Chapter 5 Accounting

One assumption in CVP analysis is that the number of units produced and sold does not change.

False

The margin of safety in dollars equals the excess of actual sales over budgeted sales.

False

Ofarrell Corporation, a company that produces and sells a single product, has provided its contribution format income statement for March. Sales (5,000 units) $205,000 Variable expenses 125,000 Contribution margin 80,000 Fixed expenses 62,400 Net operating income $17,600 If the company sells 5,400 units, its net operating income should be closest to: A. $19,008 B. $17,600 C. $24,000 D. $34,000 Selling price per unit = Sales ÷ Quantity sold = $205,000 ÷ 5,000 units = $41 per unit Variable expenses per unit = Variable expenses ÷ Quantity sold = $125,000 ÷ 5,000 units = $25 per unit Unit CM = Selling price per unit - Variable expenses per unit = $41 per unit - $25 per unit = $16 per unit Profit = (Unit CM × Q) - Fixed expenses = ($16 per unit × 5,400 units) - $62,400 = $86,400 - $62,400 = $24,000

C. $24,000

The margin of safety is: A. the excess of budgeted or actual sales over budgeted or actual variable expenses. B. the excess of budgeted or actual sales over budgeted or actual fixed expenses. C. the excess of budgeted or actual sales over the break-even volume of sales. D. the excess of budgeted net operating income over actual net operating income.

C. the excess of budgeted or actual sales over the break-even volume of sales.

Contribution margin is the amount remaining after: A. variable expenses have been deducted from sales revenue. B. fixed expenses have been deducted from sales revenue. C. fixed expenses have been deducted from variable expenses. D. cost of goods sold has been deducted from sales revenues.

A. variable expenses have been deducted from sales revenue.

The records of the Dodge Corporation show the following results for the most recent year: Sales (16,000 units) $256,000 Variable expenses $160,000 Net operating income $32,000 Given these data, the unit contribution margin was: A. $16 B. $4 C. $2 D. $6 Selling price per unit = $256,000 ÷ 16,000 units = $16 per unit Variable expense per unit = $160,000 ÷ 16,000 units = $10 per unit Unit CM = Selling price per unit - Variable expense per unit Unit CM = $16 per unit - $10 per unit = $6 per unit

D. $6

All other things the same, an increase in total fixed expenses will increase the break-even point.

True

As total sales increase beyond the break-even point, the degree of operating leverage will decrease.

True

At the break-even point, the total contribution margin and fixed expenses are equal.

True

The degree of operating leverage in a company is largest at the break-even point and decreases as sales rise.

True

Florek Inc. produces and sells a single product. The company has provided its contribution format income statement for March. Sales (5,700 units) $228,000 Variable expenses 131,100 Contribution margin 96,900 Fixed expenses 86,300 Net operating income $10,600 If the company sells 5,900 units, its net operating income should be closest to: A. $14,000 B. $10,600 C. $18,600 D. $10,972 Selling price per unit = Sales ÷ Quantity sold = $228,000 ÷ 5,700 units = $40 per unit Variable expenses per unit = Variable expenses ÷ Quantity sold = $131,100 ÷ 5,700 units = $23 per unit Unit CM = Selling price per unit - Variable expenses per unit = $40 per unit - $23 per unit = $17 per unit Profit = (Unit CM × Q) - Fixed expenses = ($17 per unit × 5,900 units) - $86,300 = $100,300 - $86,300 = $14,000

A. $14,000

Brees Inc., a company that produces and sells a single product, has provided its contribution format income statement for April. Sales (6,200 units) $136,400 Variable expenses 80,600 Contribution margin 55,800 Fixed expenses 48,700 Net operating income $7,100 If the company sells 5,800 units, its total contribution margin should be closest to: A. $55,800 B. $52,200 C. $6,642 D. $47,000 Selling price per unit = Sales ÷ Quantity sold = $136,400 ÷ 6,200 units = $22 per unit Variable expenses per unit = Variable expenses ÷ Quantity sold Variable expenses per unit = $80,600 ÷ 6,200 units = $13 per unit Unit CM = Selling price per unit - Variable expenses per unit = $22 per unit - $13 per unit = $9 per unit Total CM = Unit CM × Quantity sold = $9 per unit × 5,800 units = $52,200

B. $52,200

The contribution margin ratio is equal to: A. Total manufacturing expenses/Sales. B. (Sales - Variable expenses)/Sales. C. 1 - (Gross Margin/Sales). D. 1 - (Contribution Margin/Sales).

B. (Sales - Variable expenses)/Sales.

The break-even in units sold will decrease if there is an increase in: A. unit sales volume. B. total fixed expenses. C. unit variable expenses. D. selling price.

D. Selling Price

The overall contribution margin ratio for a company producing three products may be obtained by adding the contribution margin ratios for the three products and dividing the total by three.

False

If sales volume decreases, and all other factors remain unchanged, the contribution margin ratio will decrease.

True

If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be higher in the company with a higher proportion of fixed expenses in its cost structure.

True

Reynold Enterprises sells a single product for $25. The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales. The company's net operating income will increase by $10 if one more unit is sold.

True