety Ratio

Margin of Safety Ratio = Margin of Safety / Expected Sales

Contribution Margin Ratio

The contribution margin divided by sales or the contribution margin per unit divided by the selling price

Contribution Margin

The difference between sales and variable costs

Margin of Safety

The difference between the expected level of sales and break-even sales

Break-Even Point

The number of units a company must sell to earn a zero profit

Relevant Range

The range of activity for which estimates and predictions are likely to be accurate

Variable Costs

Those costs that increase or decrease in proportion to increase or decrease in business activity

Total Cost Equation

Total cost = Fixed cost + (Variable cost per unit x activity level in units)

CVP Assumptions

Whenever CVP analysis is performed, a number of assumptions are made that affect the validity of the analysis: • Costs can be accurately separated into their fixed and variable components. • Fixed costs remain fixed. • Variable costs per unit do not change over the activity levels of interest. • When performing multiproduct CVP analysis, it is assumed that the mix remains constant. • Selling price per unit does not change.

1 minus P-Value

determine the estimates are correct