Chapter 3

At breakeven, Unit CM x Q = Fixed expenses

True

Ceramic Creations sells pots for $25. The variable cost per pot $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 product at a selling price of $20. The variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is:

$180,000 Contribution margin = 20,000 x ($20-$11) = $180,000

Break-even point is the level of sales at which

total revenue equals total costs

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

What is Ralph Corporations margin of safety in dollars?

$1 Million Total budgeted sales - Break-even sales $5,000,000-$4,000,000= $1,000,000

Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes?

$25,000 New selling price = $110 - $10 = $100. New sales level = 1,000 units x 150% = 1,500 units. Net operating income = Sales of $150,000 (or 1,500 units × Selling price of $100 per unit) - Variable expenses of $90,000 (or 1,500 units × variable expense of $60 per unit) - Fixed expenses of $35,000 (or $30,000 + $5,000) = $25,000.

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

$380,000 [net operating income= 30,000 x (40-19) - 25,000]

Place the following items in the order in which sales dollars are applied on a CM income statement.

1. Variable costs 2. Fixed expenses 3. Net income

What is the degree of operating leverage for Rite Corporation? sales = $300,000 var expenses = 150,000 cm= 150,000 fixed expenses = 50,000 noi = 100,000

1.5 degree of operating income = cm / noi 150,000/100,000=1.5

What is Ralph Corporation's margin of safety in percentage? Selling price = $200/unit Variable Expenses = $150/unit Fixed Expenses = $1,000,000/ year Unit Sales = 25,000 units/year

20% Margin 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%.

Base Corporation has sales of $100,000, variable costs of $40,000, and fixed costs of $30,000 currently. The company is expecting a $36,000 increase in sales. What is the change in contribution margin for the company ?

21,600 (100,000-40,000/100,000) 60% x 36,000 = 21,600 Change in CM= CM Ratio x Change in Sales

Team Corporation has sales of $1 million, fixed expenses of $200,000, and variable expenses \$650 for the month of March. What is the contribution margin ratio of the company for month of March?

35% 1,000,000-650,000=350,000/1,000,000

Which tool can be used to easily calculate the change in profit resulting from a change sales price, sales volume, variable costs, or fixed costs?

CVP analysis

If the total contribution margin less than the total fixed expenses, then a _________ will occur

Net loss

At the break-even point:

Net operating income is zero Total revenue equals total cost

After reaching the break-even point, a company's net operating income will increase by ________ ________ the per unit for each additional unit sold.

contribution margin

According to the CVP analysis model and assuming all else remains the same, profits would be increased by an

decrease in the unit variable cost

A company has reached Its break-even point when the contribution margin ________ fixed expenses

Equals

Net operating income can be calculated as:

(unit sales— unit sales to break even) x unit contribution margin

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 Dollar sales to break-even = Fixed expenses of $10,000 ÷ CM Ratio of 0.40 = $25,000.

If sales increase by $50,000, what will be the net operating income for the company ?

$55,000 Profit = (CMRatioxSales) - Fixed Expenses (50%x$150,000)-$20,000=$55,000

Vivian's Violins has sales of $326,000 , contribution margin of $184,000 and fixed costs tota $85,000. Vivian's Violins net operating Income :

$99,000 ($184,000-$85,000)

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

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 Degree of operating leverage = Contribution margin/Net operating income = $300,000/$100,000 = 3.

What are the sales required to attain a target profit of $120,000?

4,000 units Unit sales to attain the target profit = ( Target profit + Fixed expenses) Unit Contribution margin. Unit sales = ($120,000+$40,000)/40=4,000 units

Company A's product sells for $90 and has a variable cost of $35 per unit. costs total $550,000. If Company A sells 16, 0 units, the contribution margin per unit is:

55 90-35=55

The current sales of Trent, Inc., 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, Inc.?

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