Chapter 5 LearnSmart

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

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

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

Fixed Profit

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

contribution margin

Profit equals ______.

(P × Q - V × Q) - fixed expenses

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

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

volume, selling price, cost

To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to $______.

0 (zero)

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 Reason: $98,000 ÷ ($50 - $15) = 2,800 to break-even. 6,400 units is needed to earn the target profit.

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 (10-6)x10000 - 35000 = 5000

Contribution margin:

Becomes profit after fixed expenses are covered

In a least-squares regression line, the intercept (a) of the line represents the total ______ cost.

fixed

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

margin [of] safety

Sniffles, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Sniffles' sales rounded to the nearest dollar must be:

$1,520,000 (240,400 + 930,000)/0.77 = 1,520,000

A company sold 20,000 units of its 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:

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

A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 unites are sold, net operating profit will be:

$198,000 (26,000 - 17,000) x 22 = 198,000

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 = 380,000

Net operating income can be calculated as:

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

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:

99,000 184,000 - 85,000 = 99,000

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?

Adams has a higher degree of operating leverage than Baron. Baron's net income grows twice as fast as its sales. Reason: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron. Reason: Operating level of $44,000 ÷ 22,000 = 2 for Baron indicates that the company's net operating income grows twice as fast as sales. Reason: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron.

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

Blank 1: contribution Blank 2: margin

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

Total fixed expenses

True or 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 Reason: Because selling prices, costs, and contribution margins of the products differ, the sales mix is assumed to be constant when doing break-even calculations.

Which of the following is needed to calculate profit?

Unit contribution margin, unit sales, and total fixed costs

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

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.

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

leverage

The variable expense ratio equals variable expenses divided by ______. Multiple choice question. net income

sales

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.

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

False : Cost structure refers to the relative portion of fixed and variable costs in an organization.

CVP analysis focuses on how profits are affected by:

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

Total contribution margin equals ______.

fixed expenses plus net operating income

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

sales mix

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

Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is ________ %.

45%

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?

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

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information:

The contribution margin per putter is $65; the sale of 12,000 putters results in net operating income of $380,000

The calculation of contribution margin (CM) ratio is:

Contribution margin divided by sales

When preparing a CVP graph, the horizontal axis represents:

Sales volume

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by:

$0.35

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $______.

$26,980 95 x 284 = 26,980

Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ratio of 72%, Chrissy's profit (loss) is:

$334,040 CM Ratio x Sales - Fixed Expenses = Profit 72% x 832,000 - 265,000 = 334,040

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 = 40,000 blankets

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. Reason: ($520,000 + $320,000) ÷ $21 = 40,000

A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $_____.

675,000 90,000 x 7.50 = 675,000

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 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

CVP is the acronym for ______ ______ ______.

Cost Volume Profit

To calculate profit, multiply the _____ per unit by sales volume and subtract total fixed cost.

contribution margin

The amount by which sales can drop before losses are incurred is the ____________ of ______________ .

margin of safety

Variable expenses ÷ Sales is the calculation for the ___________ _________ ratio.

variable expense

Which of the following are found above the contribution margin on a contribution margin format income statement?

Sales, Variable Expenses

A company is currently selling 10,000 units of products for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and increase the selling price to $45 per unit. If this change is implemented, profits will:

increase by $24,000

Which of the following statements are true?

Scattergraphs are a way to diagnose cost behavior; plotting data on a scattergraph is an important diagnostic step

When constructing a CVP graph, the vertical axis represents ______.

dollars The vertical axis represents dollars. Sales, variable costs, and fixed costs are all measured in dollars.

Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,000. If Tommy sells an additional 5,000 trains, profits will:

increase $120,000 5,000 x (50 - 26) = 120,000

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 Reason: (($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase

When preparing a CVP graph, the horizontal axis represents ______.

sales volume

Which of the following represents 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?

selling price per unit = variable cost per unit + desired profit per unit

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:

the variable cost per unit is $2.40 1,440/600 = 2.40 per unit 2,160/900 = 2.40 per unit total variable cost is $1,200 1,440/600 = 2.40 per unit 2.40 x 500 units = 1,200

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 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals:

$244,068 144,000 / 0.59 = 244,608

Place the following items 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

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 Reason: Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans.

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 Reason: ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.

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(10-6)x10000 - 35000 = 5000

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 Break-even point = $305,000 ÷ $40 = 7,625

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the break-even point in unit sales?

7,625 units 305,000/40 = 7,625

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 in units is ______.

780 27,300 / 35 = 780 units

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

Blank 1: sales Blank 2: mix

Profit = (selling price per unit × quantity sold) - ( ____________ expense per unit × quantity sold) - ________ expenses.

Blank 1: variable Blank 2: fixed

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

Blank 1: variable Blank 2: fixed

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

The calculation of contribution margin (CM) ratio is ______.

contribution margin ÷ sales

The break-even point calculation is affected by ______. Multiple select question. number of batches produced costs per unit selling price per unit sales mix

costs per unit selling price per unit sales mix

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

decrease Reason: Sales - variable cost = contribution margin so an increase in variable cost per unit lowers contribution margin per unit.

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 sells 1,200 pillows per month and expects that the improved margin would be a ______ of $______.

decrease [of] 3,000 (1500 x (25 - 19)) - (1200 x (25 - 15)) = 3000

he measure of how a percentage change in sales affects profits at any given level of sales is the ______.

degree of operating leverage

At the break-even point ______. Multiple select question. the company is experiencing a loss the company is earning a profit total revenue equals total cost net operating income is zero

total revenue equals total cost net operating income is zero

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

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

variable

Variable expenses divided by sales is the calculation for _____ _____ ratio.

variable expense

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

zero

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target point equals:

$2,200,000 (564,000 + 800,000)/0.62 = 2,200,000

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 Reason: The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.

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

$55 90-35 = 55

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is ______.

29% Reason: $245,050 ÷ $845,000 or 29%

When making a decision using incremental analysis, consider the:

change in cost resulting specifically from the decision; change in sales dollars resulting specifically from the decision

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

leverage

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

ratio

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 (4,000 + 3,200) / (15.00 - 13.50) = 4,800 bottles

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.

Blank 1: 3 or three Blank 2: 2 or two

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.

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

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Elle sells 35 elephants this month:

total sales = $1925 total variable costs = $350 profits = $875

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False Reason: Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.