ch 6

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 level of activity and their associated costs

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

cm ratio x change in sales - change in fixed expenses

which of the following are assumptions of cost-volume profit analysis

costs are linear and can be accurately divided into variable and fixed elements in multi product companies, the sales mix is constant

if operating leverage is high, a small percentage increase in sales produces a _ percentage increase in net operating income than if operating leverage is low

high

true or false: the sales mix must be taken into consideration when calculating the break-even point for more that one product due to different selling prices, costs and contribution margins among the products

true

to convert the margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the

sales price per unit

the high-low method

uses only 2 data points is based on periods where the activity tends to be unusual

profit = (selling price per unit x quantity sold) - (_ expense per unit x quantity sold) - _ expenses.

variable fixed

a company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4500. The quoted selling price per unit is 500 units should be

$20 11+4500 / 500

when preparing a multi-product break-even analysis, the assumption is ordinarily made that the _ will not change

sales mix

the break even point calculation is affected by

sales mix selling price per unit costs per unit

when the analysis of a change in profits only considers the costs and rev that will change as the result of the decision, the decision is being made using _ analysis

incremental

the relative proportions in which a company's products are sold to as

sales mix

a product has a selling price of 10 per unit, variable expenses of 6 per unit and total fixed costs of 35000. If 10000 units are sold, net operating income will be

(10-6) 10000 - 35000 = 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

8400 (320,000+200800) / (90-28)

company a has fixed costs of $564,000 and a contribution margin of 62%. sales dollars to break-even rounded to the nearest whole dollar equals

909677 564000/.62

to calculate the degree of operating leverage, divide_ by net operating income

contribution margin

to calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the

contribution margin per unit

the contribution margin income statement allows users to easily judge the impact of a change in _ on profit

cost, volume, selling price

assuming the sales price remains constant, an increase in the variable cost per unit will __ the contribution margin per unit

decrease

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 has reached its break-even point when the contribution margin _ fixed expenses

equals

the contribution margin statement is primarily used for

internal decision making

the statistic R^2

is a measure of goodness of fit

the degree of operating leverage

is greatest at sales levels near the break-even point is not constant decreases as sales and profits rise

water worlds sells wake boards and water skis and pays sales commissions based on product sales price. the wake boards sell for a higher price than the skis and the skis have a higher contribution margin per unit than the wake boards.

salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them the company would rather see more skis sold as it creates the higher profit per unit for the company

To simplify CVP calculations, it is assumed that _ will remain constant

selling price

in the equation, y = a +bx, b represents

slope of the line variable cost per unit of activity

the single point where the total rev line crosses the total expense line on the CVP graph indicates

the break-even point profit equals zero

the profit graph allows users to easily identify:

the profit at any given sales volume the sales volume required to reach the break-even point

pete's putters sells each putter for 125. the variable cost is 60 per putter and fixed costs total 400,000. based on this info

the sales of 12000 putters result in net operating income of 380,000 12000x65 = 780,000-400,000 the contribution margin per putter is 65

the break even point can be affected by

total fixed costs contribution margin per unit sales mix

variable expenses / sales is the calculation for the _ ratio

variable expense

the vertical distance between the total revenue line and the total expense line on a CVP graph represents the total:

profit or loss

to convert the formula for sales dollars to required to attain a target profit to sales dollars required to break even, set the target profit to

0

place the following in the correct order in which they appear on the contribution margin format income statement

1. sales 2. variable expenses 3. contribution margin 4. fixed expenses 5. net operating income

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

10,000 net operating loss 40,000-50,000

ceramic creations sells pots for 25. The variable cost per pot is 12 and 15000 pots must be sold to break-eve. If ceramic Creation sells 25000 pots, net operating income will be

130,000 (25000-15000)(25-12)

anne's antique store has a contributing margin ratio of 29%. the break-even point has been reached. if the store generates an additional 600,000 of sales for the year, net operating income will increase by

174000 600000 x 29%

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 x (20-11)

a company's break-even point is 17,000 units. If the contribution margin is 22 per unit and 26000 units are sold, net operating profit will be

198,000 26000-17000 x 22

if sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by

20% 5% x 4

polly's day planners sells its planners for 35 each. sales this year equals 927,500. the margin of safety is 27,300. the margin of safety is

27300/35=780

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?

