ECON137A chapter 5

CVP is the acronym for __-__-__

cost, volume, profit

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 $27.3k / $35 = 780

a 15% inc in sales resulted in a 40% inc in net income for co A & a 60% inc in net income for co B. based on this, which co has the greater operating leverage? a) co A b) co B

B

co A has fixed costs of $564k and a CM of 62%. sales dollars to break-even rounded to the nearest whole dollar equals: a) $1,484,211 b) $920,211 c) $564k d) $909,677

D $564k / 0.62 = $909,677

if sales inc by 5% and the degree of operating leverage is 4, net operating income should increase by: a) 1% b) 20% c) 0.25% d) 9%

B inc in net operating inc = 5% x 4 = 20%

CM is first used to cover ______ expenses. once the break-even point has been reached, CM becomes ______.

fixed, profit

Gifts Galore sold $189,000 worth of wrapping paper last year. Total contribution margin was $100,170. Calculate the contribution margin ratio a) 68% b) 47% c) 38% d) 53%

D CM = $100,170 / $189k = 53%

a co has reached its break-even point when the CM ________ fixed expenses

equals

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 + $4.5k/500 = $20

To reach a target profit of $180,000, 90,000 units need to be sold. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $___________

$675k 90k x $7.5 = $675k

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

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% $559,740 / $2,946,000 = 19%

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 total sales = $95 x 284 = $26,980

Plush & Cushy sells high-end desk chairs. The variable expenses per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Plush & Cushy's chairs is ____________%.

45% variable exp = $85.05 / $189 = 45%

If the total contribution margin is less than the total fixed expenses, then a _______ _______ will occur. a) net loss b) break-even point c) net profit

A

profit equals: a) (P x Q) - (V x Q) - fixed expenses b) (P - V - fixed expenses) x Q c) (P x Q) + (V x Q) - fixed expenses d) (P x Q) - (V x Q) + fixed expenses

A

the vertical distance between the total revenue line and the total expense line on a CVP graph represents the total: a) profit or loss b) units sold c) CM d) gross margin

A

which of the following is needed to calculate profit? a) unit CM, unit sales, total fixed costs b) CM ratio & total fixed costs c) CM ratio, unit sales, total fixed costs d) unit CM & total fixed costs

A

the degree of operating leverage: (check all that apply) a) is not constant b) is greatest at sales levels near the break-even point c) decreases as sales & profits rise d) inc as sales & profits rise e) is smallest at sales levels near the break-even point

A, B, C

the CM I/S allows users to easily judge the impact of a change in _____ on profit (choose all that apply) a) selling price b) cost c) organizational structure d) volume

A, B, D

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. IF 200 units is the company's break-even point, the sale of 201 units will result in a net profit of: a) $500 b) $100 c) $400 d) $200

B

A company with a high ratio of fixed costs: (check all that apply) a) will be able to avoid some of the fixed costs when sales dec by lowering productions b) is more likely to experience a loss when sales are down than a co with mostly variable costs c) is more likely to experience greater profits when sales are up than a co with mostly variable costs d) will not be concerned about fluctuating sales

B & C

The single point where the total revenue line crosses the total expense line on the CVP graph indicates: (Check all that apply.) a) profit is less than zero b) the break-even point c) profit is greater than zero d) profit equals zero

B & D

which of the following are assumptions of cost-volume-profit analysis? a) fixed costs per unit stay the same within the relevant range b) in multi product companies, the sales mix is constant c) variable costs per unit increase over the relevant range of activity d) costs are linear and can be accurately divided into variable and fixed elements

B & D

the break-even point is reached with the contribution margin is equal to a) profit b) total variable expenses c) total fixed expenses d) total sales

C

the calc of CM ratio is a) CM / total exp b) net operating income / total CM c) CM / sales d) variable exp / CM

C

the degree of operating leverage = a) total sales / net op inc b) gross margin / net op inc c) CM / net op inc d) CM / total sales

C

Water World sells wake boards and water skis a111d pays commissions to their salespeople based on each product's sales price. Although the wake boards sell for a higher price than the skis, the skis have a higher contribution margin per unit than t he wake boards. Which of the following are true in reference to sales commissions? (Check all that apply.) a) The company should not pay sales commissions on these products. b) Sales commissions based on sales price would be ideal to use under these circumstances. c) Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them. d) The company would rather see more skis sold as it creates the higher profit per unit for the company.

