A306 Chapter 2 questions

The term "cost structure" refers to the relative proportion of ____and _____costs in an organization.

fixed and variable

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

the high-low method

At the break-even point Blank______.

total revenue equals total cost net operating income is zero

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 $

2,250

When compared to a company with higher fixed costs and lower variable costs, a company with lower fixed costs and higher variable costs, has Blank______.

greater profit stability better protection from loss in bad years lower net income in good years

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be Blank______.

$100 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is Blank______. Multiple choice question.

$301,100 Reason: (67% × $1,430,000) - $657,000 = $301,100

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 Blank______.

$99,000 Reason: Net operating income = $184,000 - $85,000 = $99,000

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

65% (100 - 35)

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

False Reason: Cost structure refers to the relative portion of fixed and variable costs in an organization.

If a company with $40,000 of fixed expenses is operating at a loss, each additional unit sold will decrease that loss by the selling price per unit.

False Reason: Each additional unit sold will decrease the loss by the contribution margin, not the selling price per unit.

Which of the following statements is correct? Multiple choice question.

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

CM ratio is equal to 1 - ________ ratio

Variable expense

The calculation of contribution margin (CM) ratio is Blank______.

contribution margin ÷ sales

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

least-squares regression Reason: The contribution approach is a type of income statement format. Reason: The engineering approach is an approach that is based on an analysis of what cost behavior should be. Reason: The high-low method only uses two data points.

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, a Blank______ occurs. Multiple choice question.

net loss

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 Blank______.

sales

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

selling price cost volume

CVP analysis focuses on how profits are affected by Blank______.

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

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

total fixed expenses.

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

volume. costs. selling price.

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a Blank______. Multiple choice question.

$10,000 net operating loss Reason: Contribution margin of $40,000 - fixed expenses of $50,000 = a $10,000 loss.

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 year-end, net operating income will increase by Blank______. Multiple choice question.

$137,500 Reason: $250,000 × 55% = $137,500 increase

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 Blank______.

$334,040 Reason: (72% × $832,000) - $265,000 = $334,040

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 Blank______.

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

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? Multiple choice question.

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

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

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 Blank______.

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

Contribution margin: Multiple choice question.

becomes profit after fixed expenses are covered. Reason: Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses. Reason: Because contribution margin is a variable amount, it is affected by changes in activity. Reason: Contribution margin equals sales minus variable expenses.

Using the contribution margin ratio, the impact on net income for a change in sales dollars is Blank______. Multiple choice question.

change in sales dollars × contribution margin ratio

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the Blank______ approach.

contribution margin

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n): Multiple choice question.

decrease in the unit variable cost. Reason: A decrease in unit selling price would decrease profits. Reason: A change in sales mix would only be correct if the change was a shift toward the more profitable product(s). Reason: An increase in total fixed costs would decrease profits.

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 Blank______. Multiple choice question.

increase by $6,000 Reason: ($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 Blank______.

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

A company with a high ratio of fixed 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 best fitting line minimizes the sum of the squared errors when using Blank______. Multiple choice question.

least-square regression

The variable expense ratio equals variable expenses divided by Blank______.

sales

The contribution margin equals sales minus all Blank______ expenses.

variable

The contribution margin equals sales minus all Blank______ expenses. Multiple choice question.

variable

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

variable

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is Blank______.

$168,000 Reason: Profit = 200,000 × $4 - $632,000 = $168,000.

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by Blank______.

$174,000 Reason: $600,000 × 29% = $174,000

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If the current net loss is $3,000, selling one additional unit will decrease the loss by $

4 (10 - 6)

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 Blank______.

40,000 Reason: ($520,000 + $320,000) ÷ $21 = 40,000

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 Blank______. Multiple choice question.

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

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

Sales mix

To calculate profit, multiply the Blank______ per unit by sales volume and subtract total fixed cost. Multiple choice question.

contribution margin (sales - variable expenses)

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred. The cost equation using the high-low method is Blank______. Multiple choice question.

y = $1,450 + $2.50x. Reason: The high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) are the high and low activity months.