Accounting Exam 3
Examples of variable costs
Direct materials Direct labor Variable factory overhead Variable marketing expenses
The margin of safety is the excess of: Break even sales over expected sales Expected sales over variable costs Expected sales over fixed costs Fixed costs over expected sales Expected sales over break even sales
Expected sales over break even sales
Margin of Safety Percentage
expected sales - break even sales / expected sales
Margin of Safety in Dollars
expected sales - breakeven sales ($)
What does the contribution margin ratio mean?
40% or .4 of every sales dollar is left to cover fixed expenses and what's leftover goes to net income
Change in income (%)
DOL x change in sales (%)
The contribution margin per unit is the price at which a unit must be sold in order for the company to break even
False
To calculate the break even point in units, one must know unit fixed costs, unit variable cost, and sales price
False
Break even in sales dollars
Fixed Expenses / CM Ratio
unit sales for target profit
Fixed expense + target profit / cm per unit
Dollar sales for target profit
Fixed expense + target profit/ cm ratio
Break even in unit sales formula
Fixed expenses/ cm per unit
Degree of Operating Leverage
How percentage change in sales will impact profit
What does the contribution margin per unit mean?
It is the amount left over to cover fixed expenses and any excess goes to the net income
CM income statement how to work
Move up to find sales Move down to find income
Which of the following is the correct interpretation of a degree of operating leverage of 5?
Operating leverage of 5 means that if sales increase by 5%, there will be a 25% increase in the firm's pretax profit.
Fixed costs
Remain constant even when activity levels change Fixed cost per unit increase when activity decreases and decrease when activity increases (inverse)
In cost volume profit analysis, the unit contribution margin is:
Sales price per unit less cost of goods sold per unit Sales price per unit less unit fixed cost per unit Sales price per unit less total variable cost per unit Sales price per unit less unit total cost per unit The same as the contribution margin ratio
variable costs
They change in proportion to changes in the activity level/volume Variable costs per unit remain constant even when activity changes
Why do we use cost volume profit analysis
To predict how changes in costs and sales levels affect profit
DOL formula
Total contribution margin in $ / net income
fixed cost per unit formula
Total fixed cost/activity level (volume)
Mixed Costs
Total fixed costs + total variable cost
Contribution margin per unit is the amount by which product's unit selling price exceeds its variable cost per unit
True
Degree of operating leverage is defined as total contribution margin in dollars divided by pretax income
True
The contribution margin ratio is the percent of each sales dollar that remains after deducting the unit variable cost
True
The dollar amount of sales needed to achieve a target income is computed by dividing the sum of fixed costs plus the target pretax income by the contribution margin ratio
True
The margin of safety is the amount that sales can drop before the company incurs a loss
True
Total variable cost formula
Variable cost per Unit x activity level/quantity
Variable Expense Ratio
Variable exp per unit/ selling price per unit Var exp ratio + cm ratio = 100% (sales)
What is the break-even point?
Zero profit Total sales= total costs Neither profit nor a loss Expressed in units sold or sales dollars
Contribution Margin Ratio formula
contribution margin per unit / selling price per unit
Contribution margin Income Statement
sales - variable expenses = contribution margin - fixed expenses = net operating income (or loss)
contribution margin per unit formula
sales price per unit - variable cost per unit
Contribution margin formula
total sales - total variable costs
Mixed cost equation
y=a+bx