Accounting for Planning and Control Chapter 7
Assuming no change in sales volume, an increase in company's per-unit contribution margin would:
increase income.
As the result of changes in sales revenue, a company with a high operating leverage factor will have a
large change in net income
The area between the total revenue and total cost lines but below their intersection is called the
loss area
A firm with a relatively high operating level will have a relatively ______ safety margin.
low
When the break-even point is calculated for a company with multiple products, the break-even is valid
only if the quantity of each product sold is proportionate to the sales mix used in calculating the contribution margin
The extent to which an organization uses fixed costs in its cost structure is measured by:
operating leverage.
On the CVP graph, the fixed-expense line is
parallel to the horizontal axis
The area between the total revenue and total cost lines but above their intersection is called the
profit area
The break-even point can
provide management information related to profitability and capacity
Difference between budgeted sales revenue and break-even sales revenue.
safety margin
Operating leverage predicts the effects fixed costs have on changes in operating income when:
sales volume changes.
A technique for determining what would happen in a decision analysis if a key prediction or assumption proves to be wrong.
sensitivity analysis
A change in selling price can affect
- total sales revenue - sales volume
CVP analysis can be used to study the effect of:
-changes in selling prices on a company's profitability. -changes in variable costs on a company's profitability. -changes in fixed costs on a company's profitability. -changes in product sales mix on a company's profitability.
Cost structure
-has a significant effect of the sensitivity of profits to changes in volume -is the relative proportion of fixed and variable costs
The trade-off of a high operating leverage is the risk of having
-large committed fixed costs -high break-even points
A company with a low operating leverage will have
-low break-even point -low fixed costs -high safety margin
When companies are subject to income tax, the CVP target profit calculation
-must include the effect of income taxes -requires a second calculation to determine how much -more before-tax income is needed to meet the target profit
The safety margin
-provides information about how close operations are to the break-even point -tells management how much sales revenue can be lost before the company moves from a net income to a net loss -is the difference between budgeted sales revenue and break-even sales revenue
Operating leverage formula
Contribution Margin / Net Income
Multiple cost drivers are recognized when using _____ CVP analysis.
activity-based costing
To calculate the sales dollars or units needed to achieve a target profit, the break-even contribution margin formulas can be modified by
adding the target profit to fixed expenses
The weighted-average unit contribution margin is
an average of the contribution margin per unit times the relative sales proportion
A company has no profit or loss at the
break-even point
A study of the relationships between sales volume, expenses, revenue, and profit.
cost-volume-profit (CVP) analysis
A graphical expression of the relationships between sales volume, expenses, revenue, and profit.
cost-volume-profit (CVP) graph
Break-even volume of service revenue =
fixed expenses ÷ contribution margin ratio
If a charitable organization with revenues of $250,000, fixed expenses of $125,000, and a unit contribution margin of $12 receives donations of $9,500, the organization's new break-even point in units is ______.
fixed expenses-donations/unit contribution margin 125,000-9,500/12= 9625
When highly automated material-handling and production equipment is used to make a variety of similar products, a(n)
flexible manufacturing system is in use
Sales minus cost of goods sold equals
gross margin
Average of a firm's several products' unit contribution margins, weighted by the relative sales proportion of each product.
weighted-average unit contribution margin
The break-even point is the level of sales needed to earn a target profit of
zero
To use the profit equation to find the break-even point, profit must be set to equal
zero
The required before-tax income needed to achieve an after-tax profit of $28,000 when the tax rate is 30% is
$28,000/(1 − 30%) = $40,000.
After-tax net income is
-calculated as: (before-tax income) − tax rate (before-tax income) -the amount of income remaining after subtracting the firm's income tax expense -calculated as: (before-tax income) × (1 − tax rate)
Operating managers frequently prefer the contribution income statement because it
-separates fixed and variable expenses -highlights CVP relationships
When applying ABC to a CVP analysis,
-some costs considered fixed under traditional costing will be considered variable under ABC -multiple cost drivers are recognized
For cost-volume-profit analysis to be valid, within the relevant range,
-the sales mix remains constant -total fixed expenses will remain constant -the price of the product will not change as sales volume changes -the number of units produced and sold is equal
The assumption that the behavior of total expenses is a straight-line over the relevant range implies that
-total fixed cost remains constant -the variable cost per unit remains unchanged -the number of units produced equals the number of units sold -total revenue is a straight-line
If the operating leverage for Company A is 6 and sales increase by 3%, there is a _________% change in net income.
