ACCT 2101 Chapter 6

Morris is working on the income statement for his computer parts company. This month the company reported $200,000 in sales. The fixed costs were $40,000 and the variable costs were $80,000. What is the contribution margin?

$120,000

Riley's Rugs sold 950 rugs in June when the unit selling price was $120, unit variable cost was $40, and fixed costs were $35,000 per month. Riley's fixed costs will increase by $11,400 in July, but unit variable cost will remain the same. Sales volume is expected to remain at 950 rugs in July. Calculate the July unit selling price required to earn net income equal to June.

$132

Birdsong Company's CVP income statement included fixed expenses of $176,000 when 5,000 units were sold. The unit selling price was $160 and the unit variable expenses were $96. What is the company's net income?

$144,000

This is the current income statement for Joe's Luggage.Next month, cost of goods sold will decrease by $5.00 per unit, shipping costs will increase by $1.50 per unit, unit selling price will remain the same, and fixed costs will remain the same. The new unit contribution margin would be

$171

Cindy does the books for a small florist shop. She noticed that the shop generated $25,000 in sales this month. The fixed expenses came to $4,000, with the majority resulting from administrative expenses. The variable costs for the month came to $7,000. What is the contribution margin?

$18,000

A company's CVP income statement included fixed expenses of $220,000 when 5,000 units were sold. The unit selling price was $200 and the unit variable expenses were $120. What is the company's net income?

$180,000

Pepper Company's accounting staff prepared a CVP income statement for managers. This income statement reported that when 5,000 units are sold, the company has $330,000 of fixed expenses and a unit selling price of $300. If Pepper's net income is $270,000, what is Pepper's unit variable cost and unit contribution margin?

$180; $120

Susan's Handbags has a unit selling price of $65, unit variable cost of $35, and fixed costs of $25,000 per month. Last month Susan sold 1,000 handbags. Susan's fixed costs will increase by $5,000 next month. Calculate the unit selling price needed to maintain Susan's current level of income while keeping everything else constant.

$70

Becca's Bakery sells cupcakes at $3.15 apiece. The variable cost per cupcake is currently $1.10. The fixed costs are $12,500 per month. Calculate the contribution margin if Becca sells 375 cupcakes and the unit variable cost increases by 10%.

$727.50

Mojo's Coffee Cart currently rents space in a resort area for $1,000 per month ($12,000 annually, but only operates from April to November each year). Next year, they plan to keep the business open year round. They expect sales volume to increase by 12%. Currently, blended coffee sells for $5.00 for a 12-ounce cup, unit variable costs are $1.75 per cup, fixed costs, including the rent, are $1,500 monthly, and annual sales are $100,000. How would the singular change to remain open year-round affect the annual net income?

It would increase by $7,800.

On a CVP income statement, which of the following amounts is most likely to be reported in total dollars and on a per-unit basis?

Contribution margin.

This is the current income statement for Joe's Luggage.Calculate Joe's new net income if unit variable costs increase by 20% but fixed costs, quantities, and unit selling price remain the same.

$47,000

Anders Interiors produces lamps with a selling price of $150 and a contribution margin ratio of 30%. Variable costs include cost of goods sold and sales commissions. Next year, cost of goods sold will be $80 per unit, and sales commissions will be 4% of sales. There will be no change in unit selling price. Calculate the new contribution margin ratio.

43%

Which of the following has an impact on sales revenue, total variable costs, and contribution margin?

A change in sales volume.

Bernard's Bee's sells local, organic honey. They believe they can increase sales volume by 15% by renting space and selling their honey at a nearby farmers' market. The cost of the rental space at the farmers' market is $40 per month. Last month, they sold 100 jars of honey for $12 per jar, unit variable cost was $6.60 per jar, and fixed costs were $200 per month. What change in net income would the company achieve next month if this plan is implemented and unit selling price and unit variable costs do not change?

An increase of $41.

If unit sales are 20,000, variable costs are $320,000, sales are $600,000, and fixed expenses are $200,000, then contribution margin and net income are

Contribution Margin: 280,000 Net Income: 80,000

The margin of safety is the amount of revenue that remains after variable costs have been deducted.

False

Which of the following would cause a decrease to a company's unit contribution margin when the unit selling price is held constant?

Increased unit variable cost.

If a company's unit variable cost increases by $0.05 cents and its unit selling cost remains constant, how will the company's unit contribution margin be impacted?

It will decrease by $0.05.

