Ch 5 SmartBook

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a ______.

$10,000 net operating lost contribution margin of $40,000 - fixed expenses of $50,000 = a $10,000 loss

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 ______.

$100,170 / $189,000 = 0.53 = 53%

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is

19%

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 A or Company B)

Company B

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

Contribution margin ratio = ($1,452,000 - $958,320) ÷ $1,452,000 = 34%

Which of the following statements is correct? - The higher the margin of safety, the higher the risk of incurring a loss - The higher the margin of safety, the lower the risk of incurring a loss. - The risk of loss is not impacted by the margin of safety.

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

CVP is the acronym for _____ - _____ - _____ .

Cost-volume-profit

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 or $100.

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

contribution margin

To calculate profit, multiply the ______ per unit by sales volume and subtract total fixed cost.

contribution margin

To calculate the degree of operating leverage, divide __________ __________ by net operating income.

contribution margin

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit ________ ________ .

contribution margin

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ______ approach.

contribution margin

Contribution margin ratio is equal to __________ __________ divided by __________ .

contribution margin divided by sales

To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the ______.

contribution margin per unit

The calculation of contribution margin (CM) ratio is ______.

contribution margin ÷ sales

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

decrease

Estimating the fixed and variable components of a mixed cost using the __________ approach involves a detailed analysis of what cost behavior should be.

engineering

True or false: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

false

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

false

True or false: Operating leverage is the smallest at sales levels near the break-even point and increases as sales and profits rise.

false

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

false

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

false

True or false: When a company sells multiple products, an increase in total sales always results in an increase in total profits.

false

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

false Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages

In a least-squares regression line, the vertical intercept (a) of the line represents the total __________ cost.

fixed

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

In a least-squares regression equation, a represents the __________ and and b represents the _________ .

intercept, slope

The contribution margin statement is primarily used for ______.

internal decision making

The statistic R² ______.

is a measure of goodness of fit

The best fitting line minimizes the sum of the squared errors when using ______.

least-square regression

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called ______.

least-squares regression

To determine the slope, intercept and R² using Excel, select the Trend/Regression type ______.

linear

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals __________ __________ behavior.

linear cost

The margin of safety percentage is:

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

If the total contribution margin is less than the total fixed expenses, a ______ occurs.

net loss

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

net operating income

A simpler form of the CVP graph is called the __________ graph.

profit

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total ______.

profit or loss

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total ______.

sales

The variable expense ratio is the ratio of variable expense to ______.

sales

The relative proportions in which a company's products are sold is referred to as __________ __________ .

sales mix

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.

sales mix

The break-even point calculation is affected by ______.

sales mix, costs per unit, selling price per unit, total fixed costs, contribution margin per unit

To convert the margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the ______.

sales price per unit

Variable expenses ÷ Sales is the calculation for the __________ __________ ratio.

variable cost

When using the high low method, the change in cost divided by the change in units equals ______.

variable cost per unit

The equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is: selling price per unit = ______.

variable cost per unit + desired profit per unit

When a company only produces a single product, the total variable cost can be calculated with the equation ______.

variable cost per unit multiplied by quantity of units sold

CM ratio is equal to 1 - __________ __________ ratio.

variable expense

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

variable, fixed

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

variable, fixed

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred. Month Meals Costs Jan 1,500 $5,200 Feb 1,700 $5,700 Mar 1,200 $4,100 Apr 1,100 $4,200 May 1,150 $4,250 Jun 1,650 $5,550 The cost equation using the high-low method is:

y= $1,450 + $2.50x The high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) are the high and low activity months.

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 or zero

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

$0.35

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

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

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 Contribution margin = 20,000 × ($20 - $11) = $180,000

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $ ___________ . (whole number answer)

$2,250

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 $98,000 ÷ ($50 - $15) = 2,800

A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be $ __________ . (round answer as whole number)

$20

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 ______.

$20-$7 = $13 300 mugs x $13 = $3,900 - $1,700 = $2,200 net operating income

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 Sales = $144,000 ÷ 0.59 = $244,068

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 $100-$70 = $30

Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ratio of 72%, Chrissy's profit (loss) is ______.

$334,040 Profit = CM ratio x Sales - Fixed Expenses = 72% x $832,00 - $265,000 = $334,040

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 [net operating income = 30,000 x (40-19) - 250,000]

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______.

$40 variable cost per unit x 95 necklaces = $3,800 total variable cost

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $ __________ .

$40,000 (500,000 x 68% - 300,000 = 40,000

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

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 ________ ?

$5,000 $10,000 x ($10-$6) = $40,000 $40,000 - $35,000 = $5,000 net operating income

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month, ______. *Find Profits, Total variable costs, AND Total Sales

$55-$10 = $45 Profits = 35 elephants x $45 = $1,575 - $700 = $875 Total variable costs = (35 × $10) = $350 Total sales = 35 × $55 = $1,925

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

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 = $909,677

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 ______.

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

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 ______.

$99,000 contribution margin of $184,000 - fixed expenses of $85,000 = $99,000 net operating income

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is $ __________ .

