Chapter 6 Smart Book

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

$198,000 26,000-17,000=9,000 9,000*22=198,000

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was

$2,200 300*20-300*7-1700

If operating leverage is high, a small percentage increase in sales produces a ________ (higher/lower) percentage increase in net operating income than if operating leverage is low. (Enter either higher or lower.)

higher

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

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.

sales mix

The break-even point can be affected by ______.

sales mix total fixed costs contribution margin per unit

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

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

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

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 ______.

7625 305000/40

A company has reached its break-even point when the contribution margin _________ fixed expenses.

equals

The degree of operating leverage ______.

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

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is

19%

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

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

variable; fixed

Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $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 $7,000 current net operating income=(100x250)-5750=19250. with the change salary becomes a variable cost and net operating income would be : (100-30)x250x150%=26250 an increase of 7000 per month

The contribution margin statement is ordinarily used by those ______.

inside the company only

The contribution margin statement is primarily used for ______.

internal decision making

Solving for the sales level needed to attain a target profit of ______ is the same process as solving for the sales level needed to break-even.

$0

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

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 ______.

$909,677 $564,000/0.62

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

0

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

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

20%; 5%*4

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: Variable expense ratio = $245,050 ÷ $845,000 or 29%.

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is

34% Reason: Contribution margin ratio = ($1,452,000 - $958,320) ÷ $1,452,000 = 34%.

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 ______.

4800 bottles Sales Volume= (4000+3200) / (15.00-13.50) = 4,800 bottles

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

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.

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

Company B

True or false: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.

False

True or false: Operating leverage is the smallest at sales levels near the break-even point and increases as sales and profits rise.

False

True or false: Simple CVP analysis can be relied on for changes in volume outside the relevant range.

False

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

False

Which of the following is needed to calculate profit?

Unit contribution margin, unit sales, and total fixed costs

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 a unique contribution margin each product most likely has different costs

The contribution margin equals sales minus ______.

all variable costs

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

assumptions

Contribution margin ______.

becomes profit after fixed expenses are covered

Multiplying unit selling price times the number of units required to break-even is one way to calculate ______.

break-even sales dollars

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 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

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

contribution margin ÷ sales

Contribution margin ratio is equal to _____ divided by _____

contribution margin, sales

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

decrease

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

degree of operating leverage

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

dollars

The margin of safety percentage is:

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

The amount by which sales can drop before losses are incurred is the ________ of __________

margin; safety

A simpler form of the CVP graph is called the _____ graph.

profit

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total ______.

profit or loss

The variable expense ratio is the ratio of variable expense to ______.

sales

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

sales volume

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

selling price

The break-even point calculation is affected by ______.

selling price per unit sales mix costs 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 Reason: 1,440 ÷ 600 = $2.40 per unit × 500 units = $1,200 total variable cost. total variable cost is $1,200 Reason: 1,440 ÷ 600 = $2.40 per unit × 500 units = $1,200 total variable cost.

CM ratio is equal to 1 - ______ ______ ratio.

variable expense

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

volume selling price cost

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total ______.

$1,800,000 (975,000 + 195,000) / .65 = 1,800,000

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 Reason: Contribution margin of $40,000 - fixed expenses of $50,000 = a $10,000 loss.

Ceramic Creations sells pots for $25. The variable cost per pot is $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=10,000 10,000*(25-12)=130,000

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 98,000/(50-15) = 2,800

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 $4,500. The quoted selling price per unit for 500 units should be

$20 4500/500=9 9+11=20

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 $________

$5,000 Reason: 10,000*10-10,000*6= contribution margin contribution margin - fixed expenses ($35,000) = $5,000

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

Net operating income equals ______.

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

Which of the following are assumptions of cost-volume-profit analysis?

- In multi product companies, the sales mix is constant. - Costs are linear and can be accurately divided into variable and fixed elements.

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 Sales volume= (470,000+222,640)/32

Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is ______.

27% Reason: Variable expense ratio = $2.43 ÷ $9.00 or 27%.

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. (Enter your answers as whole numbers.)

3; 2

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 blankets ($520,000 + $320,000) / $21 = 40,000 blankets

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 ______.

42750 Reason: Total sales = $95 × 450 = $42,750

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was ______.

53% 100170/189000

If a company has a variable expense ratio of 35%, its CM ratio must be

65%

Seth's Speakers had actual sales of $1,630,000 If break-even sales equals $935,000, Seth's margin of safety in dollars is ______.

695,000 1,630,000 - 935,000=695,000

True or false: When a company sells multiple products, an increase in total sales always results in an increase in total profits.

False

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.

True or false: 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.

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______.

change in sales dollars × contribution margin ratio

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

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

contribution margin

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ______ approach.

contribution margin

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 expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) _________ (increase/decrease) of _______.

decrease $3,000

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

leverage

If the total contribution margin is less than the total fixed expenses, a ______ occurs.

net loss

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

At the break-even point ______.

net operating income is zero total revenue equals total cost

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total ______.

sales

Anne's Antique Store has a contribution 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 ______.

$174,000 Reason: Net operating income change = $600,000 × 29% = $174,000.

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 Reason: 20,000*20-20,000*11=180,000

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 Reason: Profit = CM ratio ×Sales - Fixed expenses = 72% × $832,000 - $265,000 = $334,040.

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.

$380,000 Reason: Net operating income= 30,000 × ($40 - $19) - $250,000 = $380,000

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

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

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

$0.35

Softie, 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, Softies' sales must be ______.

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

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is

$168,000 9,000*32=288000 288000-120000=168000

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 ______.

$244068 Reason: Sales = $144,000 ÷ 0.59 = $244,068

A change in sales mix ______.

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

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

$26,980 284*95

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______.

$3,800 95*40

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be

$30

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 spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes the advertising along with the price reduction will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to ______.

decrease by $16,000 Reason: If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Additional contribution margin of $44,000 - $60,000 in new fixed costs = a net operating income decrease of $16,000.

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 50-26=24 24*5000=120,000

Fantastic Frames sells units for $15 each. Variable costs total $6 per unit, and fixed costs total $90,000. If the number of units being sold increases by 2,000, net operating income will ______.

increase $18,000

The relative proportions in which a company's products are sold is referred to as _______ _________

sales mix

CVP analysis focuses on how profits are affected by ______.

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

The single point where the total revenue line crosses the total expense line on the CVP graph indicates ______.

the break-even point profit equals zero

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

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

total fixed expenses

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using ________ analysis.

incremental

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 $4,500. The quoted selling price per unit for 500 units should be _______.

$20 ($11+($4,500/500)

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is ______.

$301,100 Reason: Profit = CM ratio x Sales - Fixed expenses = 67% × $1,430,000 - $657,000 = $301,100.

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______.

decrease by $2,000 Reason: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

A company's current sales are $300,000 and fixed expenses total $225,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will ______.

increase in $6,000 Reason: Change in net operating income = $70,000 × 30% - $15,000 = $6,000 increase.

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

variable, fixed

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

A company is currently selling 10,000 units of product 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 Reason: An increase in selling price of $5 will increase the contribution margin $5 (from $27 to $32). The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

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 Reason: Net operating income = $184,000 - $85,000 = $99,000

If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by

90%

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is ______.

$168,000 4*200000-632000

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $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 $7,000 Reason: Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 150% = $18,000, an increase of $7,000 per month.