Managerial Accounting Chapter 2 Assignment

Contribution margin ratio is equal to _______ _______ divided by _________.

1. contribution 2. margin 3. sales

Water World sells wake boards and water skis and pays sales commissions based on product sales price. The wake boards sell for a higher price than the skis and the skis have a higher contribution margin per unit than the wake boards. Which of the following are true? 1. Sales commissions based on sales price would be ideal to use under these circumstances. 2. The company would rather see more skis sold as it creates the higher profit per unit for the company. 3. The company should not pay sales commissions on these products. 4. Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them.

2. The company would rather see more skis sold as it creates the higher profit per unit for the company. 4. Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them.

The single point where the total revenue line crosses the total expense line on the CVP graph indicates: 1. profit is less than zero 2. the break-even point 3. profit is greater than zero 4. profit equals zero

2. the break-even point 4. profit equals zero

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

the high-low method

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

the variable cost per unit

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:

$198,000

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:

$2,200

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 Reason: Sales =$144,000/ 0.59 = $244,068

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

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:

$55

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:

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

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 Reason: $564,000/0.62 = $909,677

Profit equals:

(P x Q) - (V x Q) - fixed expenses

At the break-even point: 1. total revenue equals total cost. 2. the company is experiencing a loss. 3. the company is earning a profit. 4. net operating income is zero.

1. total revenue equals total cost. 4. net operating income is zero.

Which of the following items are found above the contribution margin on a contribution margin format income statement? 1. Variable expenses 2. Net operating income 3. Sales 4. Fixed expenses

1. variable expenses 3. sales

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

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 Reason: $98,000/($50 - $15) = 2,800

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

34% ($1,452,000 - $958,320)/$1,452,000 = 34%.

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 Reason: Sales volume = ($4,000 + $3,200)/($15.00 - $13.50) = 4,800 bottles.

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

40,000

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

7,625 units Reason: 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 Reason: $200,800 = ($90-$28) x Q - $320,000; $200,800 + 320,000 = $62Q; $520,800/$62 = 8,400 units

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 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

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

R²

A company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 per month on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. Which of the following statements is true?

The company should accept the idea because profit will increase by $24,000. Reason: 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 x $32) - (10,000 x $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

Which of the following statements is correct?

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

Direct materials would be classified as variable and an equipment lease would be classified as fixed because of the nature of these costs when using __.

account analysis

The contribution margin equals sales minus:

all variable costs

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 level of activity and their associated costs.

An income statement constructed under the ______ approach allows users to easily judge the impact on profits of changes in selling price, cost or volume.

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

The calculation of contribution margin (CM) ratio is:

contribution margin/sales

When constructing a CVP graph, the vertical axis represents:

dollars

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

equals

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

The statistic R² Blank______.

is a measure of goodness fit

A line that minimizes the sum of squared errors is compute when using the ______ method.

least-squares regression

Which method(s) use all the available data points to divide a mixed cost into its fixed and variable components?

least-squares regression only

The first step in the high-low method is to identify the periods with the lowest and highest __.

level or activity

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

leverage

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

profit or loss

The break-even point is reached when the contribution margin is equal to:

total fixed expenses

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

true

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

$0.35

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total:

$1,800,000 Reason: Sales = ($975,000 + $195,000)/0.65 = $1,800,000

If a company has sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000 the company has a ______.

$10,000 net operating loss

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units, net profit will be:

$100

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:

$13,000

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 Reason: Profit = CM ratio x Sales - Fixed expenses = 72% x $832,000 - $265,000 = $334,040.

