Ch. 5 SB

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is ______.

$180,000 Reason: Contribution margin = 20,000 × ($20 - $11) = $180,000.

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was ______.

$2,200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

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.

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is Blank______.

$36,000 Reason: Net operating income = (750 - 450) × $120 = $36,000.

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 Blank______.

$380,000 Reason: Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $

$5000

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 Blank______.

$6,000 increase Reason: ($70,000 × 30%) - $15,000 = $6,000 increase

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 Blank______.

$99,000 Reason: Net operating income = $184,000 - $85,000 = $99,000

Net operating income equals:

(unit sales - unit sales to break even) × unit contribution margin.

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month, ______. Multiple select question: total costs = $1,250 total variable costs = $350 profits = $875 total sales = $1,925

- total variable costs = $350 Reason: Total variable costs = (35 × $10) = $350. - profits = $875 Reason: Profits = 35 × ($55 - $10) - $700 = $875. - total sales = $1,925 Reason: Total sales = 35 × $55 = $1,925.

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. Which of the following statements are correct? Multiple select question. If sales fall, Baron will experience a greater decrease in income than Adams. Baron's net income grows twice as fast as its sales. Adams has a higher degree of operating leverage than Baron.

-Baron's net income grows twice as fast as its sales. Reason: Operating level of $44,000 ÷ 22,000 = 2 for Baron indicates that the company's net operating income grows twice as fast as sales. -Adams has a higher degree of operating leverage than Baron. Reason: $60,000 ÷ $20,000 = 3 for Adams and $44,000 ÷ 22,000 = 2 for Baron.

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $

2,250

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%

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is ______.

34% Reason: ($1,452,000 - $958,320) ÷ $1,452,000 = 34%

Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is Blank______.

40,000 units and $400,000 Reason: $200,000 ÷ 5 = 40,000 units × $10 each = $400,000

Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is ______ %

45

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was Blank______.

53% Reason: $100,170 ÷ $189,000 = 53%

A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $

675000 or 675,000

If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by ____ %

90

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 _______

Blank 1: 3 or three Blank 2: 2 or two

o calculate the variable cost per unit using the high-low method, the change in _______ is divided by the change in _______ . (Enter only one word per blank.)

Blank 1: cost, dollars, or costs Blank 2: activity, units, quantity, hours, or volume

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 $ .

Blank 1: decrease Blank 2: 3,000 or 3000

The amount by which sales can drop before losses are incurred is the ____ of _____ .

Blank 1: margin Blank 2: safety

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

Blank 1: sales or sale Blank 2: mix

Variable expenses ÷ Sales is the calculation for the _______ ______ ratio

Blank 1: variable Blank 2: expense or cost

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

Company B

Cost structure refers to the relative portion of product and period costs in an organization. T/F

False Reason: Cost structure refers to the relative portion of fixed and variable costs in an organization.

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False Reason: Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals ______.

Reason: $564,000 ÷ 0.62 = $909,677

Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals ______.

Reason: $95 × 450 = $42,750

A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of $200,800 is ______.

Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

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 ______.

Reason: ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.

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 ______.

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

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by Blank______.

Reason: 5% × 4 = 20%

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 ______.

Reason: Break-even point = $305,000 ÷ $40 = 7,625.

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals Blank______.

Reason: Sales = $144,000 ÷ 0.59 = $244,068

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is ______.

Reason: Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans.

The percentage of the variation in cost that is explained by activity is ______.

R²

Which of the following statements is correct? Multiple choice question. The higher the margin of safety, the higher the risk of incurring a loss. The higher the margin of safety, the lower the risk of incurring a loss. The risk of loss is not impacted by the margin of safety.

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

When using the high low method, the change in cost divided by the change in units equals ______.

The variable cost per unit

The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

True

The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products. T/F

True

Using the high-low method, the fixed cost is calculated ______.

after the variable cost per unit is calculated using either the high or low level of activity

Contribution margin: Multiple choice question: is first used to cover variable expenses. is not affected by changes in activity. becomes profit after fixed expenses are covered. equals sales minus fixed expenses.

becomes profit after fixed expenses are covered.

Multiplying unit selling price times the number of units required to break-even is one way to calculate ______.

break-even sales dollars

When making a decision using incremental analysis consider the ______.

change in sales dollars resulting specifically from the decision change in cost resulting specifically from the decision

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

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the Blank______ approach.

contribution margin

The calculation of contribution margin (CM) ratio is Blank______.

contribution margin ÷ sales

The break-even point calculation is affected by Blank______. Multiple select question. -costs per unit -number of batches produced -selling price per unit -sales mix

costs per unit selling price per unit sales mix

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease

CVP analysis focuses on how profits are affected by ______. Multiple select question: selling price sales volume break-even point mix of products sold unit variable cost total fixed costs

decrease in the unit variable cost.

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

The measure of how a percentage change in sales affects profits at any given level of sales is the ______.

degree of operating leverage

When constructing a CVP graph, the vertical axis represents:

dollars Reason: This is only partially correct. The vertical axis represents dollars. Sales, variable costs, and fixed costs are all measured in dollars.

The term "cost structure" refers to the relative proportion of ______ and ______ costs in an organization.

fixed and variable

If operating leverage is high, a small percentage increase in sales produces a (higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

If operating leverage is high, a small percentage increase in sales produces a ________ (higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

If operating leverage is high, a small percentage increase in sales produces a _________ (higher/lower) percentage increase in net operating income than if operating leverage is low. (Enter either higher or lower.)

higher

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using ______ analysis.

incremental

The statistic R²

is a measure of goodness of fit

A company with a high ratio of fixed costs: Multiple select question. - is more likely to experience greater profits when sales are up than a company with mostly variable costs. - is more likely to experience a loss when sales are down than a company with mostly variable costs. - will not be concerned about fluctuating sales. - will be able to avoid some of the fixed costs when sales decrease by lowering production.

is more likely to experience greater profits when sales are up than a company with mostly variable costs. is more likely to experience a loss when sales are down than a company with mostly variable costs.

A company with a high ratio of fixed costs: Multiple select question. -is more likely to experience greater profits when sales are up than a company with mostly variable costs. -will not be concerned about fluctuating sales. -will be able to avoid some of the fixed costs when sales decrease by lowering production. -is more likely to experience a loss when sales are down than a company with mostly variable costs.

is more likely to experience greater profits when sales are up than a company with mostly variable costs. is more likely to experience a loss when sales are down than a company with mostly variable costs.

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

leverage

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.

net operating income will increase by $0.70 total contribution margin will increase by $0.70

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

product mix selling price volume

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

ratio

The variable expense ratio is the ratio of variable expense to Blank______.

sales

The variable expense ratio is the ratio of variable expense to ______.

sales

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

sales mix

The rise-over-run formula for the slope of a straight line is the basis of ______.

the high-low method

The break-even point is reached when the contribution margin is equal to:

total fixed expenses.

When using the high-low method, fixed costs are calculated after variable costs are determined. T/F

true

When preparing a CVP graph, the horizontal axis represents:

unit volume.

The contribution margin equals sales minus all Blank______ expenses.

variable

When using the high-low method, the slope of the line equals the ______ cost per unit of activity.

variable

The contribution margin is equal to sales minus ______.

variable expenses

The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit.

volume selling price cost

he break-even point is the level of sales at which the profit equals _______

zero