Managerial Accounting - Chapter Three

Sales Mix refers to the relative proportions in which a company's products are sold: Profits are greater if high-margin rather than low-margin items make a larger proportion of total sales Changes in sales mix can cause variations in a company's profits. 1. Shift in the sales mix from (High/Low) margin item to (High/Low)margin items can cause total profits to decrease even though total sales may increase 2. Shifts in sales mix from (High/Low) margin items to (High/Low)margin items can cause total profits to increase even though total sales may decrease

1. Shift in the sales mix from HIGH margin items to LOW margin items can cause total profits to decrease even thought total sales may increase 2. Shift in the same mix from LOW margin items to HIGH margin items can cause total profits to increase even though total sales may decrease

Cost-volume-profit(CVP) graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand

Operating leverage

A measure of how sensitive net operating income is to a given percentage change in dollar sales

Degree of operating leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income

Contribution margin ratio(CM ratio)

A ratio computed by dividing contribution margin by dollar sales

Variable expense ratio

A ratio computed by dividing variable expenses by dollar sales

Incremental analysis

An analytical approach that focuses only on those costs and revenues that change as a result of a decision

HOW ONE PIECE IMPACTS OTHER PIECES (Which one) is/ are incorrect To increase unit contribution margin 1) Increase selling price 2) Decrease the variable cost per unit

BOTH ARE CORRECT To increase unit contribution margin 1) Increase selling price 2) Decrease the variable cost per unit

HOW ONE PIECE IMPACTS OTHER PIECES (Which one(s) is/are incorrect To decrease the break-even point 1) Increase fixed expenses or 2 Decrease unit contribution margin

BOTH are INCORRECT Correct Answer for to DECREASE the break-even point 1) DECREASE fixed expenses or 2) INCREASE unit contribution margin

The degree of operating leverage IS NOT CONSTANT Greatest at sales near the _________________________ Decreases as sales and profits rise

Break-even point

What is the equation that relates to the CM ratio to the variable expense ratio

CM ratio = Contribution margin/sales CM ratio = Sales - Variable expenses/Sales CM ratio = 1 - Variable expense ratio

What does a CM ratio of 40% mean?

CM ratio is 40 % means that for each dollar increase in sales, total contribution margin will increase by 40 cents ($1.00 x 0.40) Net operating income (profit) will also increase assuming that fixed costs are not affected by the increase in sales

Express in equation form the effect of a change in sales on the contribution margin

Change in contribution margin = CM ratio X Change in sales

The following is a formula for Traditional/Contribution Income Statement Sales -Variable expenses = Contribution margin -Fixed expenses = Net operating income (Profit)

Contribution Income Statement Because it has variable and fixed expenses

_______________ _______________ ____________ is the contribution margin as a percentage of sales CM ratio = Contribution margin/sales

Contribution Margin Ratio

The degree of operating leverage IS NOT CONSTANT Greatest at sales near the break-even point _________________ as sales and profits rise

Decreases

Degree of Operating Leverage = Contribution Margin/_________________

Degree of Operating Leverage = Contribution Margin/Net Operating Income

Degree of Operating Leverage = ________________/ Net operating income

Degree of Operating Leverage = Contribution Margin/Net operating income

To calculate the DOLLAR SALES for Break Even or Target Profit - please share the formula for each

Dollar sales to break even = Fixed expenses/CM ratio Dollar sales to attain a target profit = Target Profit+Fixed Expenses/CM Ratio ONLY difference between equations is the profit figure. For break even profit = 0

If company A's contribution margin ratio is lower than company B it means___________?

Due to its lower contribution margin Company A will not lose contribution margin as rapidly as Company B when sales decline. Thus Company A's profit will be less volatile. -This is a drawback when sales increase, but it provides more protection when sales drop Because it's break-even point is lower, Company A can suffer a larger sales decline before losses emerge

Break-Even is the level of sales at which the company's profit is zero. To calculate the break-even point (in unit sales and dollar sales) managers can use either or two approaches - what are they? High-Low Method, Least Squares Regression Analysis, Equation Method, Formula Method

Equation Method and Formula Method Chapter Two (High-Low Method and Least Squares Regression Analysis) estimates the variable and fixed element in a mixed cost

To calculate the break-even point (in unit sales and dollar sales) managers can use one of two approaches. This formula is using the (equation/formula) method Profit = Unit CM x Q - Fixed Expenses

Equation Method to equate Break Even

Target profit analysis

Estimating what sales volume is needed to achieve a specific target profit

TRUE or FALSE Company A has lower fixed costs and higher variable costs, it will enjoy greater profit stability and be more protected from losses during bad years, but at the cost of lower opportunity costs in good years

FALSE Company A has lower fixed costs and higher variable costs, it will enjoy greater profit stability and be more protected from losses during bad years, but at the cost of lower NET OPERATING INCOME in good years

