Managerial Accounting Chapter 5

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars? $25,000 $2,500 $250 $16,667

Dollar sales to break-even = Fixed expenses of $10,000 ÷ CM Ratio of 0.40 = $25,000.

The measure of how sensitive net operating income is to a given percentage change in dollar sales is called _______. sensitivity leverage operating leverage risk leverage

operating leverage

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle? $500 $300 $200 $20,200

$200 Unit Contribution Margin = Sales price per unit - Variable costs per unit.

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage? 3.00 0.60 2.00 1.67

Degree of operating leverage = Contribution margin/Net operating income = $300,000/$100,000 = 3.

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio? 40% 60% 100% 20%

Contribution margin ratio = Contribution margin/Sales = ($50 − $20)/$50 = 60%.

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales? 63 units 167 units 50 units 100 units

Unit CM = Selling price of $80 − Variable expense of $30 = $50. Unit sales to break-even = Fixed expenses of $5,000 ÷ $50 = 100 units.

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold. unit contribution margin unit selling price variable expense per unit fixed expense per unit

unit contribution margin

The profit graph is based on the following linear equation: Profit = Unit CM x Q - Fixed Expenses. Sales = Unit CM - Unit Variable Cost. Profit = Unit CM x Q + Fixed Expenses. Profit = Selling Price x Q - Unit CM x Q.

Profit = Unit CM x Q - Fixed Expenses.

What is represented on the X axis of a cost-volume-profit (CVP) graph? Sales revenue Fixed cost Sales volume Variable cost

Sales volume

Target profit $ 120,000 Unit contribution margin $ 40 Fixed expenses $ 40,000 Contribution margin ratio (CM ratio) 0.40 Selling price $ 100 What are the sales dollars required to attain a target profit of $120,000? $400,000 $300,000 $10,000 $60,000

Sales dollars to attain the target profit = (Target profit + Fixed expenses)/Contribution margin ratio. Substituting the values, sales required = ($120,000 + $40,000)/0.40 = $400,000.

What does the green line in the CVP graph indicate? Total fixed costs Total expenses Total variable costs Total sales revenue

Total expenses

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio? 40% 60% 100% 20%

Variable expense ratio = Variable expenses/Sales = $20/$50 = 40%.

Income Statement Sales 100,000 Variable expenses 50,000 Contribution margin = 50,000 Fixed expenses 20,000 Net operating income= 30,000 If sales increase by $50,000, what will be the net operating income for the company?

Contribution margin = $50,000/$100,000 = .50 Profit = (CM Ratio × Sales) − Fixed Expenses = (50% × $150,000) − $20,000= $55,000.

What is usually plotted as a horizontal line on the CVP graph? Fixed expenses Variable costs Sales revenues Break-even volume

Fixed expenses

Summarized data for Ralph Corporation: Selling price $ 200 per unit Variable expenses $ 150 per unit Fixed expenses $ 1,000,000 per year Unit sales 25,000 per year What is Ralph Corporation's margin of safety in dollars? $4 million $5 million $1 million $2.2 million What is Ralph Corporation's margin of safety in percentage? 20% 100% 80% 50%

Margin of Safety in dollars = Total budgeted (or actual) sales − Break-even sales = $5,000,000 ($200 per unit × 25,000 units) − $4,000,000 ($1,000,000/($50/$200)) = $1,000,000. Margin of Safety Percentage = Margin of Safety in dollars/Total budgeted (or actual) sales in dollars = ($5,000,000 − $4,000,000)/$5,000,000 = 20%.

The current sales of Trent, Inc., are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Inc.? 24% 30% 60% 25%

Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 2 × 30% = 60%.

The following information is extracted from the records of Johnson Corporation: Target profit $ 120,000 Unit contribution margin $ 40 Fixed expenses $ 40,000 Contribution margin ratio (CM ratio) 0.40 Selling price $ 100 What are the unit sales required to attain a target profit of $120,000? 400,000 units 400 units 1,600 units 4,000 units

Unit sales to attain the target profit = (Target profit + Fixed expenses)/Unit Contribution margin. Substituting the values, unit sales = ($120,000 + $40,000)/$40 = 4,000 units.

The following explains contribution margin ________. sales minus fixed cost fixed cost minus variable cost sales minus variable cost minus fixed cost sales minus variable cost

sales minus variable cost

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes? Increase of $20,000 Decrease of $20,000 Increase of $14,200 Decrease of $12,000

Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit $114 x 300 units = $34,200 Less increase in fixed costs -$20,000 Change in net operating income = $14,200

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. Compute the profit from the sale of 100 bicycles ________. $12,000 $10,000 $20,000 $8,000

Profit = Contribution margin of $20,000 (or 100 units × Unit contribution margin of $200 per unit) − Fixed expenses of $8,000 = $12,000.

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100 and decrease fixed expenses by $20,000. What is the net operating income after the changes? Increase of $21,500 Decrease of $30,000 Increase of $24,500 Decrease of $22,000

New contribution margin per unit = $175 − $100 = $75 New contribution margin = $75 × 1,300 units = $97,500 New fixed cost = $96,000 − 20,000 = $76,000 New net operating income = $97,500 − 76,000 = $21,500 INCREASE of $21,500

A shift in the sales mix from high-margin items to low-margin items can cause total profit to ________. decrease increase remain the same

decrease

Break-even point is the level of sales at which ______ total profits equals total costs total profits exceed total costs total revenue equals total costs total sales equal total projections

total revenue equals total costs