Accounting #2 Midterm -- Midterm Study Guide

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decrease in the unit variable cost.

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

false

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

false

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

false

Total contribution margin equals ______.

fixed expenses plus net operating income

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

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

margin of safety

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

net operating income

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

product mix selling price volume

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

ratio

The contribution margin is equal to sales minus ______.

variable expenses

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

fixed, profit

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

fixed, variable

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

$.035

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$20 x 20,000 = 400,000$11 x 20,000 = 220,000400,000 - 220,000 = 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

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

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$40 x 30,000 = $1,200,000$19 x 30,000 = $570,000$1,200,000 - $570,000 = $380,000

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

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

85.05/189 = 45%

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?

Adams has a higher degree of operating leverage than Baron. Baron's net income grows twice as fast as its sales.

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

To calculate the degree of operating leverage, divide

Contribution Margin/Net Operating Income

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

False

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:

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

A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be ______.

Net operating income = (26,000 - 17,000) × $22 = $198,000.

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 A contribution margin equal to fixed costs

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

Reason: $100,170 ÷ $189,000 = 53%

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

Reason: $245,050 ÷ $845,000 or 29%

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

Reason: $250,000 × 55% = $137,500 increase

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

Reason: $600,000 × 29% = $174,000

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?

Reason: $98,000 ÷ ($50 - $15) = 2,800 to break-even. 6,400 units is needed to earn the target profit.

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:

Reason: Net income = (25,000 - 15,000) × ($25 - $12) = $130,000.

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

Reason: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

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 ______.

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

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.

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

Reason: The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.

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

Reason: Total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease.

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 ______.

Reason: 12,000 units × $65 contribution margin = $780,000 - $400,000 = $380,000. the contribution margin per putter is $65.

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 ______.

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

A company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 per month on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. The company should ______ the idea because profit will ______.

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

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 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.

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

Margin of Safety in Dollars is

budgeted (or actual) sales minus break-even sales

When making a decision using incremental analysis consider the

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

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

decrease

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

When constructing a CVP graph, the vertical axis represents:

dollars

The variable expense ratio is the ratio of variable expense to

sales

CVP analysis focuses on how profits are affected by:

sales volume selling price mix of products sold unit variable cost total fixed costs

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

selling price volume product mix

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

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

To prepare a CVP graph, lines must be drawn representing total revenue, ________

total expense, and total fixed expense

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

total fixed expenses.

When preparing a CVP graph, the horizontal axis represents:

unit volume.

Variable expenses ÷ Sales is the calculation for the___________ ratio

vairable expense

The contribution margin equals sales minus all Blank______ expenses.

variable

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) * 10,000 - $35,000 = $5,000.

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

Reason: $982,000 - $932,200 = $49,800.

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

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

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

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

Reason: ($564,000 + $800,000) ÷ 0.62 = $2,200,000

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

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

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

Reason: ($975,000 + $195,000) ÷ 0.65 = $1,800,000

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.

After reaching the break-even point, a company's net operating income will increase by the _____________ per unit for each additional unit

contribution margin

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

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

leverage

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

variable, fixed