Chapter 5 - Smartbook Assignment

Adam's Sports Store sells an item with a contribution margin ratio of 55% and total fixed costs of $8,000. If Adam's generates additional sales of $25,000 for this item, net operating income will increase by

$13,750 Sales x Contribution Margin'=$25,000 * .55

To calculate the break-even point (in unit sales and dollar sales), managers can use the equation method or the ____ method

Formula

CVP analysis allows companies to easily identify the change in profit due to changes in

volume. product mix selling price

To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to $

$0

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be

$1,520,000 Dollar sales to attain the target profit = Target profit + Fixed expenses / CM ratio = (930,000 + 240,400) / .77

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

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

Adam's Sports Store sells an item with a contribution margin ratio of 55% and total fixed costs of $8,000. If Adam's generates additional sales of $25,000 for this item, net operating income will increase by _____

$13,750 =$25,000 * 55%

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

$380,000 Net operating income = (sales - variable expenses) - fixed expenses =(30,000*40)-(30,000*19)-250,000

Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals

$42,750 =$95 * 450

A change in sales mix -from high-margin to low-margin items may decrease profits despite an increase in sales -resulting in a decrease in total sales will always result in a decrease in profits -resulting in an increase in total sales will always result in an increase in profits -from low-margin to high-margin items may increase profits despite a decrease in sales

-from high-margin to low-margin items may decrease profits despite an increase in sales -from low-margin to high-margin items may increase profits despite a decrease in sales

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

20% Percentage change in net operating income = Degree of operating leverage x Percentage change in sales =4 * .05 = .2

Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is

40,000 units and $400,000 -200,000 / (10-5) = 40,000 -40,000 * 10 each = $400,000

Citrus Fruits sells oranges for $20 per crate. If the company's margin of safety is $180,000, the margin of safety in units is ___ crates

9,000 =180,000 / 20

If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by ____ %

90% Percentage change in net operating income = Degree of operating leverage * Sales increase = 0.15 * 6

Barrons has an operating leverage of 4 and Wilkens has an operating leverage of 3. If sales decrease, the company that will experience the greatest drop in profits is... Barrons or Wilkens

Barrons

Which of the following are assumptions of cost-volume-profit analysis? -In multi product companies, the sales mix is constant. -Fixed costs per unit stay the same within the relevant range. -Variable costs per unit increase over the relevant range of activity. -Costs are linear and can be accurately divided into variable and fixed elements.

In multi product companies, the sales mix is constant. Costs are linear and can be accurately divided into variable and fixed elements.

Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will ___ per month

Increase by $7,000 Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month.

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

Increase by $7,750 =((735,000 - 700,000) * 45%)) - 8,000

Operative leverage is a measure of how sensitive ___ is to a given percentage change in unit sales

Net operating income

Once all fixed expenses have been covered, the CM ratio defines the portion of each sales dollar contributing to

Profits

The contribution margin as a percentage of sales is referred to as the contribution margin or CM

Ratio

Estimating the sales volume required to earn a given amount of net income is known as ___ ___ analysis

Target profit

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

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

The contribution margin equals sales minus all ___ expenses

Variable

Variable expenses ÷ Sales is the calculation for the ___ ___ ratio

Variable-expense

CVP analysis allows companies to easily identify the change in profit due to changes in volume location management product mix selling price

Volume Product mix Selling price

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

A company's current sales are $300,000 and fixed expenses total $85,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will

increase by $6,000 =($70,000 × 30%) - $15,000 = $6,000 increase

The margin of safety percentage is

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

CM ratio = 1 ___ the Variable expense ratio

minus

CVP analysis focuses on how profits are affected by

unit variable cost mix of products sold sales volume total fixed costs selling price

ABC Inc. sells a product for $10 per unit. Variable costs are $4 per unit and total fixed costs equal $40,000. If sales increase from 10,000 units to 14,000 what will be the increase in overall profit?

$24,000 Profit = (P x Q - V x Q) - Fixed Expenses -(10 - 4) * 10,000 - 40,000 = $20,000 -(10 - 4) * 14,000 = $44,000 -44,000 - 20,000 = $24,000

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

$241,000 -Net operating income = Contribution margin - Fixed expenses =184,000-85,000

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals

$244,068 Dollar sales to break even = Fixed expenses / Unit CM $144,000 / .59

The degree of operating leverage -decreases as sales and profits rise -is smallest at sales levels near the break-even point -is not a constant -increases as sales and profits rise -is greatest at sales levels near the break-even point

-decreases as sales and profits rise -is not a constant -is greatest at sales levels near the break-even point

Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is

27% Variable expense ratio = variable expenses / sales =2.43 / 9.00 = 0.27

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is

29% Variable expense ratio = Variable expenses / sales = 245,050 / 845,000

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is ___ for Adams, Inc. and ___ for Baron, Inc.

