Learn Smart CH 5

Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. Vivian's Vilins net operating income is:

$99,000 (184,000 - 85,000 = 99,000)

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% (559,740/2,946,000 = 19%)

The break-even pint calculation is affected by:

Sales mix, Costs per unit, Selling price per unit

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: a. 18,600 b. 8,400 c. 5,787 d. 5,162

b. 8,400

The calculation of contribution margin (CM) ratio is:

contribution margin/sales

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.

A company has reached its break-even point when the contribution margin __________ fixed expenses.

equals

Sniffles, 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, Sniffles' sales rounded to the nearest dollar must be: a. $1,170,400 b. $1,242,408 c. $5,088,695 d. $1,520,000

d. $1,520,000

Place the following items in the correct order in which they appear on the CM format income statement:

1. Sales 2. Variable expenses 3. CM 4. Fixed expenses 5. NOI

Plush & Cushy sells high-end desk chairs. The variable expenses per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Plush & Cushy's chairs is ____________%.

- 45%

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

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

$0.35

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:

$3,800 (95 x 40 = 3800)

Contribution margin divided by sales is the formula for ___________ ___________ ____________.

-Contribution -Margin -Ratio

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the break-even point in unit sales:

7,625 units (305,000/40 = 7625)

To calculate the degree of operating leverage, divide _______ _________ by NOI.

Contribution margin

The CM income statement allows users to easily judge the impact of a change in ________, _____ _______, ________ on profit

Cost, selling price, volume

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials whcih will increase variable costs to $19. The company currently sells 1200 pillows per month and expects that the improved materials would increase sales to 1500 per month. The impact of this change on total CM would be a(n) _______ of ________.

Decrease; $3,000 (1500 x (25 - 19) - 1200 (25-25) = 3000)

A company's current sales are $300,000 and fixed expenses toatl $225,000. The CM 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 $6000 (70,000 x 30% - 15000 = 6000)

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on the information:

The sale of 12,000 putters results in net operating income of $380,000. (12,000 x 65 = 780,000 - 400,000 = 380,000) The contribution margin per putter is $65

Candie Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candie Central sells 500 units:

Total variable cost is $1,3200 (1440/600 = 2.4 x 500 = 1,220) The variable cost per unit is $2.40 (1440/600 = 2.4)

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will: a. decrease by $2,000 b. increase by $6,000 c. increase by $10,000 d. decrease by $8,000

a. decrease by $2,000

At the break-even point: (select all that apply) a. net operating income is zero b. the company is experiencing a loss c. total revenue equals total cost d. the company is earning a profit

a. net operating income is zero c. total revenue equals total cost

Place the following items in the correct order in which they appear on the contribution margin format income statement. a. Contribution Margin b. Sales c. Fixed Expenses d. Net operating income e. Variable expenses

b. Sales e. Variable expenses a. Contribution Margin c. Fixed Expenses d. Net operating income

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: (select all that apply) a. Pete's Putters is unable to make a profit b. The contribution margin per putter is $65 c. Lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit d. The sale of 12,000 putters results in net operating income of $380,000

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

Place the following items in order to create the equation used to calculate the variable expense ratio using total values. a. Total sales dollars b. Total variable expenses c. /

b. Total variable expenses c. / a. Total sales dollars

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

$168,000 (Profit = 200,000 x 4 - 632,000 = 168,000)

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:

$174,000 (600,000 x 29% = 174,000)

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

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 (470,000 + 222,640 / 32 = 21,645)

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 company is currently selling 10,000 units of a product. The selling price is $40 per unit and the CM is $27 per unit. The company thinks spending $50,000 on advertising will increase sales by 750 units per month and allow them to increase the selling price to $45 per nit. If this is correct the company should:

Accept the idea because profit will increase by $24,000 (An increase in selling price of $5 will increase the CM $5 (from $27 to $32). The increased CM of $74000 ((10,750 x 32) - (10000 x 27)) - the additional fixed costs of $50,000 = a profit increase of $24,000)

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

CM ratio x Change in sales - Change in fixed expenses.

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:

In crease by $7,750 (Change in NOI = 735,000 - 700,000 x 45% - 8,000 = 7,750.)

Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,00. If Tommy sells an additional 5000 trains, profits will:

Increase $120,000 (5000 x 950-26) = 120,000)

Net operating income can be estimated for any sales volume above the break-even point by ___________ the number of units sold above the point by the unit CM.

Multiplying

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales:

Net operating income will increase by $0.70 Total contribution margin will increase by $0.70

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

Operating leverage

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: a. $168,000 b. $768,000 c. $18,000 d. ($32,000)

a. $168,000

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: a. $695,000 b. $2,565,000 c. $0.57 d. $1.74

a. $695,000

Which of the following are decisions in which using CVP analysis could be useful? a. Deciding what marketing strategy to use b. Deciding what price to charge for goods and services c. Deciding to change the sick leave policy for employees d. Deciding which products to offer e. Deciding which services to offer f. Deciding what cost structure to implement

a. Deciding what marketing strategy to use b. Deciding what price to charge for goods and services d. Deciding which products to offer e. Deciding which services to offer f. Deciding what cost structure to implement

