Chapter 6 - Accounting 2

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

Contribution margin.

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.

The margin of safety percentage is ______.

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

The break-even point can be affected by ______.

sales mix, total fixed costs, and contribution margin per unit

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.

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 ______.

$1630000- $935000= $695000.

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.

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.

True or false: Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

True.

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.

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.

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?

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

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 ______.

$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 ______.

$42,750.

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

20% 5% x 4 = 20%

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

The amount by which sales can drop before losses are incurred is the ____ of _____.

Margin of Safety.

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

Net operating income.

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

fixed and variable.

A change in sales mix ______.

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

Which of the following statements is correct?

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

The degree of operating leverage ______. Select all that apply.

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

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% Margin of safety = $272,000/(100,000 × $17) = 16%

Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is ______.

780 units $27,300/$35= 780 units.

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 ______.

8400 units ($200,800 + $320,000)/(($90 - $28)/90) = $756,000 $756,000/$90 = 8400 units

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

90%.

When a company produces and sells multiple products ______.

A change in the sales mis will most likely change the break-even pint Each product cost likely creates a unique total of fixed costs. Each product most likely has a unique CM.

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.

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

False.

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

False.

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

False.

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

Fixed and variable.

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 ______.

Sales Volume= (4000+3200) / (15.00-13.50) = 4,800 bottles.

The term used for the relative proportion in which a company's products are sold is ______.

Sales mix.

Solving for the sales level needed to attain a target profit of $____ is the same process as solving for the sales level needed to break-even.

Zero.

A company with a high ratio of fixed costs: Multiple select question.

b) is more likely to experience a loss when sales are down than a co with mostly variable costs c) is more likely to experience greater profits when sales are up than a co with mostly variable costs

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales.

The degree of operating leverage ______.

contribution margin ÷ net operating income

A company with a high ratio of fixed costs

is more likely to experience greater profits when sales are up than a company with mostly variable costs. is more likely to experience a loss when sales are down than a company with mostly variable costs.

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

leverage.