Managerial Accounting Chapter 5

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 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 (90x-28x-320000=200800, x = 8400)

To calculate the degree of operating leverage

Contribution Margin / Operating Income

Contribution margin ratio

Contribution Margin / Sales

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...

Contribution cost per unit is $55 Unit contribution margin = 90 - 35 = 55

a change in sales mix

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

The contribution margin statement is primarily used for

internal decision making

The degree of operating leverage:

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

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

least-squares regression only

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 that compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. Should Goldin implement the change?

Yes, income will increase by $7,000. Current income:($80 x 200) - $5,000 = $11,000 With the change: ($80 - $20) x 200 x 150% = $18,000, an increase of $7,000 per month.

The amount by which sales can drop before losses are incurred is the ___ ___ ___.

margin of safety

if the total contribution margin is less than the total fixed expenses, then a __ will occur

net loss

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

CVP analysis is based on some _____ that may be violated in practice, but the tool is still generally useful.

assumptions

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

contribution margin

The contribution margin income statement allows users to easily judge the impact of a change in ____ on profit

cost, selling price, volume

CVP analysis allows companies to easily identify the change in profit due to changes in:

costs, selling price, volume

Assuming the sales price remains constant, an increase in the variable cost per unit will _______ the contribution margin per unit.

decrease

Tasty Tangerine currently selling 50,000 boxes $25/box. VC= $17/box. FC= $260,000. Plan to increase advertising and reduce selling price. Advertising increase FC by $60,000. Reduce price by $2, increase sales by 24,000 boxes. As a result, net operating income would:

decrease by $16,000

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 $ _______________________________.

decrease, $3000 [1500*($25-$19)] - [1200 * ($25-$15)] = -$3000

The measure of how a percentage change in sales affects profits at any given level of sales is the

degree of operating leverage

When a company produces and sells multiple products

each product most likely creates a unique total of fixed costs, each product most likely has a unique contribution margin, a change in the sales mix will most likely change the break-even point

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: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation

false

Contribution margin is first used to cover _ expenses. Once the break-even point has been reached, contribution margin becomes ___.

fixed, profit

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

fixed; variable

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

the high-low method

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

zero

Chitter-Chatter sells phones and has a set 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 Sales = (975000+195000)/0.65 = $1800000

A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be

$20 ($11+($4,500/500)

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be $___

$30 (100-70=30. For every unit above break-even, profit increases by the contribution margin per unit

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. What is the company's profit?

$301,100 Profit = CM ratio X Sales - Fixed Expenses = 67% X $1,430,000 - $657,000 = $301,100

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is

$36000 net operating income = (750-450)*120 = 36000

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

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:

$982,000 - $932,000 = $49,800

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

$99000 (184000-85000 = 99000)

Water World sells wake boards and water skis and pays commissions to their salespeople based on each product's sales price. Although the wake boards sell for a higher price than the skis, the skis have a higher contribution margin per unit than t he wake boards. Which of the following are true in reference to sales commissions? (Check all that apply.)

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

The profit graph allows users to easily identify

-the profit at any given sales volume. -the sales volume required to reach the break-even point

Order of the Contribution Margin Format Income Statement

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

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 $__________.

168000

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 (559740/2946000)

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

20% 5%*4

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

21645 sales volume = (470000+222640)/32 = 21645

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 $___________.

26980

Spice sells paprika for $9.00 per bottle. Each bottle incurs $2.43 in variable cost. Spice incurs annual fixed costs of $825,000. The variable expense ratio for paprika is:

27% $2.43 / $9 = 27%

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

53%

If a company has a variable expense ratio of 35%, its CM ratio must be ___%

65

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

A tool used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable cost, or fixed costs

CVP analysis

A company with a high ratio of fixed costs

Is more likely to experience greater profits one sales are up in a company with mostly variable costs, is more likely to experience a loss when sales are down then I company with mostly variable costs

Scattergraphs are a way to diagnose cost behavior

Plotting data on a scattergraph is an important diagnostic step

the percentage of the variation in cost that is explained by activity is:

R^2

Which of the following are assumptions of cost-volume-profit analysis? a. variable costs per unit increase over the relevant range of activity b. costs are linear and can be accurately divided into variable and fixed elements c. fixed costs per unit stay the same within the relevant range d. in multi-product companies, the sales mix is constant

b and d

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

Which statements regarding the high-low method are true? (select all that apply) a. When applying this method, use the data points with the high and lowest level of cost b. The high-low method should only be used if a scattergraph plot indicates a linear relationship between cost and activity c. It only uses two data points d. It is superior to least-squares regression

b. The high-low method should only be used if a scattergraph plot indicates a linear relationship between cost and activity c. It only uses two data points

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?

break-even point = 305000 / 40 = 7625

Multiplying unit selling price times the number of units required to break-even is one way to calculate

break-even sales dollars

The single point where the total revenue line crosses the total expense line on the CVP graph indicates:

breakeven point profit is 0

The variable cost per unit using the high-low method is calculated as

change in cost divided by change in units (activity)

Ellie's Elephant Sho sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs of $700. If Ellie sells 35 elephants this month: Check all that apply: profits = $875 total sales = $1975 total costs = $1250 total variable costs = $350

profits = 875 total sales = 1925 total variable costs = 350

contribution margin equals

sales minus all variable costs

Contribution margin is equal to

sales minus variable costs

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

sales mix

The break-even point calculation is affected by

sales mix, selling price per unit, costs per unit

When preparing a CVP graph, the horizontal axis represents

sales volume

CVP analysis focuses on how profits are affected by:

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

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

scattergraph

Candle Central has $1440 of total variable expense for a sales level of 600 units and $2160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units:

the variable cost per unit is $2.40; total variable cost is $1200

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

total profit or loss

At the break-even point

total revenue equals total cost net operating income is zero

at the break-even point

total revenue equals total cost, net operating income is zero

when using excel, the intercept (a), slope (b) and R^2 is determined by selecting any data point in the scattergraph plot and selecting add

trendline

If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income

true

In a least-squares regression line, the intercept (a) of the line represents the total fixed cost

true

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

unit sales to break even = fixed expenses / unit contribution margin 144,000/.59 =$ 244,068

The high-low method

uses only two data points is based on periods where the activity tends to be unusual

Using the high-low method, the fixed cost is calculated:

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

Variable expenses / sales is the calculation for

variable expense ratio

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

change in sales dollars * contribution margin ratio

When making a decision using incremental analysis consider the:

change in sales dollars resulting specifically from the decision, change in cost resulting specifically from the decision

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

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

contribution margin

To calculate profit, multiply the ___ per unit by sales volume and subtract total fixed cost

contribution margin

Total contribution margin equals

fixed cost plus profits (fixed expenses + net operating income)