2800 98000 / (50-15)

the cutting edge sells ice skates. Total sales are 845,000, total variables expenses are 245,050 and total fixed expenses are 302,000. the variable expense ratio is

29% 245050/845000

given sales of 1452000, variable expenses of 958320 and fixed expenses of 354000 the contribution margin ratio is

34% 1452000-958320 / 1452000

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

36000 (750-450) x 120

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

380,000 30,000 x (40-19) - 250,000

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

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 sales volume = (520000+320000) / 21

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

42,750 95 x 450 = 42750

seating galore sells high-end desk chairs. The variable expense per chair is 85.05 and the chair sells for 189.00 each. The variable expense ratio for seating galore's chair is _

45% 85.05 / 189

A company sells 500 sells 500 sleds per month for 80. Variable costs are 41 per unit and fixed expenses are 3500 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 19500 (500 x 39) total. the new contribution margin would be 35 per unit (39-4 new cost) or 19950(570 x 35) an increase of 450

gifts galore has sales rev of 189000. total contribution margin was 100170 and total fixed expenses were 27500. the contribution margin ratio was

53% 100170/189000

a company needs to sell 90000 units to reach the target profit of 180000. if each unit sells for 7.50 the total sales dollars needed to reach the target profit is

675000 90000 x 7.50

vivian's violins has sales of $326,000, contribution margin of $184,000. Vivian's Violins net operating income is _

99000 184000-85000=99000

when a company produces and sells multiple prouducts

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

company A has sales of 500,000, variable costs of 350,000 and fixed costs of 150,000. Company A has

a contribution margin equals to fixed costs reached the break even point

cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

a company is currently selling 10,000 units of product monthly for 40 per unit. The unit contribution margin is 27. the company believes that spending 50,000 per month on advertising will allow them to increase the selling price to 45 and that sales will increase by 750 units per month. the company should

accept the idea because profit will increase by 24000 an increase in selling price of 5 will increase the contribution margin 5(from 27 to 32). the increased contribution margin of 74000 (10750 x 32) - (10000 x 27) - 50000 = a profit increase of 24000

CVP analysis is based on some _ that may be violated in practice, but the tool is still generally useful

assumptions

margin of safety in dollars is

budgeted sales minus break-even sales

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

change in cost divided by change in units (activity)

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 1200 pillows per month and expects that the improved materials would increase sales to 1500 per month. the impact of this change on total contribution margin would be an _ of_

decrease 3000 (1500x(35-19)-(1200 x(25-15)

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 increase advertising and reduce the selling price. The advertising would increase fixed costs by 60,000. Management believes the advertising along with 2 reduction in the selling price per box will increase sales volume by 24000 boxes. If management's predictions are correct, making these changes will cause net income for the year to

decrease by 16000 (74000)(6) - (50000x8) 44000-60000 = -16000

CVP analysis investigates a company personnel policies, business values, and performance measures for a specific company

false

simple CVP analysis can be relied on for changes in volume outside the relevant range

false

true of false: knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits

false

in a least-squares regression line, the intercept (a) of the line represents the total _ cost

fixed

a change in sales mix

from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales

bluin corporation pays its salesperson a flat salory of 5750 per month and is considering paying her 30 per unit instead. current unit sales are 250 per month, but bluin believes the compensation change will increase unit sales by 50%. bluin's current contribution margin is 100 per unit. if bluin switches the compensation and sales grow as expected, net operating income will _ per month

increase by 7000 100 x 250 - 5750 = 19250. with the change salary becomes a variable cost and net operating income would be: (100-30) x 250 x 150% = 26250, an increase of 7000 per month

Goldin corporation currently pays its salesperson a flat salary of $5000 per month and is considering paying him 20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will

increase by 7000 current income: (80 x 200) - 5000 = 11000. With the change in salary becomes a variable cost: (80-20) x 200 x 15% = 18000, an increase of 7000 per month

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

which statement regarding the high-low method are true?

it only uses two data points the high-low method should only be used if a scattergraph plot indicates a linear relationship between cost and activity

a method that uses all the available data points to divide a mixed cost into its fixed and variable components is

least-squares regression

the amount by which sales can drop before losses are incurred is the _ of _

margin safety

margin of safety percentage is

margin of safety in dollars divided by total budgeted (or actual) sales in dollars

Candle central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If candle central sells 500 units, which of the following statements would be true?

the variable cost per unit is 2.40 1440/600 = 2.40 per unit x 500 units =1200 total variable cost total variable cost is 1200

when using excel, the intercept (a), slope (b) and R^2 is determined by selecting any data point in the scattergraph plot and selecting Add_

trendline

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

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

the equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is: selling price per unit =

variable cost per unit + desired profit per unit

when a company produces a single product, the total variable cost can be calculated with the equation

variable cost per unit multiplied by quantity of units sold

the contribution margin is equal to sales minus

variable expenses

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

volume, costs, selling price