6x3%=18%
Given the following information, calculate the break-even point in sales dollars. Total Per unit % Sales $4.00 Variable costs $3.00 Contribution margin $1.00 Fixed costs 72,000
72000/1.00=72000x4.00=288000
Food Mart produces gourmet cookies, which sell for $16 a basket. Variable costs per basket are $6 and fixed costs are $5,000 per month. If Food Mart expects to sell 1,500 baskets of cookies, what is the margin of safety in number of baskets?
Cont. Margin per unit = $16 − $6 = $10 cont. margin per unit; ($5,000 + $0) ÷ $10 = 500 units required sales in units; Expected sales − Breakeven sales = 1,500 − 500 = 1,000 margin of safety.
Flower Depot, Inc. sells a single product for $10. Variable costs are $3 per unit and fixed costs total $80,000 at a volume level of 7,200 units. What dollar sales level would Flower Depot have to achieve to earn a target profit of $235,000?
Contribution margin Percentage = ($10 − $3)/ $10 = 70%; (Total Fixed cost + Target profit) ÷ Contribution Margin percentage = Total Sales; ($80,000 + $235,000) ÷ 70% = $450,000.
At a volume of 35,000 units, Almount Industries reported sales revenues of $1,925,000, variable costs of $350,000, and fixed costs of $261,000. The company's contribution margin per unit is:
Contribution margin per unit = (Total Sales − Total variable costs) ÷ Number of units; ($1,925,000 − $350,000) ÷ 35,000 = $45 per unit.
Target before tax income =
Target after tax net income ÷ (1 − tax rate)
Necessary first step in any cost-volume-profit (CVP) analysis
analyzing organizations cost behavior, fixed or variable
The intersection of the total cost line and total revenue line in a CVP graph is the
break-even point
The volume of activity at which an organization's revenues and expenses are equal. May be measured either in units or in sales dollars.
break-even point
Break-even point in units × selling price per unit is the calculation for
break-even sales
As the operating leverage factor increases,
break-even sales revenue will increase and margin of safety will decrease
The break-even point in sales dollars may be calculated as
break-even units × sales price per unit
Cost-volume-profit analysis can be extended to determine the effect on profit of other changes, such as
changes in income tax rates
An income statement on which fixed and variable expenses are separated.
contribution income statement
Sales revenue minus variable expenses is called
contribution margin
The unit contribution margin divided by the sales price per unit. Also may be expressed in percentage form; then it is called the contribution-margin percentage.
contribution-margin ratio
The relative proportions of an organization's fixed and variable costs.
cost structure
If fixed expenses decrease with no other change, the break-even point will
decrease
If the selling prices increase with no other change, the break-even point will
decrease
Operating leverage is greatest in firms with
high proportion of fixed costs and low proportion of variable costs
When compared to companies with low operating leverage, companies with a higher operating leverage will have
higher fixed costs and higher break-even sales revenue
Advanced manufacturing systems are more fixed cost intensive, resulting in
higher operating leverage, higher break-even point and lower safety margin
If fixed expenses increase with no other change, the break-even point will
increase
If the selling prices decrease with no other change, the break-even point will
increase
If variable cost increase with no other change, the break-even point will
increase
Operating leverage for managerial accountants refers to an organization's ability to
increase net income with changes in sales
An analysis that focuses only on the different in the total contribution margin between two alternatives is called the
incremental approach
The effect of an increase in sales revenue for a company with a cost structure largely dependent upon variable expenses will have a
low contribution margin rate and therefore a low percentage increase in net income
When nonprofit organizations receive donations, it is equivalent to a(n)
reduction in fixed expenses
When firms introduce advanced manufacturing systems,
the break-even point tends to increase and the number of sales units required to earn a target profit tends to decrease
In a traditional CVP graph, the total revenue line intercepts the vertical axis at
the origin
Sales mix is
the relative proportion of each type of product sold
The difference between total sales revenue and total variable expenses is
total contribution margin
Total sales revenue less total variable expenses.
total contribution margin
In a traditional CVP graph, the total cost line intercepts the vertical axis at
total fixed expenses
A statement that shows the gross margin for a company is an example of a(n)
traditional income statement
Sales price minus the unit variable cost.
unit contribution margin
Fixed expenses divided by unit contribution margin is the formula for break-even in
units
intercepts at the amount equal to fixed expenses at the zero activity level
vertical axis