This is the current income statement for Matt's Mercedes.Next year Matt wishes to raise the unit selling price to $120,000. Sales commissions will change to 4% of sales revenue. Assuming the same number of units are sold both years and the cost of goods sold per unit remains the same, what will be the effect on unit variable cost for Matt's Mercedes?

Unit variable cost will decrease by $200.

Contribution margin divided by sales equals

contribution margin ratio.

The margin of safety tells us how far sales can ________ before the company begins operating at a ________.

drop; loss

The unit contribution margin will ____________________ if fixed costs decrease and all else remain the same.

not be affected

This is the current income statement for Joe's Luggage.Joe expects unit variable costs to increase 20% next year. Fixed costs and quantities are expected to remain the same. The unit selling price that Joe would need to charge to earn the same $120,000 net income next year would be

$386.50.

Ransdell Industries would like to maintain the same level of net income this year as it had last year, but it is facing a $15,000 increase in its fixed costs. If Ransdell's contribution ratio is consistently 0.35, how much additional sales revenue is required to offset the fixed cost increase?

$42,857

This is the current income statement for Jenny's Gems.Calculate the new unit contribution margin if cost of goods sold decreases by $7.00 per unit, shipping cost increases by $1.75 per unit, unit selling price remains the same, and fixed costs remain the same.

$50.25

Sam recently discovered that costs from his vendor will cause an increase of $40 to the unit variable cost; the current unit variable cost is $80. Sam wants to determine if he can keep the unit selling price the same for customers by decreasing his fixed costs by $15,000. Currently Sam's sales are $300,000 at $200 per unit, and his fixed costs are $95,000. If Sam makes his proposed changes, how many units will he need to sell to keep customer prices the same while earning the same net income?

2,063

Jane has been told that next month there will be a $20 increase to the current $60 unit variable cost for her product. Her current sales per month are $220,000 at $110 per unit, with monthly fixed costs of $80,000. Jane does not want to increase the unit selling price , so she is planning to cut fixed costs by $12,000. How many units will Jane's company need to sell with these changes in order to keep unit selling price the same while earning the same net income?

2,934

Anders Interiors sells lamps with a selling price of $150 and a contribution margin ratio of 30%. Unit variable costs are expected to increase by $10 next year with no change in unit selling price. Calculate the new contribution margin ratio.

23%

Jake works for a lawn and garden store. During certain seasons the store is busier than others, so he wants to determine the margin of safety ratio. When the store's sales are $210,000, net income is $20,000. He has determined that the break-even point is $160,000. What is the margin of safety ratio for Jake's store?

23.8%

BKK Corporation sells headphones with a unit selling price of $200 and a contribution margin ratio of 40%. Unit variable costs are expected to increase $10 next year with no change to the unit selling price. Calculate the new contribution margin ratio.

35%

Milne Technology sells 15,000 units each quarter. Its current unit selling price is $25 and its contribution margin ratio is 0.6. Next quarter the unit selling price will increase to $28 , and Milne will retain the same contribution margin ratio. How will the unit variable cost change next quarter?

It will increase by $1.20.

If a company's unit selling price and unit variable costs are both increased by $5, what will happen to the unit contribution margin?

It will remain unchanged.

This is the current income statement for Celebrity Shoes.Next year, Celebrity wishes to raise the unit selling price to $110. Sales commissions will change to 2.5% of sales. Cost of goods sold per unit, fixed costs, and sales volume will remain the same. How will these changes affect the unit contribution margin?

The unit contribution margin will increase by $10.25.

What is the difference between determining the break-even point in units and determining the required sales in units for a target net income?

To determine the break-even point in units you only need to know the unit contribution margin and the fixed costs, whereas to determine the required sales in units for a target net income you also need to know the target net income.

Mike's Yogurt sells frozen yogurt by the ounce at $1.50 per ounce. The variable cost is $0.30 per ounce. The fixed costs are $1,500 per month. Calculate the unit contribution margin if the unit variable cost increases by 20%.

$1.14

Break-even point in dollars can be calculated by dividing the fixed costs by the

contribution margin ratio.

If the unit variable cost increases while the unit selling price remains unchanged, the unit contribution margin will

decrease

Bernard's Bees sells local organic honey. It has a contribution margin ratio of 45%. To increase production, the company is purchasing several new hives which will increase fixed costs from $200 to $500 per month. Last month's net income was $200. What amount of monthly sales revenue would be needed to keep net income at the same level with the new hives? Round to the nearest whole dollar.

$1,556

Becca's Bakery sells cupcakes at $3.15 apiece. The variable cost per cupcake is $1.10. The fixed costs are $12,500 per month. Calculate the unit contribution margin if unit variable cost increases by 10%.

