ACCT 292 Chapter 6: Cost-Volume-Profit Relationships

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

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

False

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

False

When using the high-low method, fixed costs are calculated after variable costs are determined.

True

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity,

choose the periods with the highest and lowest levels of activity and their associated costs

To calculate the degree of operating leverage, divide ______ _______ by net operating income.

contribution margin

Total contribution margin equals ______.

fixed expenses plus net operating income

CVP analysis focuses on how profits are affected by

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

The contribution margin is equal to sales minus ______.

variable expenses

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred. The cost equation using the high-low method is

y = $1,450 + $2.50x.

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

total fixed expenses.

Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

True

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 breakeven point of 200 units. If the company sells 201 units, net profit will be

$100

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

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

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is ______.

$2,250

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

Profit equals:

(P × Q - V × Q) - fixed expenses.

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

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

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

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?

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

When a company produces and sells multiple products

a change in the sales mix will most likely change the break-even point each product most likely has different costs each product most likely has a unique contribution margin

Cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

Using the high-low method, the fixed cost is calculated

after the variable cost per unit is calculated using either the high or low level of activity

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

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, 3,000

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

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.

Estimating the fixed and variable components of a mixed cost using the ______ approach involves a detailed analysis of what cost behavior should be.

engineering

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

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

The high-low method

is easy to apply uses only two data points

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

net operating income

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

product mix selling price volume

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

ratio

The variable expense ratio equals variable expenses divided by

sales

The variable expense ratio is the ratio of variable expense to

sales

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

sales mix

The rise-over-run formula for the slope of a straight line is the basis of

the high-low method

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

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

zero

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 contribution margin would be a

$450 increase

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

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

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

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

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

Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False

The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

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

The variable cost per unit using the high-low method is calculated as

change in cost ÷ change in units (activity)

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

When using the high-low method, the slope of the line equals the ______ cost per unit of activity.

choose the periods with the highest and lowest levels of activity and their associated costs

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

To calculate the variable cost per unit using the high-low method, the change in _______ is divided by the change in _______.

cost, activity

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

decrease

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

fixed, profit

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

fixed, variable

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

The high-low method

is based on periods where the activity tends to be unusual uses only two data points

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.

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

leverage

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals ______ _______ behavior.

linear cost

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

margin, safety

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

sales mix

The contribution margin equals sales minus all Blank______ expenses.

variable

Variable expenses ÷ Sales is the calculation for the _____ ______ ratio.

variable expense