Mana. Accounting Ch. 4

The break even point changes when the company a. increases fixed costs b. increases production c. decreases sales d. increases sales

A. The break even formula is: Fixed costs / CM per unit. Sales or production will not impact break-even, so the answer is not b. c. or d. When fixed costs change it requires more/less units sold to cover the fixed costs.

The break even point in sales dollars can be calculated using: a. sales revenue as a percentage of income b. contribution margin as a percentage of income c. contribution margin as a percentage of sales d. fixed costs as a percentage of sales

C. Break even in sales dollars is calculated as Fixed Costs / CM % and the CM % is calculated as CM / Sales, therefore it is a percentage of sales

As the contribution margin percentage increases, the sales dollars required to break even will a. decrease b. increase c, remain the same d. can't tell unless you know what the contribution margin is currently

A. The contributon margin percentage is the percentage of every sales dollar that is available to cover fixed costs and when fixed costs are covered is profit. As the percentage increases, less sales will give the same amount of profit.

Management changed the salesperson's compensation from a fixed salary to only sales commission based on sales dollars. If the company is more profitable, the a. break even point will increase b. break even point will decrease c. operating leverage will decrease d. contribution margin will decrease

B. A decreasing break even point means that less sales must occur to be profitable and therefore, there is more profit for every unit sold. Operating leverage should increase for this to increase the profits of the company. Contribution margin per unit will increase because variable costs are decreasing.

If the sales volume increases and nothing else changes a. contribution margin per unit will increase b. margin of safety will increase in units c. break even will increase in units d. operating income will decrease

B. Margin of safety is current sales - breakeven sales and as current sales increases, margin of safety increases also. Since sales and variable costs do not change, the contribution margin per unit does not change and the break even amount does not change either. Operating income will increase as sales increase.

A management team that prefers to have a low operating leverage means that the company most likely a. expects a strong increase in sales volume b. expects a decrease in sales volume c. is very unprofitable d. has very high fixed costs

B. The operating leverage indicates how much profits will change as sales change. A company will want to have a low operating leverage when sales are decreasing, because the decrease will lower profits by a lower amount than a high operating leverage. Contribution margin is what most affects the operating leverage, not fixed costs. Operating leverage is not a direct indicator of whether the firm is profitable.

When variable costs decrease and all other factors do not change a. the number of units necessary to be profitable increases b. the number of units necessary to be profitable decreases c. the number of units necessary to be profitable does not change d. none of the above

B. When variable costs decrease the contribution margin per unit will increase. When you have a higher contribution margin you will need fewer units to be profitable.

A company has one product with a break even point of 50,000 units. Fixed costs are $200,000 and the product sells for $10 each. What is the contribution margin ratio? a. 10 % b. 20% c. 40% d. 50%

C. At break even fixed cost = contribution margin, so if fixed costs are $200,000, then contribution margin is $200,000 also and for 50,000 units that gives a CM per unit of $4. CM per unit / Sales per unit is the CM ratio. $4 / $10 = 40%

Operating leverage is related to a. sales and variable costs only b. sales and fixed costs only c. sales and fixed costs and variable costs d. variable costs and contribution margin dollars

C. Operating leverage works because fixed costs remain constant and as the contribution margin ratio remains constant and sales increase, the company will earn more profits. The formula is CM / Income and income includes all costs.

A company has variable costs of 60% of sales and wants to increase advertising expenses by $50,000. If sales increase by $100,000, how much will operating income change? a. $10,000 increase b. $ 90,000 decrease c. $ 10,000 decrease d. $ 40,000 decrease

C. The CM ratio is calculated by taking Sales - VC, if variable costs are 60%, then the CM ratio is 40%. The CM ratio tells you how much of every additional sales dollar is available to cover fixed costs. For $100,000 increase in sales, there is $40,000 additional contribution margin. The increase in fixed cost of $50,000 is more than the CM that the company will earn from additional sales, and operating income will decrease by $10,000.

To maximize profits the company should pay a high sales commission on a. products with a high variable cost b. products associated with a low fixed cost c. products with high contribution margin ratios d. products with the highest prices

C. The company should encourage the sales force to sell the products that bring the highest amount of profit for every sales dollar sold, which is the highest contribution margin ratio. High variable costs and high prices do not neccessary bring high profit. Products associated with low fixed cost take less sales in units to cover the fixed cost.

If fixed costs increase while the sales price and variable costs do not change, the contribution margin will a. increase b. decrease c. remain constant d. change in direct proportion to the increase in fixed costs

C. The contribution margins is sales less variable costs. If these do not change then contribution margin will not change also. Contribution margin is not impacted by fixed cost changes.

Two companies have a break even point of 2,000 units. One company has lower fixed costs and higher variable costs than the other company. How will a 10% increase in units sold affect the two companies? a. the two companies profits will increase by the same percentage b. the company with the higher variable cost will be more profitable c. the company with the higher variable cost will be less profitable d. can't determine without additional information

C. The higher variable cost will give a lower contribution margin ratio and lower contribution dollars from the same increase in sales. Less contribution margin dollars will lead to lower profits.

What must you consider when doing cost volume profit analysis when the company has four different products with four different contribution margin ratios? a. the per unit contribution margin of each product only b. that fixed costs will change as the mix changes within the relevant range c. that the sales mix will impact profitability d. that as sales increase the variable costs will decrease

C. The sales mix will impact profits when the company has different products with different contribution margin ratios. You can not only consider the profits individually when doing an analysis for the entire company. As sales increase, variable costs will increase, not decrease.

A company could never incur a loss that is greater than a. total sales b. total fixed costs c. total costs d. total contribution margin

C. Use the formula: Sales - VC = CM - FC = Income/Loss. If sales are 0 than the loss will not be greater than its total costs, FC + VC. Sales of 0 are the lowest sales can go, so the company can't incur more loss than its total costs.

When a company's profits do not change as volume changes, it has a. no fixed costs b. no variable costs c. a sales price equal to variable costs d. fixed costs equal to variable costs

C. Use the formula: Sales - VC = CM - FC = Profit. When the sales price equals variable costs than there will be no contribution margin. This will hold true as volume changes. Fixed costs do not change with volume changes, therefore profit will not change either. The contribution margin being 0 is the key.

When calculating break even, which of the following is true? a. sales mix remains the same b. variable costs do not change per unit c. fixed costs change per unit d. all of the above

D. All of the above are assumptions that must hold true when calculating break even.

Which of the following is not a major assumption that is used in cost volume profit analysis? a. all costs are categorized as fixed or variable b. total contribution margin will change as volume changes c. variable costs are constant per unit d. fixed costs are constant per unit

D. Fixed costs are constant in total and do change per unit. All other answers are assumptions that must hold true for cost volume profit analysis be useful.

Once the volume of sales is higher than the break even point a. the contribution margin ratio increases b. the contribution margin per unit increases c. total fixed cost per unit will not change d. total contribution margin will be higher than fixed costs

D. Use the formula: Sales - VC = CM - FC = Profit. When sales go higher than break-even the profit becomes positive and the contribution margin will be higher than fixed costs since the fixed costs do not increase with volume increases. The contribution margin per unit and ratio do not change with volume because the cost per unit remains the same

Contribution margin is calculated as a. one less the variable cost as a percentage of sales b. sales per unit less variable costs per unit c. sales less fixed costs less income d. all of the above

D. You can calculate the contribution margin in all of the following ways because Sales - VC = CM - FC = Income