Chapters 5 & 6

Cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

Contribution Margin

becomes profit after fixed expenses are covered.

Costs that can be traced directly to a segment

should not be allocated to other segments

The rise-over-run formula for the slope of a straight line is the basis of

the high-low method

The segment margin represents the

the margin available after a segment has covered all of its own costs

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

total expense, and total fixed expense

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

total fixed expenses.

Profit equals

(P × Q - V × Q) - fixed expenses.

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

To calculate the variable cost per unit using the high-low method, the change in is divided by the change in

Blank 1: cost, dollars, or costs Blank 2: activity, units, quantity, hours, or volume

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

Blank 1: margin Blank 2: safety

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

Blank 1: ratio

Only costs that would disappear over time if a segment disappeared should be treated as

Blank 1: traceable

The segment margin equals the segment's contribution margin less the segment's

Blank 1: traceable or direct

Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax of a store is the

Blank 1: traceable, traced, or direct Blank 2: common

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

$0.35

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

$2,200,000 Reason: ($564,000 + $800,000) ÷ 0.62 = $2,200,000

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?

$2,80098,000/(50-15) = 2,800

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is

$49,800 Reason: $982,000 - $932,200 = $49,800.

Net operating income equals:

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

When making a decision using incremental analysis consider the

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

When preparing a segment margin income statement:

-traceable fixed expenses are deducted from contribution margin -cost of goods sold consists of only variable manufacturing costs

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is

40,000 Reason: Sales Volume = (520,000 + 320,000)/$21 = 40,000 blankets

Because nonmanufacturing costs are not included as costs of a product, the use of

Blank 1: absorption or full

Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False

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

Sales Variable Expenses

Which of the following statements is correct? The risk of loss is not impacted by the margin of safety. The higher the margin of safety, the lower the risk of incurring a loss. The higher the margin of safety, the higher the risk of incurring a loss.

The higher the margin of safety, the lower the risk of incurring a loss.

Discontinuing a profitable segment results in

The loss of the segment's revenues A reduction in the overall profits of the company

A cost that can be traced directly to a specific segment should be charged directly to that segment and not allocated to other segments.

True

Margin of safety in dollars is

budgeted (or actual) sales minus break-even sales

The variable cost per unit using the high-low method is calculated as

change in cost ÷ change in units (activity)

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 calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

Incorrectly or arbitrarily assigning common costs to segments:

could reduce the overall profits of the company. holds managers responsible for costs they cannot control. distorts the profitability of segments.

GAAP and IFRS rules for publicly traded companies

create problems in reconciling internal and external reports require segmented financial data be included in annual reports require that the same method be used for both internal and external segment reporting

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 this plan 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: Total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease.

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 enable them to 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. 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.

The best fitting line minimizes the sum of the squared errors when using

least-square regression

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called

least-squares regression

Arbot Co. manufactures appliances at three manufacturing facilities in the United States. Each location has a plant manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a

traceable fixed cost to the plant and a common fixed cost

When a segment is eliminated, a

traceable fixed cost will disappear common fixed cost will remain unchanged

Using absorption costing for segmented income statements can lead to:

under-costing of segments. omission of upstream and downstream costs.

When preparing a CVP graph, the horizontal axis represents:

unit volume.

The slope of the regression line represents the ______ cost per unit of activity.

variable

When using the high-low method, the slope of the line equals the cost per unit of activity. (Enter only one word per blank.)

variable

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred. The cost equation using the high-low method is

y = $1,450 + $2.50x. Reason: The high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) are the high and low activity months.

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

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: Contribution margin = 20,000 × ($20 - $11) = $180,000.

