Chapter 6 - Accounting

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

Volume, cost, and selling price.

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 $______ .

(10-6)x10000 - 35000 = 5000.

Profit equals:

(P x Q) - (V x Q) - fixed expenses.

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______.

change in sales dollars × contribution margin ratio.

To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the ______.

contribution margin per unit.

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

contribution margin ÷ sales.

Total contribution margin equals ______.

fixed expenses plus net operating income.

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is ______.

$55 Unit contribution margin = $90 - $35 = $55.

CVP is the acronym for _____-_____ -_____.

Cost-volume-profit.

When constructing a CVP graph, the vertical axis represents:

Dollars.

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 ______.

53%(100,170/189,000 = 53%).

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 ______.

564,000 / 0.62 = $909,677.

If a company has a variable expense ratio of 35%, its CM ratio must be ____%.

65%.

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 ($11+($4,500/500).

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 ______.

$244,068 Breakeven Point in Sales Dollars = $144,000 / 0.59.

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be $_____.

$30 (100 - 70 = 30).

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is ______.

$301,100 Profit = CM ratio X Sales - Fixed Expenses = 67% X $1,430,000 - $657,000 = $301,100

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.

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

$0.35.

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a ______.

$10,000 net operating loss.

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be ______.

$100 (100,000 - 80,000 / 200 = 100).

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 Blank______. Multiple choice question.

$2,200,000 Sales = ($564,000 + $800,000)/0.62 = $2,200,000.

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $_____.

$26,980.

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ______.

1. The contribution margin per putter is $65 2. The sale of 12,000 putters results in net operating income of $380,000(12,000 units x $65 contribution margin = $780,000 - $400,000 = $380,000.

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 ______.

21,645 Sales volume= (470,000+222,640)/32.

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

34% [(1,452,000-958,320)/1452000].

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 blankets ($520,000 + $320,000) / $21 = 40,000 blankets.

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% 85.05 / 189 = 45%

CVP analysis is based on some that may be violated in practice, but the tool is still generally useful.

Assumptions.

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 ______.

Net Operating Income = (750 - 450) x $120 = $36,000.

Contribution margin:

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.

To calculate profit, multiply the Blank______ per unit by sales volume and subtract total fixed cost.

Contribution margin.

Simple CVP analysis can be relied on for changes in volume outside the relevant range.

False.

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False.

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total ______. Multiple choice question.

Profit or loss.

A simpler form of the CVP graph is called the _____ graph.

Profit.

A company is currently selling 10,000 units 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 ______.

The company should accept the idea because profit will increase by $24,000.

The profit graph allows users to easily identify ______.

The sales volume required to reach the break-even point and the profit at any given sales volume.

CVP analysis focuses on how profits are affected by ______.

Unit variable cost, total fixed costs, sales volume, selling price, and mix of products sold.

Candle Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units ______.

a. total variable cost is $1,200 b. the variable cost per unit is $2.40.

When making a decision using incremental analysis consider the ______.

b. change in cost resulting specifically from the decision. d. change in sales dollars resulting specifically from the decision.

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.

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

total 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 ______ approach. Multiple choice question.

Contribution margin.

Which of the following items are found above the contribution margin on a contribution margin format income statement?

Sales and Variable expenses.

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

Selling price, product mix, and volume.

To simplify CVP calculations, it is assumed that ______ will remain constant.

Selling price.

The single point where the total revenue line crosses the total expense line on the CVP graph indicates ______.

The break-even point and profit equals zero.

Ceramic Creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If Ceramic Creations sells 25,000 pots, net operating income will be:

$130,000 (25,000-15,000) x ($25-$12).

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 units (305,000/40 = 7625).

The contribution margin equals sales minus all ______ expenses.

Variable.

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit.

At the break-even point ______.

total revenue equals total cost and net operating income is zero.

The contribution margin statement is ordinarily used by those ______.

inside the company only.

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is ______.

$168,000.

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $_____.

$40,000 (500,000 x 68% - 300,000 = 40,000.

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

CM ratio x Change in sales - Change in fixed expenses.

A company has reached its break-even point when the contribution margin ____ fixed expenses.

Equals.

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

Sales.

When preparing a CVP graph, the horizontal axis represents:

Unit volume.

CM ratio is equal to 1 -___ ___ ratio.

variable expense

To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to $_____.

zero.

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.

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by ______.

$174,000.

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 ______.

$180,000Contribution margin = 20,000 x ($20-$11) = $180,000

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 ______.

$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 98,000/(50-15) = 2,800.

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______.

$3,800 (95 x 40 = 3800)

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 The current contribution margin is $39 per unit ($80-$41) or 19500(500x39)total. The new contribution margin would be $35 per unit (39-4)or 19950(570x35) an increase of $450.

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 per monthcurrent net operating income=(100x250)-5750=19250. with the change salary becomes a variable cost and net operating income would be : (100-30)x250x150%=26250 an increase of 7000 per month.

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% Variable expense ratio = $245,050/$845,000 = 29%

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=90000 x 7.50.

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.

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 by $3000.

Which of the following are assumptions of cost-volume-profit analysis?

In multi product companies, the sales mix is constant. Costs are linear and can be accurately divided into variable and fixed elements.

Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,000. If Tommy sells an additional 5,000 trains, profits will ______.

Increase $120,000.

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ______.

Increase by $7,750 (Change in NOI = 735,000 - 700,000 x 45% - 8,000 = 7,750.)

The contribution margin statement is primarily used for ______.

Internal decision making.

If the total contribution margin is less than the total fixed expenses, a Blank______ occurs.

Net loss.

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.

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

Ratio.

Profit = (selling price per unit × quantity sold) - (______ expense per unit × quantity sold) - ______ expenses.

Variable and Fixed.

Variable expenses ÷ Sales is the calculation for the ____ _____ ratio.

Variable expense 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 Reason:A special order bulk sale will not increase fixed costs and therefore they should not be considered in setting a price. Variable costs are what will be incurred to complete the order.