Accounting Exam 3

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Examples of variable costs

Direct materials Direct labor Variable factory overhead Variable marketing expenses

The margin of safety is the excess of: Break even sales over expected sales Expected sales over variable costs Expected sales over fixed costs Fixed costs over expected sales Expected sales over break even sales

Expected sales over break even sales

In cost volume profit analysis, the unit contribution margin is:

Sales price per unit less cost of goods sold per unit Sales price per unit less unit fixed cost per unit Sales price per unit less total variable cost per unit Sales price per unit less unit total cost per unit The same as the contribution margin ratio

What does the contribution margin ratio mean?

40% or .4 of every sales dollar is left to cover fixed expenses and what's leftover goes to net income

Change in income (%)

DOL x change in sales (%)

The contribution margin per unit is the price at which a unit must be sold in order for the company to break even

False

To calculate the break even point in units, one must know unit fixed costs, unit variable cost, and sales price

False

Break even in sales dollars

Fixed Expenses / CM Ratio

unit sales for target profit

Fixed expense + target profit / cm per unit

Dollar sales for target profit

Fixed expense + target profit/ cm ratio

Break even in unit sales formula

Fixed expenses/ cm per unit

Degree of Operating Leverage

How percentage change in sales will impact profit

What does the contribution margin per unit mean?

It is the amount left over to cover fixed expenses and any excess goes to the net income

Which of the following is the correct interpretation of a degree of operating leverage of 5?

Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.

Fixed costs

Remain constant even when activity levels change Fixed cost per unit increase when activity decreases and decrease when activity increases (inverse)

DOL formula

Total contribution margin in $ / net income

Contribution margin per unit is the amount by which product's unit selling price exceeds its variable cost per unit

True

Degree of operating leverage is defined as total contribution margin in dollars divided by pretax income

True

The contribution margin ratio is the percent of each sales dollar that remains after deducting the unit variable cost

True

The dollar amount of sales needed to achieve a target income is computed by dividing the sum of fixed costs plus the target pretax income by the contribution margin ratio

True

The margin of safety is the amount that sales can drop before the company incurs a loss

True

Total variable cost formula

Variable cost per Unit x activity level/quantity

Variable Expense Ratio

Variable exp per unit/ selling price per unit Var exp ratio + cm ratio = 100% (sales)

Contribution margin Income Statement

sales - variable expenses = contribution margin - fixed expenses = net operating income (or loss)

contribution margin per unit formula

sales price per unit - variable cost per unit

Contribution margin formula

total sales - total variable costs

Mixed cost equation

y=a+bx

Contribution Margin Ratio formula

contribution margin per unit / selling price per unit

What is the break-even point?

Zero profit Total sales= total costs Neither profit nor a loss Expressed in units sold or sales dollars

CM income statement how to work

Move up to find sales Move down to find income

variable costs

They change in proportion to changes in the activity level/volume Variable costs per unit remain constant even when activity changes

Why do we use cost volume profit analysis

To predict how changes in costs and sales levels affect profit

fixed cost per unit formula

Total fixed cost/activity level (volume)

Mixed Costs

Total fixed costs + total variable cost

Margin of Safety Percentage

expected sales - break even sales / expected sales

Margin of Safety in Dollars

expected sales - breakeven sales ($)


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