Acct. 231 Ch. 6

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?

$200 Unit Contribution Margin = Selling price per unit of $500 − Variable expenses per unit of $300 = $200.

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?

$21,500 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

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% Variable expense ratio = Variable expense ÷ Sales = $20 ÷ $50 = 40%

Assume the following (1) selling price per unit = $30, (2) variable expense per unit = $18, and (3) total fixed expenses = $55,200. Given these three assumptions, the unit sales needed to achieve a target profit of $12,000 is:

5,600 Units Break even sales in units = Fixed expenses / Contribution margin Break even sales in units = $55,200 / ($30-$18) Break even sales in units = 5,600 Units

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?

60% CM ratio = Unit CM ÷ Unit selling price = ($50 − $20) ÷ $50 = 60%

The current sales of Trent, Incorporated, 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, Incorporated?

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

With regards to interpretation, what are the important areas that appear on a CVP graph?

Break-even point, loss area, and profit area The CVP graph has three important areas: the break-even point, where the total revenue and total expense lines cross; the loss area, where the sales are below the break-even point, and the profit area, where sales are above the break-even point.

Assume the following information: Amount Per Unit Sales $ 600,000 $40 Contribution margin $360,000 $24 Net operating income $ 144,000 What is the degree of operating leverage?

Degree of operating leverage = 2.50 Degree of operating leverage = Contribution margin / Net operating income Degree of operating leverage = 360000/144000 Degree of operating leverage = 2.50

What is usually plotted as a horizontal line on the CVP graph?

Fixed expenses

Assume the following information for a company with only two products: Product A Product B Total Sales $600,000 $400,000 $1,000,000 Contribution margin $ 360,000 $200,000 $560,000 Fixed expenses $240,000 The company's break-even point in dollar sales is closest to:

The company's break-even point in dollar sales is closest to:$428,571 Total Contribution margin = $560,000 Total Sales = $1,000,000 Overall Contribution margin ratio = Total Contribution margin/Total Sales = 560,000/1,000,000 = 56% Break even sales in dollars = Fixed cost/Overall Contribution margin ratio = 240,000/56% = $428,571

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

Unit volume In a CVP graph, unti volume (or activity volume) is represented on the horizontal (X) axis and dollars on the vertical (Y) axis.

If the contribution margin is not sufficient to cover fixed expenses:

a loss occurs.

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

decrease Shifting sales mix from high-margin items to low margin items can cause total profits to decrease.

Last month when Holiday Creations, Incorporated, sold 36,000 units, total sales were $144,000, total variable expenses were $120,960, and fixed expenses were $38,500. Required: 1. What is the company's contribution margin (CM) ratio? 2. What is the estimated change in the company's net operating income if it can increase sales volume by 575 units and total sales by $2,300? (Do not round intermediate calculations.)

#1 Total Sales (a) = $144,00 Total Variable Expenses = $120,960 Total Contribution Margin (b) = $23,040 CM Ratio (b/a) = 16 % #2 Change in Total Sales (a) = $2,300 CM Ratio (b) = 16% Estimated change in the net operating income (a * b) = $368

Lin Corporation has a single product whose selling price is $130 per unit and whose variable expense is $65 per unit. The company's monthly fixed expense is $32,150. Required: 1. Calculate the unit sales needed to attain a target profit of $2,300. (Do not round intermediate calculations.) 2. Calculate the dollar sales needed to attain a target profit of $8,900. (Round your intermediate calculations to the nearest whole number.

1--530 units. ($2,300 + $32,150) ÷ ($130 - $65) = 530 2--$82,100 CM Ratio = $130 - $65 = $65 $65 ÷ $130 = 0.5 ($8,900 + $32,150) ÷ 0.5 = $82,100

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

Which of the following is not an underlying assumption of cost-volume-profit analysis?

Net operating income is constant.

Contribution margin equals ________

sales minus variable cost

Summarized data for Ralph Corporation: Selling price $200 per unit Variable expenses $150per unit Fixed expenses$ 1,000,000 per year Unit sales 25,000 per year What is Ralph Corporation's margin of safety in dollars?

