accounting chapter 20!

a cost volume profit chart is also called a

break even chart

change in operating income

change in sales dollars x contribution margin

total cost

(variable cost per unit x units produced) +fixed costs

contribution margin ratio

Contribution Margin / Sales

fixed cost characteristics

-Cost per unit decreases as the activity level increases and increases as the activity level decreases. -Total cost remains the same regardless of changes in the activity base

characteristics of variable costs

-Cost per unit remains the same regardless of changes in the activity base -Total cost changes in proportion to changes in the activity base

Understanding cost behavior depends on knowledge of all of the following except

-intangibles (answer) -activity drivers -activity bases -relevant range

operating leverage

A measure of the relative mix of a business's variable costs and fixed costs, computed as contribution margin divided by operating income.

Variable costs for Oswego Company were 35% of sales, and sales were $425,000. Fixed costs were $100,000. What was the operating income?

35% of sales is equal to variable costs: ($425,000 × 0.35) = $148,750. Operating Income = Sales - Variable Costs - Fixed Costs = $425,000 - $148,750 - $100,000 = $176,250.

Which of the following is not one of the ways that cost-volume-profit analysis can be useful for managerial decision making?

For determining where to purchase raw materials

Variable costs as a percentage of sales for Craig, Inc., are 70%, current sales are $600,000, and operating income is $70,000. What is the amount of fixed costs?

If variable costs are 70% of sales, then 70% of $600,000 is $420,000. Sales - Variable Costs = Contribution Margin = $600,000 - $420,000 = $180,000. Contribution Margin - Operating Income = Fixed Costs = $180,000 - $70,000 = $110,000.

contribution margin

Sales - Variable Costs

Fritz, Inc.'s unit selling price is $75, the unit variable costs are $45, fixed costs are $150,000, and current sales are 10,000 units. How much will operating income change if sales increase by 5,000 units?

The contribution margin is calculated as sales price per unit minus variable cost per unit, or $75 - $45 = $30 per unit. Thus, the additional 5,000 units would provide a $150,000 (5,000 units × $30) increase to operating income.

Which of the following is true when using the concept of contribution margin in managerial decision making?

The contribution margin ratio is most useful when the increase or decrease in sales volume is measured in sales dollars.

Craig Co. sells two products: A and B. Last year, Craig sold 14,000 units of A and 21,000 units of B. Related data are as follows: ProductUnit SellingPriceUnit VariableCostUnit ContributionMarginA$110$70$40B 70 50 20 What was Craig Co.'s unit contribution margin?

The sales mix is calculated based on adding the units of each product to get the total units. Then each product is divided by the total units. 14,000 A units + 21,000 B units = 35,000 total units. A's proportion is 14,000 ÷ 35,000 = 40%. B's proportion is 21,000 ÷ 35,000 = 60%. Unit selling price of A and B($110 × 0.40) + ($70 × 0.60) = $86 Unit variable cost($70 × 0.40) + ($50 × 0.60)= $58 Unit contribution margin($40 × 0.40) + ($20 × 0.60)= $28

primary cost volume profit analysis assumptions

Total sales and total costs can be represented by straight lines. Within the relevant range of operating activity, the efficiency of operations does not change. Costs can be divided into fixed and variable components. The sales mix is constant. There is no change in the inventory quantities during the period.

Total direct materials costs are $127,500, fixed costs are $75,000, and units produced are 15,000. What is the direct materials cost per unit?

Variable Cost per Unit = Total Variable Costs ÷ Units Produced = $127,500 ÷ 15,000 = $8.50.

Unit variable costs may be affected by all of the following except changes in the a.level of activity. b.wage rate of direct labor. c.cost per unit of direct materials. d.sales commission paid to salespeople.

a level of activity

Break-even analysis for a service company involves identifying the correct

a.unit of analysis.

activity bases

activities that cause the cost to change

An example of a type of company with high fixed costs is a(n)

airline manufacturer

profit volume chart

charts only the difference between total sales and total costs

fixed costs

costs that remain the same in total dollar amount as the activity base changes

variable costs

costs that vary in proportion to changes in the activity base

Cost-volume-profit relationships in a service company are measured with respect to

customers and activities

variable cost per unit

difference in total cost/ difference in units produced

mixed costs

have both fixed and variable components

margin of safety

indicates the possible decrease in sales that may occur before an operating loss results; may be expressed in terms of sales dollars, sales units, or percent of current sales.

percent change in operating income

percent change in sales x operating leverage

Contribution margin ratio is also referred to as

profit volume ration

margin of safety =

sales - sales at break even point / sales

operating loss

sales levels to left of break even point

operating profit

sales levels to right of break even point

In a cost-volume-profit graph, the

sales line is plotted by beginning at zero on the left corner of the graph.

unit contribution margin

sales price per unit - variable cost per unit

In a cost-volume-profit chart, the

slope of the total costs line is dependent on the variable cost per unit.

Cost-Volume-Profit Analysis

the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits

cost behavior

the manner in which a cost changes as a related activity changes.

relevant range

the range of activity over which the changes in the cost are of interest.

sales mix

the relative distribution of sales among the products sold by a company

fixed cost =

total cost - (variable cost per unit x units produced)

Which of the following conditions would cause the break-even point to increase? a.Unit variable cost decreases. b.Unit selling price increases. c.Unit variable cost increases. d.Total fixed costs decrease.

unit variable cost increases