TRUE or FALSE If you have two companies with the same revenues and the same total expenses BUT different cost structures, the company with the higher proportion of fixed costs in cost structure will have lower operating leverage

FALSE If you have two companies with the same revenues and same total expenses BUT different cost structures, the company with the higher proportion of fixed costs in cost structure will have HIGHER operating leverage

TRUE or FALSE In TARGET PROFIT ANALYSIS we estimate what fixed and variable expense is need to achieve a specific target profit

FALSE In target profit analysis we estimate what SALES VOLUME is needed to achieve a specific target profit

TRUE or FALSE CM Ratio is valuable in situations where the dollar sales of one product must be traded off against the dollar sales of another product. Products that yield the least amount of contribution margin per dollar of sales should be emphasized

FALSE Products that yield the GREATEST amount of contribution margin per dollar of sales should be emphasized

TRUE or FALSE The relation between profit and the CM ration can also be expressed using the following equation Profit = CM ratio x Sales - Variable Expenses

FALSE Profit = CM ratio X Sales - FIXED EXPENSES This is how the formula derived Profit = (Sales-Variable expenses)-Fixed Expenses Profit = (Contribution margin-Fixed Expenses) Profit = Contribution Margin/Sales X Sales - Fixed Expenses Profit = CM Ratio X Sales - Fixed Expenses IN TERMS OF CHANGES Change in profit = CM ratio X Change in sales - Change in fixed expenses

TRUE or FALSE The CVP graph highlights cost-volume-profit relationships over narrow ranges of activity

FALSE The CVP graph highlights cost-volume-profit relationships over WIDE ranges of activity

TRUE or FALSE To increase the margin of safety 1) Increase total sales or 2) Decrease break-even point or 3) Increase total sales or Decrease break-even point

FALSE To increase the margin of safety 1) Increase total sales or 2) Decrease break-even point or 3) Increase total sales AND Decrease break-even point #3 should be AND vs OR

TRUE or FALSE Managers adopt assumptions with respect to the five factors that impact profits (selling price, sales volume, unit variable cost, total fixed cost, mix of products sold) because assumptions provide a perfect information

FALSE Assumptions provide "good enough" not perfect ) information Assumptions are: 1.Selling price is constant. The price of a product or service will not change as volume changes. 2. Cost are linear and can be accurately divided into variable and fixed elements. (the variable element is constant per unit. The fixed element is constant in total over the entire relevant range) 3. In multiproduct companies the mix of products sold remains constant

TRUE or FALSE To calculate the break-even point managers can use one of two approaches (equation/formula method. BUT the equation method and the formula method are not mathematically equivalent

FALSE In calculating the break-even point the equation and formula method are mathematically equivalent. Equation: Profit = Unit CM x Q -Fixed Expenses Formula: Unit Sales to break even = Fixed expenses/Unit CM

To calculate the break-even point managers can use one of two approaches. This formula is using the (equation/formula) method Unit sales to break even = Fixed expenses/Unit CM

Formula Method to equate Break Even

If company A's margin of safety is GREATER than company B it means__________________?

If company A's margin of safety is GREATER than company B it means company A is less vulnerable to downturns than company B.

If contribution margin is not sufficient to cover the fixed expenses, a (profit/loss) occurs for the period

If contribution margin is not sufficient to cover the fixed expenses a LOSS occurs for the period

HOW ONE PIECE IMPACTS OTHER PIECES (Which one(s) are/is incorrect) To increase margin of safety 1) Decrease total sales 2) Decrease break-even point 3) Increase total sales AND decrease break-even point

Incorrect - decrease total sales Correct Answer - to increase margin of safety 1) INCREASE total sales 2) DECREASE break-even point or 3) INCREASE total sales AND DECREASE break-even point

Contribution Income Statement is for (inside/outside) the company

Inside

The amount by which sales can drop before losses are incurred is called ___________________________

Margin of Safety

MARGIN OF SAFETY Calculate the margin of safety for this company Sales(at current volume of 400 speakers $100,000 Break-even sales (at 350 speakers) - $ 87,500 Margin of safety in dollars Margin of safety percentage

Margin of safety in dollars: Total budget (or actual) sales - Break-even sales 100,000-87,500 = 12,500 Margin of safety percentage = Margin of safety in dollars/Total budgeted (or actual) sales in dollars 100,000/12,500 = 12.5% Margin of safety can also be expressed in terms of number of units sold = Dividing the margin of safety in dollars /Selling price per unit

Net Operating Income(Profit) = (Sales - Variable Expenses)-Fixed Expenses What is the equation for a single product company

Net Operating Income is the same as Profit Profit = (PxQ - VxQ) - Fixed Expenses P = Selling price per unit Q = quantity sold V = Variable expenses (per unit x quantity sold)

Cost structure refers to the relative proportion of fixed and variable costs in an organization. Mangers often have latitude in trading off between these two type of labor costs. Which cost structure is better - high variable costs and low fixed costs, or the opposite?