When making a decision using incremental analysis consider the: (select all that apply) a. old income statement in comparison to the new income statement b. change in cost resulting specifically from the decision. c. volume that would occur regardless of the decision d. change in sales dollars resulting specifically from the decision

b. change in cost resulting specifically from the decision. d. change in sales dollars resulting specifically from the decision

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? a. 3,600 b. 1,960 c. 6,400 d. 2,800

d. 2,800

The margin of safety percentage is: a. Margin of safety in dollars divided by break-even sales in dollars b. Total budgeted (or actual) sales in dollars divided by margin of safety in dollars c. Total budgeted (or actual) sales in dollars divided by break-even sales in dollars d. Margin of safety in dollars divided by total budgeted (or actual) sales in dollars

d. Margin of safety in dollars divided by total budgeted (or actual) sales in dollars

The equation used to calculate the variable expenses ratio using total values is total variable expenses divided by total: a. Contribution margin b. Fixed expenses c. Net income d. Sales

d. sales

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs toatl $30,000. A move to a larger facility would increase rent expense by $8000 and allow the company to meet its demand for an addition 1000 units. If the move is made, profits will:

decrease by $2000 (6000(1000x(10-4)) - 8000 new cost = <2000>)

CVP analysis focuses on how profits are affected by:

selling price, total fixed costs, unit variable cost, mix of products sold, sales volume.

The contribution margin is equal to sales minus:

variable expenses.

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)

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $___________.

- $26,980

To reach a target profit of $180,000, 90,000 units need to be sold. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is $____________.

- $675,000

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

-Contribution -Margin

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. the company currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) ___________ (increase/decrease) of $__________.

-Decrease -3,000

A company has reached its break-even point when the contribution margin ___________ fixed expenses.

-Equals

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

-Operating -Leverage

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

-Sales -Mix

Variable expenses/Sales is the calculation of the __________ __________ ratio.

-Variable -Expense

The break-even point is the level of sales at which profit equals ___________.

-Zero

Place the following items in the order in which sales dollars are applied on a CM income statement.

1. Variable costs 2. Fixed expenses 3. Net income

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 (520,000 + 320,000 / 21 = 40,000)

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 units x 10 = 400,000)

Plush & Cushy 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 Plush & Cushy's chairs is:

45% (85.05/189 = 45%)

Gifts Galore had $189,000 of Sales Revenue from wrapping paper sales last year. Total contribution margin was $100,170 and total fixed expenses were $27,500. the contribution margin ratio was:

53% (100,170/189,000 = 53%)

The contribution margin income statement allows users to easily judge the impact of a change in _________ on profit. (select all that apply) a. total fixed costs b. organizational structure c. Variable cost per unit d. selling price per unit e. volume of sales

a. total fixed costs c. Variable cost per unit d. selling price per unit e. volume of sales

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

Sales

Variable expenses/Sales is the calculation of the _____ ______ ratio.

Variable expense

Profit = (selling price per unit x quantity sold) - (_________ expense per unit x quantity sold) - ________ expenses.

Variable; Fixed

Candle Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units: (select all that apply) a. total variable cost is $1,200 b. the variable cost per unit is $2.40 c. sales are $3,600 d. total fixed cost is $1,440

a. total variable cost is $1,200 b. the variable cost per unit is $2.40

The contribution margin is equal to sales minus: a. variable expenses b. fixed expenses c. net operating income d. both variable expenses and fixed expenses

a. variable expenses

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is: a. $(249,979) b. $380,000 c. $630,000 d. $1,520,000

b. $380,000

Place the following items in the order in which sales dollars are applied on a contribution margin income statement: a. Net income b. Variable costs c. Fixed expenses

b. Variable costs c. Fixed expenses a. Net income

Which of the following must be subtracted from sales to reach the contribution margin? (select all that apply) a. Fixed overhead b. Variable overhead c. Variable direct materials d. Variable selling and administrative costs e. Fixed selling and administrative costs f. Variable direct labor

b. Variable overhead c. Variable direct materials d. Variable selling and administrative costs f. Variable direct labor

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 will be: a. $0 b. $374,000 c. $198,000 d. $572,000

c. $198,000

A company needs to sell 90,000 units to reach the target profit of $1800,000. If each unit sells fro $7.50, the total sales dollars needed to reach the target profit is:

$675,000 (90,000 x 7.50 = 675,000)

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: a. 14,688 b. 6,958 c. 21,645 d. 7,730

- 21,645

Profit = (selling price per unit x quantity sold) - (variable expense per _________ x quantity sold) - _________ expenses.

-unit -fixed

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 $__________.

168,000

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

False

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales: (select all that apply) a. net operating income will increase by $0.70 b. total contribution margin will increase by $0.70 c. net operating income will increase by $0.30 d. total contribution margin will increase by $0.30

a. net operating income will increase by $0.70 b. total contribution margin will increase by $0.70

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the BREAK-EVEN point in unit sales? a. 5,100 units b. 12,725 units c. 7,625 units

c. 7,625

If a company only has a single product, total sales can be calculated using only: a. Sales price per unit minus variable cost per unit, then multiplied by the number of units sold b. Sales minus variable costs c. Sales price per unit multiplied by the number of units sold d. Sales minus both variable costs and fixed costs

c. Sales price per unit multiplied by the number of units sold