C & D

Which of the following items are found above the contribution margin on a contribution margin format income statement? a) net op inc b) fixed exp c) variable exp d) sales

C & D

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes that compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. Should Goldin implement the change? a) inc by $1k b) dec by $1k c) dec by $7k d) inc by $7k

D current income: ($80 x 200) = $11k change salary: ($80 - $20) x 200 x 150% = $18k

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

assumptions

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 currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) ___________ (increase/decrease) of $__________.

decrease, $3k [1.5k x ($25 - $19)] - [1.2k x ($25 - $15)] = -$3k

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

margin, safety

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

variable, fixed

Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. If the company's contribution margin ratio is 72%, what is its profit? a) $567k b) ($32.4k) c) $559,040 d) $334,040

D

The equation used to calculate the variable expenses ratio using total values is total variable expenses divided by total: a. Contribution margin b. Fixed expenses c. Net income d. Sales

D

a co sold 20k units of its product at a selling price of $20. the variable cost/unit is $11. fixed expenses is $150k. the co's CM is a) $130k b) $30k c) $150k d) $180k

D

if a co has a variable expense ratio of 35%, its CM ratio must be _____%

65% CM ratio = 1 - variable expense ratio

A company currently has a contribution margin ratio of 30% and sales of $300,000. Fixed expenses total $225,000. The company has decided to expand production and, as a result, is expecting to increase sales by $70,000. The change will also result in an increase in fixed expenses of $15,000. What will be the impact on net operating income? a) inc by $6k b) dec by $27k c) dec by $15k d) inc by $21k

A change in net op inc = $70k x 30% - $15k = $6k

vivian's violins has sales of $326k, CM of $184k, and fixed costs total $85k. vivian's violins net op inc is: a) $99k b) $241k c) $57k

A net op inc = $184k - $85k - $99k

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: a. $168,000 b. $768,000 c. $18,000 d. ($32,000)

A profit = 200k x $4 - $632k = $168k

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: (select all that apply) a. total variable cost is $1,200 b. the variable cost per unit is $2.40 c. sales are $3,600 d. total fixed cost is $1,440

A & B

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: (select all that apply) a. Pete's Putters is unable to make a profit b. The contribution margin per putter is $65 c. Lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit d. The sale of 12,000 putters results in net operating income of $380,000

A & B

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales: (select all that apply) a. net operating income will increase by $0.70 b. total contribution margin will increase by $0.70 c. net operating income will increase by $0.30 d. total contribution margin will increase by $0.30

A & B

when making a decision using incremental analysis consider the: a) change in sales dollars resulting specifically from the decision b) change in cost resulting specifically from the decision c) volume that would occur regardless of the decision d) old I/S in comparison to the new I/S

A & B

The profit graph allows users to easily identify: (Check all that apply.) a) the sales volume required to reach the BEP b) total expenses incurred at any given sales volume c) the profit at any given sales volume

A & C

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, what is net operating income? a) ($10k) b) $36k c) ($64k) d) $54k

B

Operating leverage is a measure of how sensitive _ __ is to a given percentage change in sales dollars. a) total gross margin b) net operating income c) selling price per unit d) total variable expense

B

The contribution margin statement is primarily used for: a) external financial statement reporting b) internal decision making c) both internal & external reporting d) tax purposes

B

an I/S constructed under the _____ approach allows users to easily judge the impact on profits of changes in selling price, cost, or volume a) traditional b) CM c) gross margin d) B/S

B

to prepare a CVP graph, lines must be drawn representing total revenue, a) total expense, and profit b) total expense, and total fixed expense c) total variable expenses, and total fixed expenses d) break-even point, and profit

B

Blissful Blankets hopes to achieve a profit this year of $520,000. Each blanket has a contribution margin of $21. Fixed costs for the company are $320,000. How many blankets does Blissful Blankets need to sell in order to achieve its target profit? a) 15.2k b) 40k c) 9,524 d) 24,762

B sales volume = ($520k + $320k) / $21

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: a) $0.57 b) $1.74 c) $695k d) $2,565,000

C $1.63m - $935k = $695k

A company is currently selling 10,000 units of product. The selling price is $40 per unit and the contribution margin is $27 per unit. The company thinks spending $50,000 on advertising will increase sales by 750 units per month and allow them to increase the selling price to $45 per unit. If this change is implemented, profits will a) inc by $74k b) dec by $29,750 c) inc by $24k d) inc by $3,750

C an inc in selling price of $5 will inc the CM $5 (from $27 to $32). the inc CM of $74k [(10,750 x $32) - (10k x $27)] - the additional fixed costs of $50k = profit inc of $24k

Fantastic frames sells its frames for $15 per unit. Variable costs total $6 per unit, and fixed costs total $90,000. If the number of units being sold increases by 2,000 frames, net operating income will a) dec $72k b) dec $48k c) inc $18k d) inc $30k

C change in net op inc = 2k($15 - $6) = $18k

Adam's Sports Store has a contribution margin ratio of 55%. The break-even point has already been reached this year. If the shop is able to generate additional sales of $250,000 by the end of the year, net operating income for the year will increase by: a) $250k b) $112.5k c) $137.5k

C net op inc change = $250k x 55% = $137.5 inc

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%, what amount of sales dollars must be sold to reach the target profit? a) $913,880 b) $1,364,000 c) $2.2m d) $3m

C sales - ($564k + $800k) / 0.62

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: a. 14,688 b. 6,958 c. 21,645 d. 7,730

C sales volume = ($470k + $222,650) / $32 = 21,645

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? a. 3,600 b. 1,960 c. 6,400 d. 2,800

D $98k($50 - $15) = 2.8k