No single answer to this question. Each approach has its advantage and you have to do calculations for each situation.

LEVER is a tool for multiplying force ______________________ leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales

Operating leverage

What is the Simple Profit Equation in Terms of the Unit Contribution Margin (Unit CM)

Profit = Unit CM x Q - Fixed Expenses Unit CM is (P-V) P = Price V = Variable

The Profit Graph is a simpler form of a CVP (Cost-Volume-Profit) graph. What is the formula

Profit-Unit CM x Q - Fixed expenses

The degree of operating leverage IS NOT CONSTANT Greatest at sales near the break-even point Decreases as sales and profits ___________

Rise

PROFITS are affected by the following factors EXCEPT Selling prices, Sales volume, Unit variable costs, Total fixed costs, Sunk costs, Mix of products solid

Sunk cost

PER UNIT Contribution Income Statement Per Unit Sales -Per Unit Variable Expenses = Per Unit Contribution Margin TRUE or FALSE Once the break-even point has been reached, net operating income(profit) will increase by the amount of the unit contribution margin for each additional unit sold

TRUE

TRUE or FALSE If company B has higher fixed cost and lower variable costs, it will experience wider swings in net operating income as sales fluctuate, with greater profits in good years and greater losses in bad years

TRUE

TRUE or FALSE Operating leverage acts as a multiplier If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income

TRUE

TRUE or FALSE In TARGET PROFIT ANALYSIS we can use the same methods as used to calculate BREAK EVEN but solving for profit

TRUE 1. Equation Method: Profit =Unit CM x Q - Fixed Expenses 2. Formula Method Unit sales to attain the target profit = Target profit = Fixed Expenses/Unit CM

TRUE or FALSE Without knowing the future, it is not obvious which cost structure is better - both have advantages and disadvantages

TRUE Cost structure refers to the relative proportion of fixed and variable costs in an organization

TRUE or FALSE To calculate the break-even point managers can use one of two approaches (equation/formula) method. The Formula Method is the shortcut version of the equation method.

TRUE The Formula Method is a shortcut version of the equation method - each unit sold provides a certain amount of contribution margin that goes toward covering fixed expenses. In a single product situation, the formula for computing the unit sales to break even is: Unit sales to break even = Fixed expenses/Unit CM

TRUE or FALSE The CVP (Cost-Volume-Profit) graph is sometimes called a break-even chart

TRUE Unit volume is represented on the horizontal (X) axis Dollar on the vertical (Y) axis

Companies usually compensate salespeople by paying them a commission based on sales, a salary, or combo True or False Commissions based on sales dollars can lead to lower profits

TRUE to eliminate conflicts, commissions can be based on contribution margin rather than on selling price. Focus: by maximizing their own compensation, salespersons will also maximize the company's profits

Margin of safety

The excess of budgeted or actual dollar sales over the break-even dollars sales

Break-even point

The level of sales at which profit is zero

Sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales

In addition to finding the break-even point in unit sales (equation or formula method), one can find break -even point in DOLLAR SALES using ___________ (#) Methods

Three 1. Equation Method 2.Formula Method (Equation/Formula Method multiple results by selling price) 3. Dollar sales to break even = Fixed expenses/CM ratio Break-even point in dollar sales is the same under all three methods because these methods are mathematically equivalent

What is the formula for variable expense in total? What is the formula for variable expense per unit?

Total Variable Expenses/Total Sales = Total Variable Expense Ratio Total Variable Expenses per Unit/Unit Selling Price = Variable Expense Ratio per Unit

To calculate the Break Even Point or the Target Profit Analysis one can use EQUATION METHOD. Please share the formulas for each

USING THE EQUATION METHOD Break Even Point : Profit = Unit CM x Q - Fixed Expenses Target Profit Analysis: Profit = Unit CM x Q - Fixed Expenses ONLY difference between equations is the profit figure. For break even profit = 0

To calculate the Break Even Point or the Target Profit Analysis one can use FORMULA METHOD. Please share the formulas for each

USING THE FORMULA METHOD Unit sales to break even =Fixed expenses/Unit CM Unit sales to attain the target profit = Target profit + Fixed expenses/Unit CM ONLY difference between equations is the profit figure. For break even profit = 0

The amount available to cover fixed expenses and then to provide profits for the period is called ______________ __________________.

contribution margin

If sales are zero, the company's loss would equal its ___________ ______________

fixed expenses Each unit that is sold reduces the loss by the amount of the UNIT contribution margin

Once the break-even point has been reached, each additional unit sold increased the company's profit by the amount of the __________ _____________ ____________.

unit contribution margin