MBA - Account Analysis ch.2

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

$0.35

Ceramic Creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If Ceramic Creations sells 25,000 pots, net operating income will be:

$130,000 Reason: Net income = (25,000 - 15,000) x ($25 - $12) = $130,000.

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by:

$174,000 Net operating income change = $600,000 x 29% = $174,000.

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is:

$36,000 Net operating income = (750 - 450) x $120 = $36,000.

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 net income would be a

$450 Increase

****Profit =

(selling price per unit x quantity sold) - (Variable expense per unit x quantity sold) - Fixed expenses (SP * units sold) - (VC per unit * units sold) - FC

Net operating income can be calculated as:

(unit sales - unit sales to break even) x unit contribution margin

Water World sells wake boards and water skis and pays sales commissions based on product sales price. The wake boards sell for a higher price than the skis and the skis have a higher contribution margin per unit than the wake boards. Which of the following are true?

- The company would rather see more skis sold as it creates the higher profit per unit for the company. - Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them.

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has:

- a contribution margin equal to fixed costs - reached the break-even point

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales:

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

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%

****Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be $

30

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 ratio = ($1,452,000 - $958,320)/$1,452,000 = 34%.

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as:

CM ratio x Change in sales - Change in fixed expenses

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

Company B

Contribution margin ratio is equal to

Contribution Margin / Sales or Revenue

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

Cost structure refers to the relative portion of fixed and variable costs in an organization.

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

Decrease

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False

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

Fixed, Profits

The term "cost structure" refers to the relative proportion of _______ and _______ cost in an organization

Fixed, Variable

If operating leverage is high, a small percentage increase in sales produces a _____________ (higher/lower) percentage increase in net operating income than if operating leverage is low

Higher

The amount by which sales can drop before losses are incurred is the

Margin of Safety

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

NOI

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:

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

****A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be:

Net operating income = (26,000 - 17,000) x $22 = $198,000.

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

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

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:

Reason: $1,630,000 - $935,000 = $695,000

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:

Reason: $200,800 = ($90-$28) x Q - $320,000; $200,800 + 320,000 = $62Q; $520,800/$62 = 8,400 units

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is:

Reason: Sales volume = ($470,000 + $222,640)/$32 = 21,645 fans.

Whats the correct order of the contribution margin format on income statement

Sales Variables Expenses Contribution Margin Fixed Expenses Net Operating Income

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 whats the contribution income statement

Sales = 1,925 - VC = 350 CM = 1,575 - FC = 700 NOI = 875

Which of the following statements is correct about margin of safety?

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

The equation used to calculate the variable expense ratio using total values is:

Total VC / Sales

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin PER UNIT is:

Unit contribution margin= $90 -$35 = $55. READING IS ESSENTIAL

When preparing a CVP graph, the horizontal axis (X) represents:

Unit or Sales Volume and Dollars represents vertical or (Y) axis

The contribution margin is equal to sales minus:

Variables Expenses (VC)

Margin of safety in dollars is:

budgeted (or actual) sales minus break-even sales

When a company sells one unit above the number required to break-even, the company's net operating income will:

change from zero to a net operating profit

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

Once the break-even point has been reached, the sale of an additional unit will lead to an increase in contribution margin that is _______ the increase in net operating income.

equal to

A company has reached its break-even point when the contribution margin _________ fixed expenses

equals

*****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 Change in net operating income = ($735,000-$700,000) x 45% - $8,000 = $7,750.

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using

incremental analysis

The margin of safety percentage is:

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

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total:

profit or loss

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

sales mix

To prepare a CVP graph, lines must be drawn representing total revenue,

total expense, and total fixed expense

When making a decision using incremental analysis consider the:

- change in sales dollars resulting specifically from the decision - change in cost resulting specifically from the decision

The break-even point calculation is affected by:

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

When a company produces and sells multiple products:

- each product most likely creates a unique total of fixed costs. - a change in the sales mix will most likely change the break-even point - each product most likely has a unique contribution margin.

At the break-even point:

- net operating income is zero. - total revenue equals total cost.

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales

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

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information:

- the contribution margin per putter is $65. - the sale of 12,000 putters results in net operating income of $380,000 12,000 units x $65 contribution margin = $780,000 - $400,000 = $380,000.

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?

Reason: $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:

Reason: $520,000 = $21 x Q - $320,000; $520,000 + 320,000 = $21xQ; $840,000/$21 = 40,000 blankets

A company is currently selling 10,000 units 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 increase the selling price to $45 per unit. If this change is implemented, profits

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

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the BREAK-EVEN point in unit sales?

Reason: Break-even point = $305,000/$40 = 7,625.

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

Reason: Increase in net operating income = 5% x 4 = 20%.

Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by the end of the year, net operating income for the year will increase by:

Reason: Net operating income change = $250,000 x 55% = $137,500 increase.

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will:

Reason: New contribution margin = $6,000 (1,000 x ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

Sniffles, 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, Sniffles' sales rounded to the nearest dollar must be:

Reason: Sales = ($240,400 + $930,000)/0.77= $1,520,000.

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:

Reason: Sales = ($975,000 + $195,000)/0.65 = $1,800,000.

A company with a high ratio of fixed costs:

- 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.

*****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:

Reason: Sales volume = ($4,000 + $3,200)/($15.00 - $13.50) = 4,800 bottles.

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:

Reason: Sales volume = ($4,000 + $3,200)/($15.00 - $13.50) = 4,800 bottles.