$1 million --Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales --Total budgeted (or actual sales) = $200 per unit x 25,000 units = $5,000,000 --CM Ratio = (Sales − Variable expenses) ÷ Sales = ($200 − $150) ÷ $200 = $50 ÷ $200 = 25% or 0.25 --Break-even sales = Fixed expenses ÷ CM ratio = $1,000,000 ÷ 0.25 = $4,000,000 --Margin of safety in dollars = $5,000,000 − $4,000,000 = $1,000,000

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

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

Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November. Sales (5,700 units) $ 319,200 Variable expenses 188,100 Contribution margin 131,100 Fixed expenses 106,500 Net operating income$ 24,600 If the company sells 5,300 units, its net operating income should be closest to:

$15,400 Selling price per unit = Sales ÷ Quantity sold = $319,200 ÷ 5,700 units = $56 per unit Variable expenses per unit = Variable expenses ÷ Quantity sold = $188,100 ÷ 5,700 units = $33 per unit Unit contribution margin = Selling price per unit − Variable expenses per unit = $56 per unit − $33 per unit = $23 per unit Profit = (Unit contribution margin × Q) − Fixed expenses = ($23 per unit × 5,300 units) − $106,500 = $121,900 − $106,500 = $15,400

Jilk Incorporated's contribution margin ratio is 58% and its fixed monthly expenses are $36,000. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $103,000?

$23,740 Profit = (Contribution margin ratio × Sales) − Fixed expenses= (0.58 × $103,000) − $36,000 = $59,740 − $36,000 = $23,740

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 CM ratio = (Sales − Variable expenses) ÷ Sales = ($100 − $60) ÷ $100 = $40 ÷ $100 = 40% or 0.40Dollar sales to break-even = Fixed expenses ÷ CM Ratio = $10,000 ÷ 0.40 = $25,000

Walton Corporation is currently selling 104 units of its product. The company is deciding the price that it should charge for a bulk order of 40 units. The variable cost per unit is $200. This order will not involve any additional fixed costs and the company's current sales will not be affected. The company targets a profit of $4,000 on the bulk order. What selling price per unit should the company quote for the bulk order?

$300 Required profit per unit = Target profit of $4,000 ÷ 40 units = $100Selling price per unit = Required profit per unit of $100 + Variable cost per unit of $200 = $300

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 sales dollars required to attain a target profit of $120,000?

$400,000 Dollar sales to attain the target profit = (Target profit + Fixed expenses) ÷ CM ratio Dollar sales to achieve the target profit = ($120,000 + $40,000) ÷ 0.40 = $400,000

Thomason Corporation has provided the following contribution format income statement. Assume that the following information is within the relevant range. Sales (1,000 units) $40,000 Variable expenses 30,000 Contribution margin 10,000 Fixed expenses 7,000 Net operating income $3,000 If the variable cost per unit increases by $1, spending on advertising increases by $2,000, and unit sales increase by 50 units, the net operating income would be closest to:

$450 Selling price per unit ($40,000 / 1,000 units) = $40 Variable cost per unit ($30,000 / 1,000 units) = $30 Unit contribution margin ($40 - $30) = $10 Selling price = $40 Variable cost per price ($30 per unit + $1 per unit) = 31 per unit Unit contribution margin = $9 Unit sales (1,000 units + 50 units) = 1,050 units Contribution margin (Unit contribution margin x Unit sales) = $9,450 Fixed expenses ($7,000 + $2,000) = $9,000 Net operating income (contribution margin - fixed expenses) = $450

Assume the following (1) total sales = $200,000 (2) breakeven sales = $120,000, and (3) total fixed expenses = $50,000. Given these three assumptions, the margin of safety is:

$80,000 given the following information: Total Sales = $200,000 Breakeven Sales = $120,000 Total Fixed Expenses = $50,000 Explanation: Margin of Safety = Total Sales - Breakeven Sales Margin of Safety =$200,000−$120,000=$80,000

Whirly Corporation's contribution format income statement for the most recent month is shown below: Total Per Unit Sales (7,100 units) $220,100 $31.00 Variable expenses 134,900 19.00 Contribution margin 85,200 $12.00 Fixed expenses 55,700 Net operating income $29,500 Required: (Consider each case independently): 1. What would be the revised net operating income per month if the sales volume increases by 60 units? 2. What would be the revised net operating income per month if the sales volume decreases by 60 units? 3. What would be the revised net operating income per month if the sales volume is 6,100 units?

(Photo)

The contribution margin ratio equals:

(Sales − Variable expenses)/Sales.

Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: Selling price per unit $28 Variable expense per unit $13 Fixed expense per month $13,350 Unit sales per month 1,040 Required: 1. What is the company's margin of safety? (Do not round intermediate calculations.) 2. What is the company's margin of safety as a percentage of its sales? (Round your percentage answer to 2 decimal places (i.e. .1234 should be entered as 12.34).)

1--$4,200 $28 × 1040 = $29,120 (Total Sales) Contribution Margin: $28 - $13 = $15 $15 ÷ $28 = 0.5357 Fixed Expense ÷ CM ratio = Break-Even Sales $13,350 ÷ 0.5357 ≈ $24,920 $29,120 - $24,920 = $4,200 2--14.42% $4,200 ÷ $29,120 = 0.14423 ≈ 14.42%

Mauro Products distributes a single product, a woven basket whose selling price is $13 per unit and whose variable expense is $11 per unit. The company's monthly fixed expense is $4,000. 1. Calculate the company's break-even point in unit sales. 2. Calculate the company's break-even point in dollar sales. (Do not round intermediate calculations.) 3. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales?(Do not round intermediate calculations.)

