acc200 chapter 8 smartbook

When a company produces and sells multiple products

A change in the sales mis will most likely change the break-even pint Each product cost likely creates a unique total of fixed costs. Each product most likely has a unique CM

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

CVP analysis

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

The margin of safety percentage is

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

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

ratio

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

CVP analysis allows companies to easily identify the change in profit due to changes in

volume selling price product mix

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.

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

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.

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is

16% Reason: $272,000 ÷ (100,000 × $17) = 16%

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

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%

A company's current profit is $25,000 for a product that sells for $100 and has a unit contribution margin of $65. Fixed costs are $40,000. If the company increases sales by 50 units, total profit will increase by $

3,250 CM per unit * increase in sales 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. Thus, the degree of operating leverage is ___ for Adams, Inc. and ___ for Baron, Inc.

3; 2 CM ÷ net income

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.

If operating leverage is low, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income.

False Reason: The opposite is true. Operating leverage acts as a multiplier so with a high operating leverage, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income.

Which of the following statements is correct?

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

The sales volume level at which profits equal zero is the

break-even point

Margin of safety in dollars is

budgeted (or actual) sales minus break-even sales

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

Costs are separated into variable and fixed categories when using the ___ approach.

contribution

The degree of operating leverage =

contribution margin ÷ net operating income

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

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

leverage

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.

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; 3000

In a CVP graph, the vertical axis represents

dollars

Target profit analysis

estimates sales needed to earn a given profit is similar to break-even analysis

Estimating the sales volume required to earn a given amount of net income is known as ___ ___ analysis

target proft

In a CVP graph, the horizontal axis represents

unit sales

CVP analysis focuses on how profits are affected by

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

The contribution margin equals sales minus all Blank______ expenses.

variable

Variable expenses ÷ Sales is the calculation for the ___ ___ ratio.

variable expense

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 Reason: ($975,000 + $195,000) ÷ 0.65 = $1,800,000

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

ABC Inc. sells a product for $10 per unit. Variable costs are $4 per unit and total fixed costs equal $40,000. If sales increase from 10,000 units to 14,000 what will be the increase in overall profit?

$24,000 Reason: ($10 - $4) = $6 CM per unit × 14,000 units = $84,000 - $40,000 or $44,000 in profits - current profits of $20,000 ($6 CM × 10,000 - $40,000) = $24,000 increase.

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

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

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. (fixed expenses ÷ CM per unit)

CVP is the acronym for

Cost Volume Profit

To calculate the break-even point (in unit sales and dollar sales), managers can use the equation method or the ___ method.

formula

A company is currently selling 10,000 units per month 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.

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 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will

increase by $4,000 Reason: Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 125% = $15,000, an increase of $4,000 per month.

A company's current sales are $300,000 and fixed expenses total $85,000. 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 by $6,000 Reason: ($70,000 × 30%) - $15,000 = $6,000 increase

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 Reason: Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month.

The variable expense ratio equals variable expenses divided by

sales

The variable expense ratio is the ratio of variable expense to

sales

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

sales mix

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

sales mix

The break-even point calculation is affected by

selling price per unit sales mix costs per unit