ACCT 2101 Chapter 6

A company's current budget shows the following: budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's margin of safety in dollars is

$49,800 Margin of safety: $982,000 - $932,200 = $49,800

Desks by Daisy sells a very popular student dest for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell __ desks per month in order to break-even.

250

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

False

True or False: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.

False

The profit equation method uses which of the following equations?

Total sales revenue - Total variable costs - Total fixed costs = Profit

If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ration will:

both increase

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

Which of the following is NOT a method used for basic CVP analysis:

break-even analysis

Unit __ __ is the amount each unit sold contributes towards fixed costs and profit.

contribution margin

The weighted average __ ___ ___ is based on the relative percentage of total sales revenue in dollars, not units.

contribution margin ratio

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

profit equals zero; the break-even point

__ __ analysis is an extension of break-even analysis that allows managers to determine units or sales needed to achieve an earning's goal.

target profit

The weighted average unit contribution margin is:

the average unit contribution margin of multiple products weighted according to units sold.

The weighted-average contribution margin ratio is calculated using:

the total sales mix

To prepare a CVP graph, lines must be drawn representing:

total revenue and total cost

In the profit equation, total ___ is a function of the number of units sold (Q).

variable costs; sales revenue; unit price

The term cost structure refers to how a company uses __ costs versus __ costs in its operations.

variable; fixed

Sniffles, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $2,404,000. To achieve a target profit of $9,300,000, Sniffles' sales must be:

$15,200,000 Sales = ($2,404,000 + $9,300,000)/0.77 = $15,200,000

Sweet Dreams sells 15,000 pillows per year for $25 per unit. Each pillow currently incurs a variable cost per unit of $14. Sweet dreams has developed a plan to improve customer satisfaction by using higher quality direct materials. The change in materials will increase the variable cost per unit to $19. Fixed costs per year total $90,000. If sales increase by 5,000 units per year, what price will Sweet Dreams have to charge to earn the same profit it is earning now ($75,000 per year)?

$27.25 Costs + Target Profit: ($19 x 20,000 + $90,000 + $75,000) = $545,000 / 20,000 = $27.25

Given total fixed costs of $35,000 and a contribution margin ration of 40%, $____ must be sold in order to break-even

$35,000/40%= $87,500

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

Margin; safety

A firm that has a net operating income of $50,000, a contribution margin of $150,000 and sales of $300,000 has a degree of operating leverage of __.

3 $150,000/$50,000 = 3

A company sells its product for $40 per unit. Variable costs are $12 per unit. Total fixed costs are $50,000. In order to reach their profit goal of $90,000 the company must sell ___ units of the product.

5000

A company has fixed costs of $25,000 and a weighted average unit contribution margin of $25. Of the sales, 65% are Product XYZ and 35% are Product TDW. In order to breakeven the company must sell __ units of Product XYZ and __ units of Product TDW.

650; 350

In order to reach a target profit of $180,000, 90,000 units need to be sold. Assuming each unit sells for $7,50, the total sales dollars needed to reach the target profit is $___.

675,000

Given total fixed costs of $35,000 and a contribution margin ratio of 40% $__ must be sold in order to break even.

87,500 $35,000/0.40=87500

Which of the following are assumptions of cost volume profit analysis?

All costs can be classified as either fixed or variable; in multi product companies, the sales mix is constant; production volume is equal to sales volume.

CVP:

Can be used to make many different decisions; allows managers to see how changing one variable can impact another; can be used for "what-if" analysis.

The ___ ____ ____ tells how much contribution margin is generated per dollar of sales revenue.

Contribution margin ratio

Which of the following is the equation used to calculate the degree of operating leverage?

Degree of operating leverage = contribution margin / net operating income

Multi-product target profit analysis:

Depends upon the sales mix; is calculated the same way as single product analysis

CVP analysis is useful for companies with the need to answer which of the following questions?

How can we increase net income?

Lilly's Lilacs sells two different potted plants - A and B. The weighted average per unit contribution margin is $30 and Lily's fixed costs are $24,000. The sales mix is 60% - A and 40% - B. Which of the following statements are true?

If Lily sells 480 units of both A and B she will have a net profit. Lily must sell a total of 800 plants to break even.

Tasty Tangerine is currently selling 50,000 boxes of tangerines for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to increase the visual appeal of its packaging and reduce the selling price. The design change would result in a $60,000 increase to fixed costs. management believes the design change along with the $2 reduction in the selling price per box would increase sales volume by 24,000 boxes. Which of the following is true?

Net operating income would decrease by $16,000. If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes x $6)- (50,000 boxes x $8)). Additional contribution margin of $44,000 - $60,000 in new fixed costs = a net operating income decrease of $16,000.

According to the assumptions of CVP, which of the following will not change as the volume of a product increases or decreases?

Price

The break-even point can be affected by which of the following

Product mix; sales mix; total fixed costs

When preparing the break-even analysis for a company that produces and sells multiple products, the assumption is ordinarily made that which of the following will not change?

Sales mix

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

The formula used to calculate the sales volume needed to achieve a target profile is:

Unit sales to attain a target profit = (Target profit + Fixed expenses)/ Unit contribution margin

Which of the following must be subtracted from sales to reach the contribution margin?

Variable manufacturing costs; variable selling and administrative costs

At the break-even point:

all expenses have been covered by revenue; net operating income is zero

The weighted average unit contribution margin:

assumes that the percentage of each product sold is constant; is used instead of the single product contribution margin in multi-product breakeven analysis; is based on the relative percentage of each unit sold.

When constructing a CVP graph, the vertical (y) axis represents __.

dollars

Setting two profit equations so that they yield the same profit allows managers to calculate the __ __.

indifference point

If operating leverage is high, a small percentage increase in sales can produce a much ___ larger percentage increase in net operating income.

larger

The margin of safety in percentage form is:

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

Decisions about whether to use fixed or variable costs to run a business affects a company's __ leverage.

operating