Accounting Chapter 5

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

$0.35

A company reported $100,000 in sales and $80,000 in variable costs at the break even point of 200 units. If the company sells 201 units, net profit will be ____.

$100 (100,000 - 80,000) / 200 Sales - variable costs / units

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 Net operating income = 184,000 (CM) - 85,000 (Fixed costs)

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

1. Fixed 2. Profit

Correct order of contribution margin format income statement

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

Once the break-even point is reached, the sale of an additional unit increases the contribution margin by an amount that is ___ the increase in net operating income.

equal to

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 CM = 20,000(units) * 20 - 11 (selling price minus variable cost per unit)

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 30,000 (quantity) * 40 - 19 (selling minus variable cost) - 250,000 (fixed expenses) = 380,000 (net operating income)

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 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.

Profit equals:

(P × Q - V × Q) - fixed expenses.

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 currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) ___________ (increase/decrease) of $__________.

-Decrease -3,000

At the break-even point ____.

-Net operating income is zero -total revenue equals total cost

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

-fixed -variable

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.

CVP analysis focuses on how profits are affected by:

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

Which of the following items are found ABOVE the contribution margin on a contribution margin format income statement?

-sales -variable expenses

Elle's elephant shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs of $700. If Ellie sells 35 elephants this month, _____.

-total sales = $1,925 (35*55) -profits = $875 (35 * (55-10) - 700) -total variable costs = 350 (35*10)

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

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:

21,645 (470,000 + 222,640 / 32 = 21,645)

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% 2.93 / 9.00 = .27 or 27%

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

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 (4,000 + 3,200) / (15.00 - 13.50) = 4,800

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:

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

Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is

45%

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 (10,000 * 10) Sales - (6 *10,000) variable expenses - (35,000) fixed costs

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 Break-even point = 305,000 (fixed costs) / 40 (CM)

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

The calculation of contribution margin (CM) ratio is ______.

Contribution Margin / Sales

After reaching the break-even point, a company's net operating income will increase by the __ __ per unit for each additional unit sold.

Contribution margin

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

Cost structure

T/F: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False

T/F: without knowing the future, it is best to have a cost structure with high variable costs.

False

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

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

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 = 7,750

the ______________________ is the excess budgeted or actual sales dollars over the break-even sales dollars

Margin of safety

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

Net operating income

Which of the following statements is correct?

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

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

Volume Selling price Product mix

Contribution margin:

becomes profit after fixed expenses are covered

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

contribution margin

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decrease in the unit variable cost

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the ______.

degree of operating leverage

When constructing a CVP graph, the vertical axis represents:

dollars

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 ___ analysis

incremental

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

leverage

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

ratio

Variable expense ratio is the ratio of variable expense to ____.

sales

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

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

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

total expense, and total fixed expense

Variable expenses / sales is the calculation for the ____.

variable expense ratio

The contribution margin is equal to sales minus ____.

variable expenses

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

zero