3 and 2 Degree of operating leverage = Contribution margin / net operating income

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is

34% Contribution margin = Sales - Variable Exp CM Ratio = Contribution margin / sales =(1,452,000 - 958,320) / 1,452,000

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

4,800 Dollar sales to attain the target profit = Target profit + fixed expenses / cm ratio =(4,000 + 3,200 0 / ($15.00 - $13.50)

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was

53% Contribution margin ratio = Contribution margin / sales =100,170 / 189,000

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 ____

7,625 Unit sales to break even = Fixed expenses / Unit CM =305,000 / 40

Multiplying unit selling price times the number of units required to break-even is one way to calculate ____

Break-even sales dollars

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?

CVP analysis

Using the contribution margin ratio, the impact on net income for a change in sales dollars is

Change in sales dollars x contribution margin ratio

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ___

Change in sales dollars x contribution margin ratio

Costs are separated into variable and fixed categories when using the ___ approach

Contribution

The degree of operating leverage =

Contribution margin / Net operating income

CVP is the acronym for

Cost-volume-profit

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) ____ (increase or decrease) of $___

Decrease of $3,000 =(1200*25)-(1200*15) = 12,000 =(1500*25)-(1500*15)= 15,000

If operating leverage is low, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income True or False

False

Simple CVP analysis can be relied on for changes in volume outside the relevant range. True or False

False

When a company sells multiple products, an increase in total sales always results in an increase in total profits. True or False

False

The variable expense ratio equals variable expenses divided by

Sales

To simplify CVP calculations, it is assumed that ___ will remain constant.

Selling price

Simple CVP analysis is -only useful if assumptions are not violated -generally not valid outside the relevant range

generally not valid outside the relevant range

A company is currently selling 10,000 units per month of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will

increase by $24,000 An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will

increase by $4,000 Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 125% = $15,000, an increase of $4,000 per month.

The term used for the relative proportion in which a company's products are sold is

sales mix

To convert the margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the

sales price per unit

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a

$450 increase -The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units x $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units x $35), an increase of $450.

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is

$49,800 Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales =$982,000-932,200

A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $

$675,000 =90,000 * 7.50

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

$695,000 Margin of safety in dollars = Total budgeted (or actual) sales - Break-even sales =1,630,000 - 935,000

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals

$909,677 Dollar sales to break-even = Fixed expenses / CM ratio

Which of the following are assumptions of cost-volume-profit analysis? -Variable costs per unit increase over the relevant range of activity. -Fixed costs per unit stay the same within the relevant range. -Costs are linear and can be accurately divided into variable and fixed elements. -In multi product companies, the sales mix is constant.

-Costs are linear and can be accurately divided into variable and fixed elements. -In multi product companies, the sales mix is constant.

When a company produces and sells multiple products -the sales mix has no effect on the company's profit -a change in the sales mix will most likely change the break-even point -each product most likely has different costs -each product most likely has a unique contribution margin

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

The break-even point calculation is affected by -costs per unit -selling price per unit -number of batches produced -sales mix

-costs per unit -selling price per unit -sales mix

Target profit analysis -can only be done using the formula method -estimates sales needed to earn a given profit -is similar to break-even analysis

-estimates sales needed to earn a given profit -is similar to break-even analysis

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is ___%

19 Margin of safety percentage = Margin of safety in dollars / Total budgeted (or actual) sales in dollars =559,740 / 2,946,000

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?

2,800 Unit sales to break-even = Fixed costs / Unit CM =$98,000 / (50-15)

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

7,625 Unit sales to break even = Fixed expenses / unit CM =305,000 / 40

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

8,400 Dollar sales to attain the target profit = Target profit + Fixed expenses / CM ratio =(320,000 + 200,800) / (90-28)

If two companies have the same total revenue and total expenses but different proportions of fixed and variable costs, then the company with the higher proportion of ____ costs will have higher operating leverale. Fixed or variable

Fixed

Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to

break-even

The sales volume level at which profits equal zero is the

break-even point

Margin of safety in dollars is ___

budgeted (or actual) sales minus break-even sales

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 spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan 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

decrease by $16,000 =((74,000 boxes * $6) - (50,000 boxes * $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease