ACG 2071 chapter 6

Given total fixed costs of $35,000 and a contribution margin ratio of 40%, $-- of revenue must be earned to break even. (Enter your answer as a whole number.)

Blank 1: 87500 or 87,500

Decisions about whether to use fixed or variable costs to run a business affects a company's-- leverage. (Enter only one word per blank.)

Blank 1: operating

True or false: CVP analysis is only used for break-even and target profit analysis.

False Reason: CVP analysis can be used for a variety of different managerial decisions.

True or false: Cost structure refers to how a company uses product and period costs in an organization.

False Reason: Cost structure refers to how a company uses fixed and variable costs in an organization.

True or false: The terms operating leverage and financial leverage refer to the same concept.

False Reason: While these concepts are related, operating leverage addresses fixed vs. variable costs and financial leverage addresses debt vs. equity.

The contribution margin stated as a percentage of sales dollars is the ______.

contribution margin ratio

The Greenery sells three products. Product A has a contribution margin of $10 per unit, Product B has a contribution margin of $15 per unit and Product C has a contribution margin of $12 per unit. Sales are: 25% A, 35% B and 40% C. The weighted average unit contribution for The Greenery is ______.

$12.55 Reason: ($10 × 25% + $15 × 35% + $12 × 40%) = $12.55

Jacki's Jewels sells 10,000 necklace & earring sets per year. Fixed costs are $80,000 and variable costs are $20 per set. Jacki is planning to increase the quality of the stones, which will increase variable costs by $8 per set and increase sales by 25%. If Jacki increases the quality of the stones, what price will she need to charge to attain her target profit of $60,000 per year?

$39.20 Reason: Costs + Target Profit = ($28 x 12,500 + $80,000 + $60,000) = $490,000 ÷ 12,500 sales in units or $39.20 per set.

A company sells two products. Product A sells for $10.00 per unit and Product B sells for $8.00 per unit. Variable costs are $3.00 for Product A and $2.50 for Product B. If the sales mix is 70% Product A and 30% Product B, the weighted average contribution margin is ______.

$6.55 Reason: $7.00 × 70% + $5.50 × 30% = $6.55

Select all that apply Which of the following are assumptions of cost volume profit analysis?

-All costs can be classified as either fixed or variable. -Production volume is equal to sales volume. -In multi-product companies, the sales mix is constant.

Select all that apply The weighted average unit contribution margin ______.

-assumes that the percentage of each product sold is constant -is used instead of the single product contribution margin in multi-product break-even analysis -is based on the relative percentage of each unit sold

In the profit equation, total ______ is a function of the number of units sold (Q).

-sales revenue -variable costs

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

Larson's Ltd. sells its product for $12.00 per unit. The contribution margin per unit is $8.00 and fixed costs are $75,000. Larson has to sell to ______ units to break even.

9,375 Reason: $75,000 ÷ $8.00 = 9,375 units

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False Reason: The margin of safety is the excess of the budgeted (or actual) sales dollars over break-even sales dollars.

The equation for the profit equation method is ______.

Total Sales Revenue - Total Variable Costs - Total Fixed Costs = Profit

Contribution margin equals sales minus ______.

all variable costs

The difference between break-even analysis and target profit analysis is the ______.

amount that profit is set to

If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ratio will ______.

both increase Reason: An increase in selling price increases contribution margin.

Contribution margin ______.

covers fixed cost and profit

When constructing a CVP graph, the vertical axis represents ______.

dollars

The break-even point is reached when total revenue is ______ total costs.

equal to

CVP analysis can help answer the question of _____.

how net income can be increased

According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases.

price

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.

sales mix

The weighted-average contribution margin ratio is calculated using the ______.

total sales mix

The amount that each unit sold contributes to fixed costs and profit is ______.

unit contribution margin

When preparing a CVP graph, the slope of the total cost line represents______.

variable cost per unit

The goal of break-even analysis is to find the level of sales where profit is equal to ______.

zero

Sweet Dreams sells 15,000 pillows per year for $25 per unit. Variable cost per unit is $14. Sweet Dreams wants to improve customer satisfaction by using higher quality direct materials which will increase the variable cost per unit to $19. Fixed costs per year total $90,000. If sales increase by 5,000 units per year, what price will Sweet Dreams have to charge to earn the same profit it is earning now ($75,000 per year)?

$27.25 Reason: Costs + Target Profit: ($19 × 20,000 + $90,000 + $75,000) = $545,000 ÷ 20,000 units = $27.25

Given budgeted sales of $982,000, break-even sales of $932,200, and fixed expenses of $429,000, the budgeted margin of safety in dollars is______.

$49,800 Reason: $982,000 - $932,200 = $49,800.

Select all that apply Multi-product target profit analysis ______.

-is calculated the same way as single product analysis -depends upon the sales mix

Select all that apply At the break-even point,______.

-total revenue equals total cost -profit is zero

Select all that apply CVP ______.

1. allows managers to see how changing one variable can impact another 2. used to make many different decisions 3. "what-if" analysis

Given sales of $110,000, a contribution margin of $75,000 and net operating income of $30,000, operating leverage is ______.

2.5 Reason: $75,000 ÷ $30,000 = 2.5

A company sells 15,000 units of product per month. The sales price per unit is $5.00, variable costs are $2.80 per unit and and total fixed costs equal $3,000. The contribution margin ratio is ______.

44% Reason: ($5.00 - $2.80) ÷ $5.00 = 44%

The margin of-- is the difference between actual or budgeted sales and the break-even point.

Blank 1: safety

Desks by Daisy sells a student desk for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell-- desks per month in order to break-even. (Enter your answer as a whole number.)

Blank 1: 250

Given net operating income of $50,000, contribution margin of $150,000 and sales of $300,000, the degree of operating leverage of -- . (Enter your answer as a whole number.)

Blank 1: 3

Given sales of 10,000 units per month, sales price per unit of $4.00, variable costs of $1.80 per unit and and total fixed costs of $5,000, the contribution margin ratio is-- %. (Enter your answer as a whole number.)

Blank 1: 55

Given fixed costs of $30,000, variable costs of $2.00 per unit, and a contribution margin of $5.00 unit,-- units have to be sold in order to break even. (Enter your answer as a whole number.)

Blank 1: 6000 or 6,000

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

Solving for the sales level needed to achieve a profit of zero is ______ analysis.

break-even

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will ______.

decrease Reason: An increase in selling price increases contribution margin and decreases the break-even point.

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the ______.

degree of operating leverage

A company sells a product for $80 per unit and has a contribution margin ratio of 45%. Fixed costs total $180,000. Sales dollar to break even equals ______.

$400,000 Reason: $180,000 ÷ 45% = $400,000

A company sells two products. Product A sales total $28,000 and Product B sales total $12,000. Total contribution margin is $18,000 for Product A and $9,000 for Product B. The weighted average contribution margin ratio is-- %. (Enter your answer as a whole number rounded to one decimal place.)

Blank 1: 67.5 (18,000+9,000)/(28,000+12,000) = 27,000/40,000 = 0.675 x 100 = 67.5%

Tess's Tidbits sells three different snack packs. The weighted average contribution margin is $15.00 and total fixed costs are $20,000 per month. Of her total sales, 40% are for the deluxe snack pack, 35% are standard snack packs and 25% are mini snack packs. In order to earn the target profit of $10,000 per month, Tess needs to sell-- deluxe snack packs each month. (Enter your answer as a whole number.

Blank 1: 800

The amount each unit sold contributes towards fixed costs and profit is the unit---- . (Enter only one word per blank,)

Blank 1: contribution Blank 2: margin

To calculate the degree of operating leverage, divide---- by net operating income. (Enter only one word per blank.)

Blank 1: contribution Blank 2: margin

Fill in the blank question. The extent to which a company uses fixed costs (as opposed to variable costs) in its operations is called---- . (Enter only one word per blank.)

Blank 1: cost Blank 2: structure

The extent to which a company uses fixed costs (as opposed to variable costs) in its operations is called---- . (Enter only one word per blank.)

Blank 1: cost Blank 2: structure

Decisions about the use of debt versus equity affects a company's---- . (Enter only one word per blank.)

Blank 1: financial Blank 2: leverage

When constructing a CVP graph, the place where the total cost line intercepts the y-axis represents total-- costs. (Enter only one word per blank.)

Blank 1: fixed

When multiple products are sold, the break-even point depends on the-- mix. (Enter only one word per blank.

Blank 1: product or sales

How much contribution margin is generated per dollar of sales revenue is the contribution margin-- . (Enter only one word per blank.)

Blank 1: ratio

An extension of break-even analysis that allows managers to determine units or sales needed to achieve an earning's goal is called ----analysis. (Enter only one word per blank.)

Blank 1: target Blank 2: profit

Methods that can be used to model the relationship between revenues, costs, profit and volume-- include the contribution margin method and the contribution method----. (Enter only one word per blank.)

Blank 1: unit Blank 2: margin Blank 3: ratio

Which of the following is NOT a method used for basic CVP analysis?

Break-even analysis

Decisions about whether to use fixed or variable costs to run a business impact a company's ______.

operating leverage

The weighted average unit contribution margin is the average unit contribution margin of multiple products weighted according to ______.

percentage of units sold