(9000 x 32) - 120,000 = 168,000

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. Which of the following statements are correct? (1) Baron's net income grows twice as fast as its sales. (2) Adams has a higher degree of operating leverage than Baron. (3) If sales fall, Baron will experience a greater decrease in income than Adams.

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

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

- Costs are linear and can be accurately divided into variable and fixed elements. - In multi product companies, the sales mix is constant.

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.

Which of the following statements are true? - When plotting a scattergraph, cost is the independent variable. - Scattergraphs are a way to diagnose cost behavior. - Scattergraphs should be used after high-low or regression analysis is performed. - Plotting data on a scattergraph is an important diagnostic step.

- Scattergraphs are a way to diagnose cost behavior. - Plotting data on a scattergraph is an important diagnostic step.

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

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

A change in sales mix ______.

- from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales - from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and increase the selling price to $45 per unit. If this change is implemented, profits will ______.

- increase by $24,000 An increase in selling price of $5 will increase the contribution margin $5 (from $27 to $32). The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will ______.

- increase by $7,000 Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 150% = $18,000, an increase of $7,000 per month

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 Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ______.

- increase by $7,750 Change in net operating income = ($735,000 - $700,000) × 45% - $8,000 = $7,750

The degree of operating leverage ______.

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

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.

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

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

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

- the break-even point - profit equals zero

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 ______.

- the contribution margin per putter is $65. - the sale of 12,000 putters results in net operating income of $380,000

The profit graph allows users to easily identify ______.

- the profit at any given sales volume - the sales volume required to reach the break-even point

At the break-even point ______.

- total revenue equals total cost - net operating income is zero

The high-low method ______.

- uses only two data points - is easy to apply - is based on periods where the activity tends to be unusual

The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit.

- volume - selling price - cost

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

0.5 x 4 = 0.2 5% x 4 = 20%

List in order the elements that appear on the contribution margin format income statement.

1. Sales 2. Variable Expenses 3. Contribution Margin 4. Fixed Expenses 5. Net Operating Income

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 ______.

21,645 Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans

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 ______.

25,000 - 15,000 = 10,000 pots $25-$12 = $13 10,000 x $13 = $130,000 net operating income

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

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 bottles ($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 Blissful Blankets need to sell in order to achieve its target profit is ______.

40,000 Sales volume = ($520,000 + $320,000) ÷ $21 = 40,000 blankets

Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is ______.

40,000 units and $400,000 $200,000 ÷ 5 = 40,000 units × $10 each = $400,000

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 _____ % .

45

If a company has a variable expense ratio of 35%, its CM ratio must be __________ % .

65

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

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 ______.

7,625 Break-even point = $305,000 ÷ $40 = 7,625

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 ______.

8,400 units ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units

Citrus Fruits sells oranges for $20 per crate. If the company's margin of safety is $180,000, the margin of safety in units is __________ crates.

9,000 crates

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

90% 15% x 6 = 0.15 x 6 = 0.9 = 90%

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

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

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

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

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 ______.

Net operating income change = $600,000 × 29% = $174,000

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is ______.

Profit = 200,000 × $4 - $632,000 = $168,000

The percentage of the variation in cost that is explained by activity is ______.

R²

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be ______.

Sales = ($240,400 + $930,000) ÷ 0.77= $1,520,000

Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals ______.

Total sales = $95 × 450 = $42,750

When using Excel, the intercept (a), slope (b) and R² is determined by selecting any data point in the scattergraph plot and selecting Add __________ .

Trendline

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 ______.

Variable expense ratio = $2.43 ÷ $9.00 or 27%

The contribution margin equals sales minus ______.

all variable costs

CVP analysis is based on some _____ that may be violated in practice, but the tool is still generally useful.

assumptions

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

Contribution margin ______.

becomes profit after fixed expenses are covered

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

Multiplying unit selling price times the number of units required to break-even is one way to calculate ______.

break-even sales dollars

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit

The variable cost per unit using the high-low method is calculated as ______.

change in cost ÷ change in units (activity)

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

change in sales dollars × contribution margin ratio

To prepare a scattergraph plot in Excel, highlight the data and select the "Scatter" subgroup from the __________ group within the Insert tab.

chart or charts

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, ______.

choose the periods with the highest and lowest levels of activity and their associated costs

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

The measure of how a percentage change in sales affects profits at any given level of sales is the ______.

degree of operating leverage

A company's current sales are $300,000 and fixed expenses total $225,000. 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 ______.

increase by $6,000 Change in net operating income = $70,000 × 30% - $15,000 = $6,000 increase

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using __________ analysis.

incremental

The contribution margin statement is ordinarily used by those ______.

inside the company only

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

selling price

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

selling price, costs, volume

The rise-over-run formula for the slope of a straight line is the basis of ______.

the high-low method

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

True or false: The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

true

True or false: When using the high-low method, fixed costs are calculated after variable costs are determined.

true

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 ______.

unit contribution margin = $90 -$35 = $55

When preparing a CVP graph, the horizontal axis represents ______.

unit volume (sales volume)