ACC Exam 3

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is __________.

49,800 982,000-932,200= 49,800

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= 0.53

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

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 $______

$0

The sales volume level at which profit equals zero is the _____

Break-even point

The contribution margin equals sales minus all _______ expenses

Variable

If operating leverage is low, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income

False

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

Selling price

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit $40. The BREAK-EVEN point in unit sales is ________.

7,625 305,000/40=7,625

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

8,400

Citrus Fruit sells orange for $20 per crate. If the company's margin of safety os $180,000, the margin of safety in units is _______ crates

9,000 180,000/20= 9,000

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

90

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total ______.

$1,800,000 (975,000+195,000) / 0.65

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

The degree of operating leverage =

Contribution margin / Net operating income

The calculation of contribution margin (CM)

Contribution margin / Sales

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 increase advertising and reduce the selling price. The advertising would increase fixed costs by $60,000. Management believes the advertising along with a $2 reduction in the selling price per box 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

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000 and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will _______.

Decrease by $2,000

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

False

If two companies have the same total revenue and total expenses but different proportions of fixed and variable costs, then the company with the higher proportion of _______ costs will have higher operating leverage

Fixed

Simple CVP analysis is _______

Generally not valid outside the relevant range

Margin of safety in dollars is ________

Budgeted (or actual) sales minus break-even sales

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

Change in sales dollars x contribution margin ratio

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

Ratio

Anne's Antique Store sells an item with a contribution margin ratio of 29% and total fixed costs of $15,000. If the store generates an additional $60,000 of sales for the item this year, net operating income will increase by ________.

$17,400 60,000 x 0.29

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals:

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

ABC Inc. sells a product for $10 per unit. Variable costs are $4 per unit and fixed costs equal $40,000. If sales increase from 10,000 to 14,000 what will be the increase in overall profit?

$24,000 $6 CM per unit x 14,000= 84,000 84,000-40,000-20,000 (6x 10,000-40,000) =24,000

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:

$244,068 144,000/0.59

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 95 x 284= 26,980

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 increase

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 ______.

16% 100,000 x 17 = 1,700,000 272,000 / 1,700,000 = 0.16 = 16%

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 50-15=35 98,000/35=2,800

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

20% 5x4=20

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

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 currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) ___________ (increase/decrease) of $__________.

Decrease ; 3,000

Target profit analysis ______.

Estimates sales needed to earn a given profit Is similar to break-even analysis

A company's current sales are $300,000 and fixed total $85,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $7,000 and fixed expenses by $15,000. If these results occur, net operating income will __________.

Increase by $6,000 (70,000 x 0.3) - 15,000

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

The degree of operating leverage ______

Is not a constant Decreases as sales and profits rise Is greatest at sales levels near the break-even point

The margin of safety percentage is ____

Margin of safety in dollars / Total budgeted (or actual) sales in dollars

CM ratio= 1 _____ the variable expense ratio

Minus

The variable expense ratio is the ratio of variable expense to ________

Sales

The variable expense ration equals variable expenses divided by _____

Sales

To convert the margin of safety in dollars to the margin of safety in terms of units sold, divide the margin of safety in dollars by the ________

Sales price per unit

CVP analysis focuses on how profits are affected by _______

Sales volume, selling price, total fixed cost, unit variable cost, mix of products sold5

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 _______.

4,800 (4000+3200) / (15.00-13.50) =4,800

Operating leverage is a measure of how sensitive ________ is to a given percentage change in unit sales

Net operating income

Once all fixed expenses have been covered, the CM ratio defines the portion of each sales dollar contributing to ________

Profit

Costs are separated into variable and fixed categories when using the ________ approach

Contribution

To calculate the break-even point (in unit sales), managers can use the equation method or the _______ method

Formula

Estimating the sales volume required to earn a given amount of net income is known as _________ _________ analysis

Target profit

Which of the following statements is correct?

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

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 Sales= 30,000 x 40 = 1,200,000 Variable expenses= 30,000 x 19 = 570,000 (1,200,000-570,000) - 250,000 = 380,000

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 90,000 x 7.5

Seth's Speakers had actual sales of $1,630,000. If break-even sakes equals $935,000, Seth's margin of safety in dollars is _______.

$695,000 1,630,000-935,000=695,000

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:

$909,677 564,000 / 0.62

Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivians Violins net operating income is ________

$99,000 184,000-85,000

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 ______.

27% 2.43/9

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% 245,050/845,000

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 ________ for Baron, Inc.

3, 2 60,000/20,000=3 44,000/22,000=2

A company's current profit is $25,000 for a product that sells for $100 and has a unit CM of $65. Fixed costs are $40,000. If the company increases sales by 50 units, the total profit will increase by $_______

3,250 65x50

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

34% 958,320/1,452,000= 0.66 1-0.66= 0.34 = 34%

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 ________.

40,000 520,000 + 320,000 = 840,000 840,000 / 21 = 40,000

CVP analysis allows companies to easily identify the change in profit due to ________

Volume, selling price, product mix