SCM Chap 6 smartbook

Softie, 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, Softies' sales must be

($240,400 + $930,000) ÷ 0.77= $1,520,000

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

Net operating income = (750 - 450) × $120 = $36,000.

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

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

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

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

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

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

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

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

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

high-low method

The contribution margin is equal to sales minus

variable expenses

Profit = (selling price per unit × quantity sold) - ( _____ expense per unit × quantity sold) - ______ expenses.

variable, fixed

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

To prepare a CVP graph, lines must be drawn representing total revenue,

total expense, and total fixed expense

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

total fixed expenses

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 false question.

true

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

true

The contribution margin equals sales minus all ______ expenses.

variable

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

variable

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

variable cost per unit

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

contribution margin

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

decrease

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

variable expense

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

zero

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

margin of safety

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

Contribution margin = 20,000 × ($20 - $11) = $180,000.

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

leverage

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

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

A company with a high ratio of fixed 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

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is _____ for Adamsn, Inc. and ____ for baron inc

3, 2

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

Baron's net income grows twice as fast as its sales. Adams has a higher degree of operating leverage than Baron.

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

Break-even point = $305,000 ÷ $40 = 7,625

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

net operating income

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

total contribution margin will increase by $0.70 net operating income will increase by $0.70

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

$.35

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

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

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 - $932,200 = $49,800.

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $

2250

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

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

False

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

Net operating income = (26,000 - 17,000) × $22 = $198,000.

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

True

Which of the following items are found above the contribution margin on a contribution margin format income statement?

Variable expenses Sales

Cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

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

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

Contribution margin

becomes profit after fixed expenses are covered

Margin of safety in dollars is

budgeted (or actual) sales minus break-even sales

When a company sells one unit above the number required to break-even, the company's net operating income will

change from zero to a net operating profit

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

decrease of $3,000

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 high low method

is easy to apply uses only two data points

The best fitting line minimizes the sum of the squared errors when using

least squares regression

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called

least-squares regression

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?

$98,000 ÷ ($50 - $15) = 2,800

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

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

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

($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is

($520,000 + $320,000) ÷ $21 = 40,000

A company's current sales are $300,000 and fixed expenses total $85,000. 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

($70,000 × 30%) - $15,000 = $6,000 increase

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

($975,000 + $195,000) ÷ 0.65 = $1,800,000

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

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

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 $

(10-6)x10000 - 35000 = 5000

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 levels 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

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

To calculate the variable cost per unit using the high-low method, the change in _____ is divided by the change in _____

cost, activity

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a

decrease in the unit variable cost

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

When constructing a CVP graph, the vertical axis represents

dollars

Estimating the fixed and variable components of a mixed cost using the _________ approach involves a detailed analysis of what cost behavior should be.

engineering

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

false

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

false

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

false

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

fixed and variable

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

fixed, profit

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

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals ___ ____behavior.

linear cost

CVP analysis focuses on how profits are affected by

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

The contribution margin as a percentage of sales is referred to as the contribution margin or CM

ratio

The variable expense ratio is the ratio of variable expense to

sales

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

sales mix

Contribution margin format income statement order

sales, variable expenses, contribution margin, fixed expenses, net operating income