The two general costing approaches used by manufacturing companies to prepare income statements are

Blank 1: absorption or full Blank 2: variable , marginal, or direct

Common mistakes made by companies when assigning costs to segments include

arbitrarily allocating common fixed costs inappropriately assigning traceable fixed costs omitting costs that should be included

An example of a traceable fixed cost for General Motors' Corvette Division is the

depreciation cost on the equipment used to manufacture the Corvettes

Estimating the fixed and variable components of a mixed cost using the approach involves a detailed analysis of what cost behavior should be. (Enter only one word per blank.)

engineering

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

If a segment is entirely eliminated, common fixed costs will

not change

Segment break-even calculations include

only traceable fixed expenses

U.S. GAAP and IFRS ______ publicly traded companies include segmented financial data prepared for external users that use the same methods used in internal segment reports.

require

Absorption costing is

required by GAAP and IFRS used by most companies for both internal and external reports

The variable expense ratio is the ratio of variable expense to

sales

Assigning common fixed costs to segments impacts

segment margin only

CVP analysis focuses on how profits are affected by ______.

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

When calculating the profit impact of discontinuing a segment, consider

the segment's traceable fixed costs the segment's contribution margin

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 Blank______.

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

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 - $6) * 10,000 - $35,000 = $5,000.

SPS Products has two divisions—Catalog Sales and Online Sales. For the last quarter the Catalog Sales segment margin was ($5,000). Online sales were $100,000. Online Sales contribution margin was $60,000, and its segment margin was $40,000. If Catalog Sales are discontinued, it is estimated that online sales will increase by 10%. Discontinuing Catalog Sales should increase company profits by

$11,000 Reason: Increased online sales contribution margin ($100,000 × 10% ×$60,000 ÷ $100,000) is $6,000 + $5,000 saved from stopping catalog sales = $11,000

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 Reason: Net income = (25,000 - 15,000) × ($25 - $12) = $130,000.

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

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.

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: $2.43 ÷ $9.00 or 27%

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%

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

34% Reason: ($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

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

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% Reason: $100,170 ÷ $189,000 = 53%

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

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.

After reaching the break-even point, a company's net operating income will increase by the per unit for each additional unit sold. (Enter only one word per blank.)

Blank 1: contribution Blank 2: margin

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $

Blank 1: 2,250

Advocates of costing believe fixed costs are an essential part of product production. (Enter only one word per blank.)

Blank 1: absorption or full

Managers who believe that all manufacturing costs must be assigned to products in order to properly match the cost of production with sales are advocates of

Blank 1: absorption or full

For external reporting, income statements are generally prepared using

Blank 1: absorption or full Blank 2: variable , marginal, or direct

A fixed cost that supports the operations of more than one segment, but is not traceable in whole or part to any one segment is a(n)

Blank 1: common

If a segment is eliminated, ___ fixed costs that are not traced to the segment will not change.

Blank 1: common

One mistake companies make when preparing segmented income statements is arbitrarily assigning

Blank 1: common, nontraceable, or untraceable

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)

Blank 1: decrease Blank 2: 3,000 or 3000

In a least-squares regression line, the vertical intercept (a) of the line represents the total

Blank 1: fixed

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

Blank 1: fixed Blank 2: profit, income, or profits

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

Blank 1: incremental

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals

Blank 1: linear Blank 2: cost

Variable expenses ÷ Sales is the calculation for the

Blank 1: variable Blank 2: expense or cost

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

Blank 1: zero, 0, or nothing

In order to comply with GAAP and IFRS, the ______ costing method must be used for external reporting in the United States.

absorption

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decrease in the unit variable cost.

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.

Segmented income statements

may be prepared for activities at many levels in a company

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales

net operating income will increase by $0.70 total contribution margin will increase by $0.70

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.

JPL Company has two segments - Retail and Commercial. The Retail segment has a contribution margin ratio of 40% and traceable fixed expenses of $70,000. Commercial has traceable fixed expenses of $50,000 and a contribution margin ratio of 55%. The company also has $30,000 of common fixed expenses. The break-even point in dollar sales for the Retail segment equals

$175,000 Reason: $70,000 ÷ 40% = $175,000

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 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

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.

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 Reason: $1,630,000 - $935,000 = $695,000