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

false

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

false

Fill in the blank question. In a least-squares regression line, the vertical intercept (a) of the line represents the total ________ cost.

fixed

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals:

$2,200,000 Reason: Sales =($564,000 + $800,000)/0.62 = $2,200,000

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:

$38,000

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 $ _______

1. decrease 2. 3,000

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

1. fixed 2. variable

The break-even point calculation is affected by: 1. sales mix 2. number of batches produced 3. selling price per unit 4. costs per unit

1. sales mix 3. selling price per unit 4. costs per unit

CVP analysis focuses on how profits are affected by: 1. selling price 2. sales volume 3. unit variable cost 4. break-even point 5. mix of products sold 6. total fixed costs

1. selling price 2. sales volume 3. unit variable cost 5. mix of products sold 6. total fixed costs

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ___. 1. earned a net operating profit 2. a contribution margin equal to fixed costs 3. incurred a net operating loss 4. reached the break-even point

2. a contribution margin equal to fixed costs. 4. reached the break-even point

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

20% Reason: Increase in net operating income = 5% x 4 = 20%.

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 Reason: Sales volume = ($470,000 + $222,640)/$32 = 21,645 fans.

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is:

29% $245,050/$845,000 = 29%.

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: 1. lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit 2. Pete's Putters is unable to make a profit 3. the contribution margin per putter is $65. 4. the sale of 12,000 putters results in net operating income of $380,000

3. the contribution margin per putter is $65. 4. the sale of 12,000 putters results in net operating income of $380,000

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 Reason: Change in net operating income = $70,000 x 30% - $15,000 = $6,000 increase.

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $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 Reason: Current income: ($80 x 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 x 150% = $18,000, an increase of $7,000 per month

The contribution margin is equal to sales minus:

variable expenses

Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by the end of the year, net operating income for the year will increase by:

$137,500 Reason: Net operating income change = $250,000 x 55% = $137,500 increase.

A company sold 20,000 units of its product at a selling price of $20. The variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is:

$180,000

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 Reason: 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

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% Reason: Contribution margin ratio = $100,170/$189,000 = 53%.

The slope of the regression line represents the ______ cost per unit of activity.

variable

When using the high-low method, the slope of the line equals the ________ cost per unit of activity.

variable

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 Reason: Change in net operating income = ($735,000-$700,000) x 45% - $8,000 = $7,750.

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

CVP is the acronym for:

cost volume profit

The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit. 1. selling price 2. volume 3. organizational structure 4. cost

1. selling price 2. volume 4. cost

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

net operating income

High-low or least squares regression analysis should only be done if a(n) _________ plot depicts linear cost behavior.

scatter

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

Fill in the blank question. Variable expenses/Sales is the calculation for the ________ ________ ratio.

variable expense

When preparing a CVP graph, the horizontal axis represents:

sales volume

Fill in the blank question. 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

Which of the following statements are true? 1. Plotting data on a scattergraph is an important diagnostic step. 2. Scattergraphs are a way to diagnose cost behavior. 3. Scattergraphs should be used after high-low or regression analysis is performed. 4. When plotting a scattergraph, cost is the independent variable.

1. Plotting data on a scattergraph is an important diagnostic step. 2. Scattergraphs are a way to diagnose cost behavior.

Using the high-low method, the fixed cost is calculated ______. 1. after the variable cost per unit is calculated 2. before the variable cost is calculated 3. using either the high or low level of activity 4. by adding the total cost to the variable cost

1. after the variable cost per unit is calculated 3. using either the high or low level of activity

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

1. contribution 2. margin

A company with a high ratio of fixed costs: 1. will not be concerned about fluctuating sales 2. is more likely to experience greater profits when sales are up than a company with mostly variable costs. 3. is more likely to experience a loss when sales are down than a company with mostly variable costs 4. will be able to avoid some of the fixed costs when sales decrease by lowering production

2. is more likely to experience greater profits when sales are up than a company with mostly variable costs. 3. is more likely to experience a loss when sales are down than a company with mostly variable costs

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 Reason: $520,000 = $21 x Q - $320,000; $520,000 + 320,000 = $21xQ; $840,000/$21 = 40,000 blankets

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

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

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

change in sales dollars x contribution margin ratio

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 Reason: 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 x $32) - (10,000 x $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying her $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:

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

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 margin of safety percentage is:

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

If the total contribution margin is less than the total fixed expenses, then a ______ will occur.

net loss

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

sales

Fill in the blank question. The relative proportions in which a company's products are sold is referred to as _______ _______

sales mix

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

sales mix