1--2,000 baskets $4,000 ÷ ($13-$11) = 2,000 2--26,000 2,000 x 13= 26,000 3--2,300 baskets. 4,000+$600=4,600 4,600/($13-$11)=2,300 4--$29,900 2,300 x 13= $29,900

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $90,000 100% Variable expenses 36,000 40% Contribution margin 54,000 60% Fixed expenses 41,400 Net operating income $12,600 Required: 1. What is the company's degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income of a 7% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 7% increase in unit sales.

1--4.29 Contribution Margin ÷ Net Operating Income $54,000 ÷ $12,600 = 4.285 2--30.00%. Degree of Operating Leverage × 7% 4.285 × 7% = 0.3003 = 30.00% 3-- Sales: $96,300, Percent of Sales = 100% (90,000 x (1+7%)) Variable Expenses: $38,500, % of Sales = 40% ($96,300*40%) Contribution Margin: $57,780, % of Sales = 60% ($96,300-$38,500) Fixed Expenses: $41,400 Net Operating Income = $16,380 ($57,780-$41,400)

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?

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

Summarized data for Ralph Corporation: Selling price $200 per unit Variable expenses $150per unit Fixed expenses$ 1,000,000 per year Unit sales 25,000 per year What is Ralph Corporation's margin of safety in percentage?

20% --Margin of safety in dollars = Total budgeted (or actual) sales − Break-even sales --Total budgeted (or actual sales) = $200 per unit x 25,000 units = $5,000,000 --CM Ratio = (Sales − Variable expenses) ÷ Sales = ($200 − $150) ÷ $200 = $50 ÷ $200 = 25% or 0.25 --Break-even sales = Fixed expenses ÷ CM ratio = $1,000,000 ÷ 0.25 = $4,000,000 --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%

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 Degree of operating leverage = Contribution margin ÷ Net operating income Degree of operating leverage = $300,000 ÷ $100,000 = 3.00

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?

4,000 units Unit sales to attain the target profit = (Target profit + Fixed Expenses) ÷ Unit CM Unit sales to achieve the target profit = ($120,000 + $40,000) ÷ $40 = 4,000 units.

Which of the following statements is false? Multiple Choice --The break-even point is the level of sales at which the total contribution margin equals the total fixed costs. --Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales. --Margin of safety is the excess of budgeted or actual dollar sales over the break-even dollar sales. --Sales mix refers to the relative selling prices of a company's various products.

Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales.

Which of the following statements is false? --The break-even point is the level of sales at which the total sales dollar amount equals the total fixed costs. --Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales. --Margin of safety is the excess of budgeted or actual dollar sales over the break-even dollar sales. --Sales mix refers to the relative proportions in which a company's products are sold.

The break-even point is the level of sales at which the total sales dollar amount equals the total fixed costs.

Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $60 100% Variable expenses 39 65 Contribution margin $21 35% Fixed expenses are $72,000 per month and the company is selling 4,200 units per month. Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $9,600, the monthly sales volume increases by 100 units, and the total monthly sales increase by $6,000? 1-b. Should the advertising budget be increased?

decreases by $7,500. Sales = $60 × 4,200 units/month = $252,000 Variable expenses = $39 × 4,200 units/month = $163,800 Contribution Margin: $252,000 - $163,800 = $88,200 $88,200 - $72,000 = $16,200 Sales = $60 × 4,300 units/month = $258,000 Variable expenses = $39 × 4,300 units/month = $167,700 Contribution Margin: $258,000 - $167,700 = $90,300 $90,300 - $81,600 = $8,700 **$81,600 changed due to $9,600 increase in advertising expense Advertising budget should NOT be increased.

Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $60 100% Variable expenses 39 65 Contribution margin $21 35% Fixed expenses are $72,000 per month and the company is selling 4,200 units per month. Required: 2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $4 per unit and increase unit sales by 25%. 2-b. Should the higher-quality components be used?

net operating income will increase by $1,050. 4,200 units/month × 25% = 1,050 + 4,200 = 5250 5,250 × $60 = $315,000 5,250 × ($39 + $4) = $225,750 Contribution Margin: $315,000 - $225,750 = $89,250 $89,250 - $72,000 = $17,250 $17,250 - $16,200 (original net income) = $1050 The higher-quality components SHOULD be used.

Break-even point is the level of sales at which ______.

total revenue equals total costs

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