Exam 2 MGMT 201 Chapter 5

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

The break-even point can be affected by what

contribution margin per unit, sales mix, and total fixed costs

The degree of operating leverage ______. (three characteristics)

1. is not constant 2. decreases as sales and profits rise 3. is greatest at sales levels near the break-even point

CM Ratio

Contribution Margin / Sales

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit _______________ ________________

Contribution margin

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. Why?

Contribution margin because it is organized by cost behavior

Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ratio of 72%, Chrissy's profit (loss) is ______.

Profit = CM ratio × Sales - Fixed expenses 72% × $832,000 - $265,000 = $334,040.

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

sales mix

The break-even point calculation is affected by what three things

sales mix, costs per unit, selling price per unit

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 For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100

The contribution margin is equal to sales minus ______.

variable expenses

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

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

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

$675,000

Profit equals ______

(P × Q) - (V × Q) - fixed expenses

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?

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

For CVP, managers adopt the following assumptions with respect to these factors:

1. Selling price is constant. The price of a product or service will not change as sales volume changes 2. Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. In multiproduct companies, the mix of products sold remains constant

CVP analysis focuses on how profits are affected by ______.

1. selling price 2. total fixed costs 3. sales volume 4. mix of products sold 5. unit variable cost

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

100 - 70 = 30

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______. A. net operating income will increase by $0.70 B. total contribution margin will increase by $0.30 C. net operating income will increase by $0.30 D. total contribution margin will increase by $0.70

A and D

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 increase the selling price to $45 per unit. If this change is implemented, profits will ______.

An increase in selling price of $5 will increase the contribution margin $5 (from $27 to $32). The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000

To calculate the degree of operating leverage, divide _____________ ____________ by net operating income

Contribution Margin

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 ______.

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

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

True or false: Cost structure refers to the relative portion of product and period costs in an organization.

False

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

False

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

False. The CVP model must be adjusted for activity levels outside the relevant range.

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

Net losses

Which of the following is needed to calculate profit?

Unit contribution margin, unit sales, and total fixed costs

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

dollars

The contribution margin equals sales minus ______.

all variable costs

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

assumption

Contribution margin ______.

becomes profit after fixed expenses are covered

Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to ______.

break-even

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

break-even sales dollars

Margin of safety in dollars is ______

budgeted (or actual) sales minus break-even sales

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

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

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

True or false: When a company sells multiple products, an increase in total sales always results in an increase in total profits.

false

contribution margin is first used to cover _________ expenses. Once the break-even point has been reached, contribution margin becomes _________

fixed; profit

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

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 Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month

The contribution margin statement is primarily used for ______.

internal decision making

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

leverage

The amount by which sales can drop before losses are incurred is the

margin of safety

The margin of safety percentage is:

margin of safety in dollars ÷ total budgeted (or actual) sales in dollars

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

net operating income

A simpler form of the CVP graph is called the _____________ graph

profit

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

profit or loss

When preparing a CVP graph, the horizontal axis represents ______.

sales volume

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

the break-even point

Cost structure

the relative portion of fixed and variable costs in an organization.

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

total fixed expenses

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

When a company only produces a single product, the total variable cost can be calculated with the equation ______.

variable cost per unit multiplied by quantity of units sold

CM ratio is equal to 1 - __________ __________ ratio

variable expense

Variable expenses ÷ Sales is the calculation for the _________ _________ ratio

variable expense

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is ___________

$168,000

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 ______.

$2.43 ÷ $9.00 = 27%

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

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 ______.

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

Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by year-end, net operating income will increase by ______.

$250,000 x 55% = $137,500

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

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ______.

$272,000 ÷ (100,000 × $17) = 16%

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 ______.

$42,750

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, what is the total variable cost and the variable cost per unit?

-Variable cost per unit 1,440/600 = $2.40 -Total variable cost is $2.40 x 500 = $1,200

A change in sales mix ______.

-from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales -from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales

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

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is

19%

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 ______.

300 × ($20 - $7) - $1,700 = $2,200

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

34%

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

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

5% × 4 = 20%

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 $________

5,000

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

90

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

65%

Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is

780

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 ______ A. lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit B. the sale of 12,000 putters results in net operating income of $380,000 C. the contribution margin per putter is $65 D. Pete's Putters is unable to make a profit

B, C

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 50%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will ______.

Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 150% = $18,000, an increase of $7,000 per month

True or false: Operating leverage is the smallest at sales levels near the break-even point and increases as sales and profits rise.

False. The opposite is true

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

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

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ______.

Reached the break-even point because CM equals fixed costs

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

Sales Mix

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is ______

Sales volume = ($520,000 + $320,000) ÷ $21 = 40,000 blankets

CVP is the acronym for

cost volume profit

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 the advertising along with the price reduction 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 $16,000

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?

$98,000 ÷ ($50 - $15) = 2,800

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be ______

($240,400 + $930,000) ÷ 0.77= $1,520,000

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 ______.

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

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 ______.

(750 - 450) × $120 = $36,000

Net operating income equals ______.

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

A company with a high ratio of fixed costs ______.

-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

The profit graph allows users to easily identify ______.

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

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

0

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

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 net income would be a ______.

$450

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 ______.

Change in profits = 5,000 × ($50 - $26) = $120,000

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

Selling price

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

cost, selling price, volume

When making a decision using incremental analysis consider the ______.

costs and revenues that will change if the new program is implemented

True or false: 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