Managerial Accounting Chapter 5

Total contribution margin equals ______. -total sales minus fixed expenses -variable expenses plus net operating income -total sales minus net operating income -fixed expenses plus net operating income

fixed expenses plus net operating income

When preparing a CVP graph, the horizontal axis represents ______. -total costs -sales volume -sales dollars -variable costs

sales volume

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 -5,162 -18,600 -5,787

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

Select all that apply When a company produces and sells multiple products ______. -the sales mix has no effect on the company's profit -a change in the sales mix will most likely change the break-even point -each product most likely has different costs -each product most likely has a unique contribution margin

a change in the sales mix will most likely change the break-even point each product most likely has different costs each product most likely has a unique contribution margin

The degree of operating leverage = ______. -contribution margin ÷ net operating income -gross margin ÷ net operating income -contribution margin ÷ total sales -total sales ÷ net operating income

contribution margin ÷ net operating income

Select all that apply The break-even point calculation is affected by ______. -costs per unit -selling price per unit -sales mix -number of batches produced

costs per unit selling price per unit sales mix

The measure of how a percentage change in sales affects profits at any given level of sales is the ______. -margin of safety -degree of operating leverage -contribution margin ratio

degree of operating leverage

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 ______. -$3,800 -$2,200 -$2,100 -$6,000

$2,200 (300 × ($20 - $7) - $1,700 = $2,200.)

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 -$241,000 -$57,000

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

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit. -have no impact on -decrease -increase

decrease

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 ______.

decrease by $2,000 (New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.)

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 -$130,000 -$30,000 -$150,000

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

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 ______. -$1,520,000 -$630,000 -$(249,979) -$380,000

$380,000 (30,000 × ($40 - $19) - $250,000 = $380,000)

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 ______. -54% -78% -100% -27%

27% ($2.43 ÷ $9.00 or 27%.)

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 ______. -35% -81% -100% -29%

29% ($245,050 ÷ $845,000 or 29%.)

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 ______. -9,524 -40,000 -24,762 -15,238

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

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 $____

5000 (10$x10,000-(6x10,000)

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 ______. -12,725 -5,100 -7,625

7,625 ($305,000 ÷ $40 = 7,625)

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

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

False

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.

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

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

Select all that apply Which of the following items are found above the contribution margin on a contribution margin format income statement? -Net operating income -Fixed expenses -Variable expenses -Sales

Variable expenses Sales

When constructing a CVP graph, the vertical axis represents ______. -variable costs -fixed costs -dollars -unit volume

dollars

The contribution margin equals sales minus ______. -all product costs -all variable costs -product variable costs only -all fixed costs -period variable costs only

all variable costs

The calculation of contribution margin (CM) ratio is ______. -net operating income ÷ total contribution margin -contribution margin ÷ total expenses -variable expenses ÷ contribution margin -contribution margin ÷ sales

contribution margin ÷ sales

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

leverage

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

margin safety

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars. -net operating income -selling price per unit -total variable expense -total gross margin

net operating income

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as ______. -the margin of safety -the degree of operating leverage -the leverage leap -sales commissions percentage

the degree of operating leverage

To prepare a CVP graph, lines must be drawn representing total revenue, ______. -total expense, and total fixed expense -total expense, and profit -break-even point, and profit -total variable expenses, and total fixed expense

total expense, and total fixed expense

The break-even point is reached when the contribution margin is equal to ______. -total variable expenses -total fixed expenses -profit -total sales

total fixed expenses

Select all that apply At the break-even point ______. -the company is earning a profit -total revenue equals total cost -the company is experiencing a loss -net operating income is zero

total revenue equals total cost net operating income is zero

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

Select all that apply CVP analysis allows companies to easily identify the change in profit due to changes in ______. -location -volume -costs -selling price -management

volume costs selling price

Select all that apply CVP analysis focuses on how profits are affected by ______. -break-even point -sales volume -unit variable cost -mix of products sold -selling price -total fixed costs

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

Variable expenses ÷ Sales is the calculation for the ____ ____ ratio

variable expense

Contribution margin ratio is equal to ____ ____ divided by ____

contribution margin, sales

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 -change in sales - change in fixed expenses -cm ratio × change in sales - change in fixed expenses

cm ratio × change in sales - change in fixed expenses

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

contribution margin

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 ______. -decrease by $15,000 -increase by $21,000 -decrease by $27,000 -increase by $6,000

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

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 ______. -decrease by $12,250 -increase by $15,750 -increase by $7,750 -decrease by $8,000

increase by $7,750 (($735,000 - $700,000) × 45% - $8,000 = $7,750.)

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 ______. -$2,450 increase -$2,280 decrease -$450 increase -$2,730 increase

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

Profit equals ______. -(P - V - fixed expenses) × Q -(P × Q) - (V × Q) - fixed expenses -(P × Q) + (V × Q) - fixed expenses -(P × Q) - (V × Q) + fixed expenses

(P × Q) - (V × Q) - fixed expenses

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? -6,400 -1,960 -3,600 -2,800

2,800 ($98,000 ÷ ($50 - $15) = 2,800)

Contribution margin ______. -becomes profit after fixed expenses are covered -equals sales minus fixed expenses -is first used to cover variable expenses -is not affected by changes in activity

becomes profit after fixed expenses are covered

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______. -decrease in unit selling price -increase in total fixed cost -decrease in the unit variable cost -change in sales mix

decrease in the unit variable cost

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 expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) ____ (increase/decrease) of $____

decrease, 3000

Select all that apply A company with a high ratio of fixed costs ______. -will be able to avoid some of the fixed costs when sales decrease by lowering production -will not be concerned about fluctuating sales -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

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

The variable expense ratio is the ratio of variable expense to ______. -net operating income -fixed expense -the contribution margin -sales

sales

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 ______. -operating leverage -sales price -break-even -sales mix

sales mix