ACCT 2 Chapter 5: Cost-Volume-Profit Relationships SW

The measure of how a percentage change in sales affects profits at any given level of sales is the

degree of operating leverage

When constructing a CVP graph, the vertical axis represents:

dollars.

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

false

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

false

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

false

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

Profit equals:

(P × Q - V × Q) - fixed expenses

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.

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

When preparing a CVP graph, the horizontal axis represents:

unit volume.

The contribution margin equals sales minus all Blank______ expenses.

variable

Variable expenses ÷ Sales is the calculation for the _____ ________ ratio

variable expense

The contribution margin is equal to sales minus ______.

variable expenses

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 (305,000 / 40)

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 target profit ((200,800+320,000)/(90-28))

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 operating leverage

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

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

$0.35 ($1 * CM ratio of 35%)

Softie, 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, Softies' sales must be

$1,520,000 Sales = ($240,400 + $930,000) ÷ 0.77= $1,520,000

Select all that apply 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? > 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.

> Baron's net income grows twice as fast as its sales. > Adams has a higher degree of operating leverage than Baron.

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

Change in net operating income = $70,000 × 30% - $15,000 = $6,000 increase. increase by $6,000

The degree of operating leverage =

Contribution Margin / Net Operating Income

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

Margin of safety

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

Net Operating Income = (750 - 450) x $120 = $36,000

Which of the following statements is correct? > 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 risk of loss is not impacted by the margin of safety.

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

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.

adams = 3 baron = 2 adams = ( 60,000/20,000) baron = ( 44,000/22,000)

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

decrease because sale - variable = cm

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

sales mix

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

$1,800,000 target profit (975,000+195,000)/0.65

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

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

Contribution margin:

becomes profit after fixed expenses are covered.

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

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 expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) _________ (increase/decrease) of $____________

decrease; 3000 https://www.chegg.com/homework-help/questions-and-answers/sweet-dreams-sells-pillows-25--variable-costs-15-per-pillow-company-considering-improving--q83992023

The term "cost structure" refers to the relative proportion of _________ and __________ costs 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

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

leverage

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 Blank______.

$100 (100,000 - 80,000 / 200 = 100)

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 (25,000-15,000)*($25-$12)

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 20,000*20 = Sales = 400,000 20,000*11= Variable cost = 220,000 400,000-220,000= 180,000

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 ______.

$2,200 = (300*(20-7) - 1,700)

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 98,000/(50-15) = 2,800

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*40 = sales = 1,200,000 30,000*19=Variable cost= 570,000 1,200,000-570,000 =630,000 630,000-250,000= 380,000

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is

$49,800 margin of safety 982,000-932,200

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 $

$5000 (10-6)x10000 - 35000 = 5000

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 Blank______.

$99,000 184,000-85,000 = 99,000

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 enable them to increase the selling price to $45 per unit. If this change is implemented, profits will

****The company should accept the idea because profit will increase by $24,000. increase by $24,000

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 target profit (470,000+222,640)/32

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% 2.43/9

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is

29% ( Variable expense ratio = $245,050 ÷$845,000 = 29% )

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is

34% ( ($1,452,000 - $958,320) ÷ $1,452,000 = 34% )

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 bottles

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 ______.

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

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was

53% (100,170/189,000 = 53%)

Select all that apply When making a decision using incremental analysis consider the ______. > volume that would occur regardless of the decision > change in cost resulting specifically from the decision > change in sales dollars resulting specifically from the decision > old income statement in comparison to the new income statement

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

Select all that apply When a company produces and sells multiple products ______. > 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 > the sales mix has no effect on the company's profit

> 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

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

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

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

Select all that apply At the break-even point ______. > total revenue equals total cost > 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

Select all that apply Which of the following items are found above the contribution margin on a contribution margin format income statement? >Variable expenses >Fixed expenses >Net operating income >Sales

>Variable expenses >Sales

Select all that apply CVP analysis allows companies to easily identify the change in profit due to changes in ______. >management >product mix >volume >selling price >location

>product mix >volume >selling price

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

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to

decrease by $16,000 Net operating income would decrease by $16,000.If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes x $6)- (50,000 boxes x $8)). Additional contribution margin of $44,000 - $60,000 in new fixed costs = a net operating income decrease of $16,000.

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

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

net operating income

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

ratio

The variable expense ratio is the ratio of variable expense to

sales

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

sales mix

The break-even point is reached when the contribution margin is equal to:

total fixed expenses.