accounting chapter 6

sales total = 25000 per unit= 500 less: variable expenses total 150000 per unit 300 cm total 100000 per unit 200 less: fixed expenses total 80000 net operating income total 20000 find the break-even point in unit sales

80000/200

companies with low fixed cost structures have what

greater stability

how does high cm affect operating leverage

higher

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

advantage of a high fixed cost structure

income will b higher in good years

disadvantage of a high fixed cost structure

income will be lower in bad years

the contribution margin statement is ordinarily used by those

inside the company only

the contribution margin is primary used for what kind of decision making

internal

in multi product companies what happens to the sales mix

its constant

why is operating leverage dependent on

level of sales

what cost structure would give a company the most stability

low fixed cost/ high variable cost

according to the cop analysis model and assuming all else remains the same, profits would be increased by what change in the unit variable cost

a decrease in the unit variable cost

how does low cm affect operating leverage

lower

commissions based on sales dollars can lead to what

lower profits in a company

amount by which sales can drop before losses are incurred

margin of safety

gives how much sales can decline before it goes into negative

margin of safety

margin of safety in units

margin of safety in dollars/ selling price per unit

margin of safety percentage

margin of safety in dollars/ total sales

if the total cm is less then the total fixed expenses a ________ occurs

net loss

if the total contribution margin is less than the total fixed expenses, a _______ occurs

net loss

when does the operating leverage decrease

as sales and profits rise

when is operating leverage the smallest

at sales levels far from he break-even point and decreases as the sales and profits rise

when is the operating leverage highest

at sales levels near the break even point

once the break even point has been reached net operating income will increase by the amount the unit ______ _______ for each additional unit sold

contribution margin

degree of operating leverage

contribution margin/ net operating income

formula for contribution margin ratio

contribution margin/ sales

why is the contribution margin used for on income statement

covers fixed expenses and the remaining cm is the net operating income

at a given level of sales measures how percentage change in sales volume will affect profits

degree of operation leverage

what happens to inventories in cap analysis

doesn't change

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

equal to

two ways to compute number of units that must be sold to attain a target profit

equation method formula method

break-even in dollar sales formula method

fixed exp/ cm ratio

break even point in unit sales formula

fixed expense/ units cm

total contribution margin equals

fixed expenses plus net operating income

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

(750-450) * 120= 36000

net operating income equals

(dollar sales- dollar sales to break even) * unit contribution margin

is degree of operating leverage constant

no

contribution margin is first used to cover ___________ expenses. once the break-even point has been reached, contribution margin becomes __________

profit

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

false cost structure refers to the relative portion of fixed and variable costs in an organization

what does cm equal at break even point

fixed expenses

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 Blank______.

($520,000 + $320,000) ÷ $21 = 40,000

what is the profit at when at break even point

0

what does cost- volume profit focus on relationships between

1. prices 2 volume 3 variable cost 4 fixed cost 5 mix

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

100000-80000= 20000 100000-200= 99800 99800* 20000

coffe klatch is a espresso stand in a downtown office building. the average selling price of a coup of coffee is $1.49 and the average variable expense per cup is $.036 the average fixed expense per month is $1300. on average of 2100 cups are sold each moth what is the break even sales in units

1300/(1.49-.36) = 1150.44 = 15151

sales total = 25000 per unit= 500 less: variable expenses total 150000 per unit 300 cm total 100000 per unit 200 less: fixed expenses total 80000 net operating income total 20000 break-even point in dollar sales formula method

200/500= .4 contribution ratio 80000/.4

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

30000* 40= 1200000 30000 * 19= 570000- 250000=250000

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a

40000- 50000= 10000 net operating loss

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 Blank______

Reason: 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.

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 ______.

Reason: Sales dollars needed to earn the target profit = Selling price per unit x Number of units to be sold to achieve target profit = $95 × 450 = $42,750

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

Sales dollars needed to earn the target profit = Selling price per unit x Number of units to be sold to achieve target profit = $95 × 450 = $42,750

what happens to selling price when using cap analysis

stays constant

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

cm ratio * change in sales - change in fixed expenses

companies generally compensate salespeople by:

commission based on sales or salary plus a sales commission

what happens to sales mix in cap analysis

stays content

how to get variable expense

quality * variable expense per unit

how to get sales

quantity * sales price per unit

how to get cm

sales - variable expenses

equation fo contribution margin

sales revenue - variable expenses

sales (500 units) total= 250000 per unit= 500 less: variable expenses total= 150000 per unit= 300 contribution margin total= 100000 less fixed expenses 80000 net operating income total=20000 what is the profit impact if rbc cots its selling price $20 per unit, increases its advertising budget by 15000 per month and increases sales from 500 to 650 units per month

sales650 *480=312000 var expense 650* 300= 195000 312000-195000=117000cm fixed expense= 80000+15000=95000 117000-95000= 22000 22000-20000= 2000 increase

to simplify cvp calculations, it is assumed that ________ will remain constant

selling price

sales dollars need to earn the larget profit=

selling price per unit * number of units to be sold to achieve target profit

are managers able to determine their organization's cost structure

they often have some latitude

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

what does total sales equal when at break even point

total expenses

the break even point is reached when he contribution margin is equal to

total fixed expenses

margin of safety in dollars

total sales- breakeven sales dollars

what is found above the contribuiton margin on a contribution margin format income statement

variable expenses and sales

equation for target profit dollar sales

(fixed expense + target profit)/ cm ratio

equation for target profit unit sales

(fixed expense + target profit)/ unit cm

equation to find profit

(sales- variable expenses) - fixed expenses

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

90-35=55

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?

98000 / (50-15) = 2800

what is the contribution margin the same as

contribution rato

relative proportion fixed and variable costs in an organization

cost structure

what is is the degree of operating leverage dependent on

cost structure

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

net operating income