$1.94

This is the income statement for the current year for Jenny's Gems. Jenny expects a 15% increase in the unit variable cost next year, but fixed costs, and quantities are expected to remain the same. The unit selling price that Jenny would need to charge to earn the same $4,500 net income next year would be

$119.75

This is the current income statement for Jenny's Gems. Jenny expects a 15% increase in unit variable costs but no changes to unit selling price, volume, or fixed costs. Jenny's new net income is

$3,037.50.

Lily runs an art supply store. Her fixed expenses for this month were $7,000, while her variable expenses were $9,000. After totaling all of the sales for the month, Lily realized she had earned revenue of $51,000. What is Lily's net income for this month?

$35,000

The managers of Emerson, Inc. have asked the accounting staff to prepare a CVP income statement. When the company sells 10,000 units, fixed expenses are $660,000, the unit selling price is $480, and net income is $540,000. Kate Holloway is the new intern and has been asked to prepare this statement. Kate comes to you and asks your help in determining the unit variable cost and the unit contribution margin for Emerson. What are they?

$360; $120

Dana is working on the income statement for her catering business. This month she has brought in $85,000 in sales. Her fixed costs were $12,000, and her variable costs were $22,000. What is Dana's net income?

$51,000

Mike's Yogurt sells frozen yogurt by the ounce for $1.50 per ounce. The unit variable cost is currently $0.30. The fixed costs are $1,500 per month. Calculate the contribution margin if Mike sells 500 ounces and only the unit variable cost increases by 20%.

$570

Audrey's Ice Cream Shop sells homemade ice cream treats. The contribution margin ratio for the shop is currently 45%. Audrey wants to increase the shop's sales revenue by $15,000 without increasing fixed costs and maintaining the same contribution margin ratio. Calculate the increase in net income that would result.

$6,750

How much in additional sales revenue would be needed to cover an increase of $25,000 in fixed costs if a company's contribution margin ratio is consistently 0.3?

$83,333

Mojo's Coffee Cart has a consistent contribution margin ratio of 55%. The company is purchasing new coffee roasters which will increase its fixed costs from $1,500 per month to $2,000 per month. Net income in August, before the purchase of the new roasters, was $3,000. What would monthly sales revenue need to be for the company to make the same net income in September after the purchase of the new roasters? Round to the nearest whole dollar.

$9,091

Sara is working to calculate the margin of safety ratio for her father's hardware store. The store's expected sales of $110,000 will yield net income of $12,000. According to her father, the break-even point has been calculated to be $80,000. What is the margin of safety ratio for the hardware store?

27.3%

MC Corporation produces headphones that have a selling price of $200 and a current contribution margin ratio of 40%. Variable costs include cost of goods sold and sales commissions. Next year, cost of goods sold will be $120 per unit, and sales commissions will be 5% of sales. There will be no change in unit selling price. Calculate the contribution margin ratio for next year.

35%

Bernard's Bees sells local organic honey. Selling price is $12 per jar and variable costs are $6.60 per jar. Fixed costs are $200 per month. Determine the change in the contribution margin ratio if the company can lower unit variable costs by 10% while maintaining the same unit selling price.

An increase to 50.5%.

Mojo Coffee Cart sells coffee drinks at a seasonal resort. They have found a new source for their coffee beans which will lower their unit variable cost from $1.75 to $1.68. Unit selling price is and will remain $4.75. Determine the change in contribution margin ratio using the new vendor.

An increase to 64.63%.

CVP analysis 1. Is important in profit planning 2. Helps maximize use of production facilities.

Both 1 and 2

This is the current income statement for Celebrity Corn. Next year, Celebrity wishes to increase the unit selling price to $110. Shipping will change to 2.5% of sales. Cost of goods sold per unit, fixed costs, and sales volume will remain the same. How will these changes affect contribution margin and net income?

Contribution margin and net income will increase by $1,537.50.

This is the current income statement for Buffalo Bill's Hat Shop. Next year, Buffalo Bill wishes to increase the unit selling price to $110 per unit. Shipping costs will change to 2.5% of sales. Cost of goods sold per unit, fixed costs, and sales volume will remain the same. How will these changes affect contribution margin?

Contribution margin will increase by $1,537.50.

Which of the following is the amount of revenue remaining after deducting variable costs?

Contribution margin.

Davis Cookies has sales of $15,000, fixed costs of $2,000, and a contribution margin ratio of 0.45. If sales change to $12,500, fixed costs change to $500, and the contribution margin ratio changes to 0.30, what is the change in net income?

