Chapter 6 Smarbook

Using the high-low method, the fixed cost is calculated Blank______. Multiple select question. - after the variable cost per unit is calculated - by adding the total cost to the variable cost - using either the high or low level of activity

after the variable cost per unit is calculated using either the high or low level of activity

Estimating the fixed and variable components of a mixed cost using the ______ approach involves a detailed analysis of what cost behavior should be.

engineering

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 3,600 6,400 1,960

$98,000 ÷ ($50 - $15) = 2,800

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 $_____

($10 - $6) * 10,000 - $35,000 = $5,000.

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 ______. 5,162 8,400 18,600 5,787

($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ______. 15,238 40,000 9,524 24,762

($520,000 + $320,000) ÷ $21 = 40,000

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 decrease by $8,000 decrease by $12,250 increase by $15,750

(($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase

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. Which of the following statements are correct? Multiple select question. - Baron's net income grows twice as fast as its sales. - Adams has a higher degree of operating leverage than Baron. - If sales fall, Baron will experience a greater decrease in income than Adams.

- Baron's net income grows twice as fast as its sales. - Adams has a higher degree of operating leverage than Baron. Operating leverage: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron. This means Adams will experience a greater decrease if sales fall.

When a company produces and sells multiple products ______. multiple select question - 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 a unique contribution margin - each product most likely has different costs

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

A company with a high ratio of fixed costs: Multiple select question. - will not be concerned about fluctuating sales. - is more likely to experience a loss when sales are down than a company with mostly variable costs. - is more likely to experience greater profits when sales are up than a company with mostly variable costs. - will be able to avoid some of the fixed costs when sales decrease by lowering production.

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

The high-low method Blank______. Multiple select question. - generally provides an accurate estimate of true cost behavior during normal periods - uses only two data points - is difficult to apply and requires a statistical software package - is based on periods where the activity tends to be unusual

- uses only two data points - is based on periods where the activity tends to be unusual

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; 2

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 ______. $180,000 $130,000 $150,000 $30,000

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

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is ______. $3,500 $6,000 $5,000 $2,250

Estimated fixed maintenance costs = Total cost - Variable cost element = $14,250 - [($2,250/1,500) x 8,000] = $2,250

T/F Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars. True false question.

False

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 ______. $99,000 $241,000 $57,000

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

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was ______. $3,800 $2,200 $2,100 $6,000

Profit = 300 × ($20 - $7) - $1,700 = $2,200.

Which of the following statements are true? Multiple Select Question - Scattergraphs are a way to diagnose cost behavior. - Plotting data on a scattergraph is an important diagnostic step. - When plotting a scattergraph, cost is the independent variable. - Scattergraphs should be used after high-low or regression analysis is performed.

Scattergraphs are a way to diagnose cost behavior. Plotting data on a scattergraph is an important diagnostic step.

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

T/F When using the high-low method, fixed costs are calculated after variable costs are determined.

True

T/F Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

True

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 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 ______. 5,100 7,625 12,725

Unit sales to break-even = Fixed expenses ÷ Contribution margin per unit = $305,000 ÷ $40 = 7,625

Contribution margin: - is first used to cover variable expenses. - is not affected by changes in activity. - becomes profit after fixed expenses are covered. - equals sales minus fixed expenses.

becomes profit after fixed expenses are covered.

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, Blank______. - choose the periods with the highest and lowest levels of cost and their associated activities - skip that period and move to the next highest or lowest level where costs and activity match - choose the periods with the highest and lowest levels of activity and their associated costs

choose the periods with the highest and lowest levels of activity and their associated costs

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

cm ratio × change in sales - change in fixed expenses

To calculate the degree of operating leverage, divide __________ ____________by net operating income.

contribution margin

The degree of operating leverage = ______. - contribution margin ÷ total sales - gross margin ÷ net operating income - contribution margin ÷ net operating income - total sales ÷ net operating income

contribution margin ÷ net operating income

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

contribution margin ÷ sales

Once the break-even point has been reached, net operating income will increase by the amount of the unit _____ ________ for each additional unit sold.

contribution; margin

To calculate the variable cost per unit using the high-low method, the change in ________ is divided by the change in _______.

cost; activity

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit. - have no impact on - decrease - increase

decrease Sales - variable cost = contribution margin so an increase in variable cost per unit lowers contribution margin per unit.

