CHAPTER 6 Cost-Volume-Profit Analysis: Additional Issues

If the unit contribution margin is $15 and it takes 3.0 machine hours to produce the unit, the contribution margin per unit of limited resource is:

$5.

Calculation of weighted-average contribution margin ratio FORMULA

(Contribution Margin Ratio × Sales Mix Percentage) + (Contribution Margin Ratio × Sales Mix Percentage) = Weighted-Average Contribution Margin Ratio

Contribution margin ratio for each division FORMULA

(Contribution margin ÷ Sales)

Sales mix percentage FORMULA

(Division sales in dollars ÷ Total company sales in dollars) = sales mix percentage

Break-even proof—sales units

(List Product) Unit Sales (List each item under and multiply across) × Unit Contribution Margin (List each item under and multiply across)=Total Contribution Margin (List each item under and add vertically)

Likewise, a shift from high- to low-margin sales may result in a

decrease in net income even though there is an increase in total units sold.

Stevens Company has a degree of operating leverage of 3.5 at a sales level of $1,200,000 and net income of $200,000. If Stevens' sales fall by 10%, Stevens can be expected to experience a:

decrease in net income of $70,000. Net income ($200,000) × Operating leverage (3.5) × Decrease in sales (10%) = decrease in net income of $70,000

Sales mix is important to managers because

different products often have substantially different contribution margins.

A high degree of operating leverage:

exposes a company to greater earnings volatility risk.

The break-even point in units is useful for companies with _____ products.

few

Net income will be:

greater if more higher-contribution margin units are sold than lower-contribution margin units.

Companies that have higher fixed costs relative to variable costs have _________ operating leverage.

higher

A higher degree of operating leverage will result in a

higher change in net income with a given change in sales.

Net income computed under absorption costing will be:

higher than net income computed under variable costing when units produced are greater than units sold.(Net income is higher under absorption costing than under variable costing when units produced exceed units sold)

The break-even point in units helps managers determine...

how many units of each product need to be sold to avoid a loss.

A shift from low-margin sales to high-margin sales may

increase net income even though there is a decline in total units sold.

Net income will be greater if higher contribution margin units are sold rather than

lower contribution margin units.

Calculating the degree of operating leverage helps

managers determine how sensitive the company's net income is to changes in sales.

The break-even point in dollars is useful for companies with _____ products.

many

Fixed manufacturing overhead costs are recognized as:

product costs under absorption costs. (Under absorption costing, fixed manufacturing overhead costs and variable manufacturing overhead costs are both product costs.)

Determining the contribution margin per unit of limited resource helps managers decide which

product should receive any additional capacity of the limited resource.

Operating leverage refers to

the extent to which a company's net income reacts to a change in sales. Operating leverage is determined by a company's relative use of fixed versus variable costs.

When a company has a limited resource, it should apply additional capacity of that resource to providing more units of the product or service that has:

the highest contribution margin.

Cost structure refers to

the relative proportion of fixed versus variable costs that a company incurs.

The break-even point in dollars helps managers determine

the sales dollars required from each division to avoid a loss.

Companies can compute break-even sales for a mix of two or more products by determining the

weighted-average unit contribution margin of all the products.

FORMULA: contribution margin per unit of limited resource

Unit contribution margin / Machine hours required

MEM manufactures two products. Product X has a contribution margin of $26 and requires 4 hours of machine time. Product Y has a contribution margin of $14 and requires 2 hours of machine time. Assuming that machine time is limited to 3,000 hours, how should it allocate the machine time to maximize its income?

Use 3,000 hours to produce only Y.

Sales mix is:

a measure of the relative percentage in which a company's products are sold.

The term "cost" includes all costs and expenses related to production and sale of the product including (3)...

cost includes manufacturing costs plus selling and administrative expenses

Sales mix

The relative percentage in which a company sells its multiple products. It can be calculated based on unit sales or sales revenue.

degree of operating leverage...

A measure of the extent to which a company's net income reacts to a change in sales. It is calculated by dividing contribution margin by net income.

Theory of constraints

A specific approach used to identify and manage constraints in order to achieve the company's goals.

The degree of operating leverage:

A. can be computed by dividing total contribution margin by net income. B. provides a measure of the company's earnings volatility. C. affects a company's break-even point. D. All of the answer choices are correct. D is correct

CM alone is not enough to make this decision of contribution margin per unit of limited resource. The key factor is

CM per unit of limited resource.

FORMULA Degree of Operating Leverage

Contribution Margin÷Net Income=Degree of Operating Leverage

The following information is available for Chap Company. :Sales $350,000 Cost of goods sold $120,000 Total fixed expenses $60,000 Total variable expenses $100,000 Which amount would you find on Chap's CVP income statement?

Contribution margin of $250,000

Calculation of break-even point in dollars USING Weighted Average Contribution Method FORMULA

Fixed Costs÷Weighted-Average Contribution Margin Ratio=Break-Even Point in Dollars

Break-even point in units USING weighted average method FORMULA

Fixed Costs÷Weighted-Average Unit Contribution Margin=Break-Even Point in Units

Weighted-average unit contribution margin FORMULA

ITEM 1:( unit contribution margin X sales mix percentage) + ITEM 2:(unit contribution margin X sales mix percentage) = Weighted-average unit contribution margin

Which one of the following describes the break-even point?

It is the point where total sales equal total variable plus total fixed costs.

Croc Catchers calculates its contribution margin to be less than zero. Which statement is true?

Its selling price is less than its variable costs.

FORMULA: Contribution margin

Machine hours * Contribution margin per unit of limited resource

Which one of the following is the format of a CVP income statement?

Sales − Variable costs − Fixed costs = Net income.

Sales mix as a percentage of units sold FORMULA

UNITS OF ITEM / TOTAL UNITS