Decrease of $1,500.

MC Corporation has sales revenue of $2,000 and a contribution margin ratio of 0.3. If sales change to $1,700 and the contribution margin ratio changes to 0.25, what is the change in contribution margin?

Decrease of $175

Wilson Tech has sales of $15,000, fixed costs of $2,000, and a contribution margin ratio of 0.45. If sales change to $12,500, fixed costs change to $500, and the contribution margin ratio changes to 0.30, what is the change in contribution margin?

Decrease of $3,000.

RS Corporation has a current break-even point of 375,000 units. Which would be the best course of action to increase net income?

Decrease the unit variable cost

On a CVP income statement, some amounts are reported both in total dollars and on a per-unit basis, while other amounts are reported in total dollars only. Which of the following amounts on a CVP income statement is most likely to be stated in total dollars only?

Fixed costs.

Mojo's Coffee Cart currently has a contribution margin ratio of 55%. The business operates in a resort area and expects a decline in revenue of $4,500 per month during the off season. Compute the decrease in net income that the company should anticipate in the off season, assuming that monthly fixed costs and the contribution margin ratio will remain unchanged.

Net income will decrease by $2,475 per month.

This is the current income statement for Carmen's Cakes. Carmen is considering raising the unit selling price to $19.00 per cake, which she believes will decrease sales volume to 1,500 cakes. Carmen will increase cost of goods sold by $0.50 per cake but will decrease sales commissions to 3% of sales. All fixed costs will remain the same. What is the effect of these changes?

Net income will decrease by $3,915.

This is the current income statement for Celebrity Shoes.Next year, Celebrity wishes to raise the unit selling price to $110. Shipping will change to 2.5% of sales. Cost of goods sold per unit, fixed costs, and sales volume will remain the same. How will these changes affect net income?

Net income will increase by $1,537.50.

This is the current income statement for Cathy's Candy. Cathy is considering raising the unit selling price to $7.50 per pound, which she believes will decrease sales to 8,000 pounds. Cathy will increase cost of goods sold by $0.50 per pound but will decrease sales commissions to 4% of sales. Fixed costs will remain the same. How much will Cathy's net income change as a result of these actions?

Net income will increase by $3,600.

Sal started his business a year ago. At that point he was primarily focused on breaking even. Now that he has achieved that goal, he would like to start working toward achieving a profit. Sal wants to determine how many additional units he will need to sell in order to reach his goal. If he already has all of the information to find the break-even point in units, what will he need to determine the number of units required to achieve his goal?

Sal will need to know his target net income.

Which amounts are affected by a change in sales volume?

Sales revenue, total variable expenses, and contribution margin.

Which of the following is calculated by dividing the fixed costs by the contribution margin ratio?

The break-even point in dollars.

On a CVP income statement, contribution margin information is often reported as a total dollar amount and as a per unit amount.

True

This is the current income statement for Matt's Mercedes. Next year Matt wishes to raise the unit selling price to $120,000. Sales commissions will change to 4% of sales. Assuming the same number of units are sold both years and the cost of goods sold per unit remains the same, what will be the effect on variable costs for Matt's Mercedes?

Variable costs will decrease by $5,000.

If contribution margin is $280,000, sales are $600,000, and net income is $80,000, then variable costs and fixed expenses are

Variable: 320,000 Fixed: 200,000

Fixed costs divided by unit contribution margin equals

break-even point in units.

JK Corporation sells 10,000 units each quarter. Its current unit selling price is $18 and the contribution margin ratio is 0.3. Next quarter the unit selling price will increase to $20, and JK will keep the same contribution margin ratio. The unit variable cost next quarter will ________ by $1.40 per unit.

increase

Susan's Handbags typically sells 1,000 handbags each month with a unit selling price of $65. Susan's variable costs are $35 a unit, and the fixed costs are $25,000 per month. Susan wishes to raise the unit selling price to $75 while maintaining her current cost structure. If she implements the price change, only 850 units will be sold per month. If Susan changes the price and the quantity falls, the contribution margin will

increase by $4,000.

Riley's Rugs has a unit selling price of $120, unit variable cost of $40, and fixed costs of $35,000 per month. Last month, Riley's sold 950 rugs. This month, Riley's wishes to raise the unit selling price to $135, but thinks only 900 units could be sold. If Riley's makes only these changes, the contribution margin will

increase by $9,500.

If a company's unit variable cost has increased and the unit selling price has remained constant, then the

unit contribution margin will decrease by the same amount.