When constructing a CVP graph, the vertical axis represents: - unit volume. - fixed costs. - dollars. - variable costs.

dollars

Total contribution margin equals ______. - fixed expenses plus net operating income - total sales minus fixed expenses - variable expenses plus net operating income - total sales minus net operating income

fixed expenses plus net operating income

Total contribution margin equals ______. - total sales minus net operating income - fixed expenses plus net operating income - total sales minus fixed expenses - variable expenses plus net operating income

fixed expenses plus net operating income

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

fixed; variable

The high-low method (check all that apply): a) is difficult to apply and requires a statistical software package b) generally provides an accurate estimate of true cost behavior during normal periods c) is based on periods where the activity tends to be unusual d) uses only two data points

is based on periods where the activity tends to be unusual uses only two data points

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating ________

leverage

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals _______ __________ behavior

linear cost

CVP analysis focuses on how profits are affected by ______. multiple select - break-even point - mix of products sold - selling price - unit variable cost - sales volume - total fixed costs

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

Operating leverage is a measure of how sensitive Blank______ is to a given percentage change in sales dollars. - total gross margin - total variable expense - selling price per unit - net operating income

net operating income

At the break-even point ______. Multiple select question. - the company is earning a profit - the company is experiencing a loss - net operating income is zero - total revenue equals total cost

net operating income is zero total revenue equals total cost

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______. Multiple select question. net operating income will increase by $0.70 total contribution margin will increase by $0.30 net operating income will increase by $0.30 total contribution margin will increase by $0.70

net operating income will increase by $0.70 total contribution margin will increase by $0.70

The relative proportions in which a company's products are sold is referred to as ______ _______

sales mix

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

sales mix

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

selling price volume product mix

The rise-over-run formula for the slope of a straight line is the basis of Blank______. - a scattergraph - the high-low method - least squares regression

the high-low method

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

total expense, and total fixed expense

CVP analysis focuses on how profits are affected by ______. - total fixed costs - sales volume - selling price - mix of products sold - break-even point - unit variable cost

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

The break-even point is reached when the contribution margin is equal to: - total sales. - total fixed expenses. - profit. - total variable expenses.

total fixed expenses.

At the break-even point ______. Multiple select question. - the company is earning a profit - the company is experiencing a loss - total revenue equals total cost - net operating income is zero

total revenue equals total cost net operating income is zero

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

$0.35

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 ______. $630,000 $380,000 $1,520,000 $(249,979)

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

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 $2,730 increase $2,450 increase $2,280 decrease

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

T/F Cost structure refers to the relative portion of product and period costs in an organization.

False

When a company sells one unit above the number required to break-even, the company's net operating income will ______. - increase by the sales price of the extra until sold - increase or decrease depending on total fixed costs - change from zero to a net operating profit - decrease by the contribution margin per unit

change from zero to a net operating profit

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

fixed; profit

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

ratio

When using the high-low method, the slope of the line equals the _____ cost per unit of activity.

variable

When using the high low method, the change in cost divided by the change in units equals Blank______. - fixed cost per unit - total fixed cost - variable cost per unit - total variable cost - total cost

variable cost per unit

The contribution margin is equal to sales minus ______. Multiple choice question. - net operating income - both variable expenses and fixed expenses - variable expenses - fixed expenses

variable expenses

Profit = (selling price per unit × quantity sold) - ( _______expense per unit × quantity sold) - ________ expenses.

variable; fixed