CH 6 Concept Overviews, Exercises, Problems

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. What is the profit from the sale of 100 bicycles?

$12,000 Explanation: Net operating income = Contribution margin of $20,000 (or 100 units × Unit contribution margin of $200 per unit) − Fixed expenses of $8,000 = $12,000.

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle?

$200 Explanation: Unit Contribution Margin = Selling price per unit of $500 − Variable expenses per unit of $300 = $200.

With regards to interpretation, what are the important areas that appear on a CVP graph?

Break-even point, loss area, and profit area

What is usually plotted as a horizontal line on the CVP graph?

Fixed expenses

Summarized data for Ralph Corporation: Selling price: $ 200 per unit Variable expenses: $ 150 per unit Fixed expenses: $ 1,000,000 per year Unit sales: 25,000 per year What is Ralph Corporation's margin of safety in dollars?

$1 million Explanation: Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales Total budgeted (or actual sales) = $200 per unit x 25,000 units = $5,000,000CM Ratio = (Sales − Variable expenses) ÷ Sales = ($200 − $150) ÷ $200 = $50 ÷ $200 = 25% or 0.25Break-even sales = Fixed expenses ÷ CM ratio = $1,000,000 ÷ 0.25 = $4,000,000Margin of safety in dollars = $5,000,000 − $4,000,000 = $1,000,000

Grace Food Company Contribution Income Statement for the Month of October Corn Flakes: Corn Flakes: ($2,000,000 sales, 100%); ($800,000 variable expenses, 40%); ($1,200,000 contribution margin, 60%) Frosted Flakes: ($500,000 sales, 100%); ($250,000 variable expenses, 50%); ($250,000 contribution margin, 50%) Total: ($2,500,000 sales, 100%); ($1,050,000 variable expenses, 42%); ($1,450,000 fixed expenses, 58%); ($870,000 fixed expenses); ($580,000 net operating income) What is the amount of the break-even sales for Grace Food Company?

$1.5 million

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100, and decrease fixed expenses by $20,000. What is the net operating income after the changes?

$21,500 Explanation: New contribution margin per unit = $175 − $100 = $75 New contribution margin = $75 × 1,300 units = $97,500 New fixed cost = $96,000 − 20,000 = $76,000 New net operating income = $97,500 − 76,000 = $21,500

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars?

$25,000 Explanation: CM ratio = (Sales − Variable expenses) ÷ Sales = ($100 − $60) ÷ $100 = $40 ÷ $100 = 40% or 0.40Dollar sales to break-even = Fixed expenses ÷ CM Ratio = $10,000 ÷ 0.40 = $25,000

Walton Corporation is currently selling 104 units of its product. The company is deciding the price that it should charge for a bulk order of 40 units. The variable cost per unit is $200. This order will not involve any additional fixed costs and the company's current sales will not be affected. The company targets a profit of $4,000 on the bulk order. What selling price per unit should the company quote for the bulk order?

$300 Explanation: Required profit per unit = Target profit of $4,000 ÷ 40 units = $100Selling price per unit = Required profit per unit of $100 + Variable cost per unit of $200 = $300

The following information is extracted from the records of Johnson Corporation: Target profit: $120,000 Unit contribution margin: $40 Fixed expenses: $40,000 Contribution margin ratio (CM ratio): 0.40 Selling price: $100 What are the sales dollars required to attain a target profit of $120,000?

$400,000 Explanation: Dollar sales to attain the target profit = (Target profit + Fixed expenses) ÷ CM ratio Dollar sales to achieve the target profit = ($120,000 + $40,000) ÷ 0.40 = $400,000

Income Statement of Base Corporation (in Sales Volume Present): Sales: $100,000 Variable expenses: $50,000 Contribution margin: $50,000 Fixed expenses: $20,000 Net operating income: $30,000 If sales increase by $50,000, what will be the net operating income for the company?

$55,000 Explanation: CM ratio = Total CM ÷ Total sales = $50,000 ÷ $100,000 = 50% Profit = (CM ratio × Sales) − Fixed Expenses = (50% × $150,000) − $20,000= $55,000

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales?

100 units Explanation: Unit CM = Selling price of $80 − Variable expense of $30 = $50Unit sales to break-even = Fixed expenses of $5,000 ÷ Unit CM of $50 = 100 units.

Summarized data for Ralph Corporation: Selling price: $ 200 per unit Variable expenses: $ 150 per unit Fixed expenses: $ 1,000,000 per year Unit sales: 25,000 per year What is Ralph Corporation's margin of safety in percentage?

20% Explanation: Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales Total budgeted (or actual sales) = $200 per unit x 25,000 units = $5,000,000CM Ratio = (Sales − Variable expenses) ÷ Sales = ($200 − $150) ÷ $200 = $50 ÷ $200 = 25% or 0.25Break-even sales = Fixed expenses ÷ CM ratio = $1,000,000 ÷ 0.25 = $4,000,000Margin of safety Percentage = Margin of safety in dollars ÷ Total budgeted (or actual) sales in dollars = ($5,000,000 − $4,000,000) ÷ $5,000,000 = 20%

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage?

3.00 Explanation: Degree of operating leverage = Contribution margin ÷ Net operating income Degree of operating leverage = $300,000 ÷ $100,000 = 3.00

The following information is extracted from the records of Johnson Corporation: Target profit: $120,000 Unit contribution margin: $40 Fixed expenses: $40,000 Contribution margin ratio (CM ratio): 0.40 Selling price: $100 What are the unit sales required to attain a target profit of $120,000?

4,000 units Explanation: Unit sales to attain the target profit = (Target profit + Fixed Expenses) ÷ Unit CM Unit sales to achieve the target profit = ($120,000 + $40,000) ÷ $40 = 4,000 units.

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio?

40% Explanation: Variable expense ratio = Variable expense ÷ Sales = $20 ÷ $50 = 40%

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio?

60% Explanation: CM ratio = Unit CM ÷ Unit selling price = ($50 − $20) ÷ $50 = 60%

The current sales of Trent, Incorporated, are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Incorporated?

60% Explanation: Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 2 × 30% = 60%.

The profit graph is based on the following linear equation:

Profit = Unit CM x Q - Fixed Expenses Explanation: The profit graph is based on the linear equation: Profit = Unit CM x Q − Fixed expenses.

What is represented on the X axis of a cost-volume-profit (CVP) graph?

Unit volume

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________.

decrease

The measure of how sensitive net operating income is to a given percentage change in volume sales is called _______.

operating leverage

Contribution margin equals ________.

sales minus variable cost

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

unit contribution margin

Break-even point is the level of sales at which ______.

total revenue equals total costs

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

Increase of $14,200 Explanation: Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit