chapter 5 optional questions
to convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to
$0
Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals
$144,000 / 0.59 = $244,068
A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be
$20
Adam's Sports Store sells an item with a contribution margin ratio of 55% and total fixed costs of $8,000. If Adam's generates additional sales of $25,000 for this item, net operating income will increase by Blank______.
$25,000 x 55% = $13,750 increase
A company's current profit is $25,000 for a product that sells for $100 and has a unit contribution margin of $65. Fixed costs are $40,000. If the company increases sales by 50 units, total profit will increase by
$3,250 Use the equation: Profit = Unit CM x Q - Fixed Expenses
Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals
$564,000 / 0.62 = $909,677
Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals
$95 x 450 = $42,750
Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is ______.
($1,452,000 - $958,320) / $1,452,000 = 34%
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-$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
Company A has fixed costs of $564,000 and has set a target profit of $800,000. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals
($564,000 + $800,000) / 0.62 = $2,200,000
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
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) x 45% - $8,000 = $7,750 increase
to simplify CVP calculations, managers typically adopt what assumptions?
1. selling price is constant. The price of a product or service will not change as unit sales change 2. costs are linear and can be accurately divided into variable and fixed components. the variable costs per unit and total fixed costs are constant over the entire relevant range. 3. in multiproduct companies, the mix of products sold remains constant
Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is
200,000 / ($10-$5) = 40,000 units x $10 each = $400,000
Anne's Antique Store sells an item with a contribution margin ratio of 29% and total fixed costs of $15,000. If the store generates an additional $60,000 of sales for the item this year, net operating income will increase by
60,000 x 29% = $17,400
A company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needed to reach the target profit is
90,000 x $7.50 = $675,000
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?
98,000 / ($50-$15) = 2,800 to break-even. 6,400 UNITS is needed to earn the target profit
A company is currently selling 10,000 units per month of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will
An increase in selling price of $5 will increase the contribution margin $5. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.
the contribution margin as a percentage of sales is referred to as the contribution margin or ...
CM ratio
Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was
CM ratio = contribution margin / sales $100,170 / $189,000 = 53%
Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?
CVP analysis
Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will
Current income: ($80 × 200) - $5,000 = $11,000. With the change salary becomes a variable cost: ($80 - $20) x 200 × 125% = $15,000, an increase of $4,000 per month.
Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will
Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month.
Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will ______ per month.
Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month.
true or false: the high low method is superior to least-squares regression
FALSE; High-low is not as accurate as least-squares regression because it only looks at two data points, which is a major flaw.
true or false: the high low method is difficult to apply and requires a statistical software package
FALSE; The high-low method is simple to apply and does not require software.
true or false: the high low method generally provides an accurate estimate of true cost behavior during normal periods
FALSE; generally, two data points are not enough to provide good estimates and accurate information.
simple CVP analysis can be relied on for changes in volume outside the relevant range
FALSE; the CVP model must be adjusted for activity levels outside the relevant range
true or false: the high low method is based on the data points with the highest and lowest level of cost
FALSE; when applying this method, use the data points with the highest and lowest level of activity, not cost.
ABC Inc. sells a product for $10 per unit. Variable costs are $4 per unit and total fixed costs equal $40,000. If sales increase from 10,000 units to 14,000 what will be the increase in overall profit?
Profit = (P x Q - V x Q) - Fixed expenses Profit = (10 x 10,000 - 4 x 10,000)-40,000 Profit = (100,000 - 40,000) - 40,000 Profit = 20,000 Profit = (10 x 14,000 - 4 x 14,000) - 40,000 Profit = (140,000 - 56,000) - 40,000) Profit = 44,000 44,000 - 20,000 = $24,000 increase in overall profit
true or false: the high low method is easy to apply
TRUE
true or false: the high low method uses only two data points
TRUE
true or false: the high low method is based on periods where the activity tends to be unusual
TRUE; The points with the highest and lowest level of activities often tend to be unusual.
true or false: When using the high-low method, fixed costs are calculated after variable costs are determined.
TRUE; When using high-low, the variable cost per unit of activity is calculated by dividing the change in cost by the change in activity. That amount is plugged into one of the activity levels to determine the total fixed cost.
Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to
Total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Increased CM of $44,000 - $60,000 in new fixed costs = $16,000 decrease.
To analyze mixed costs with the high-low method, begin by identifying the periods with the lowest and highest level of
activity
To analyze mixed costs with the high-low method, begin by identifying the period with the lowest level of
activity and its related cost
Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to
break-even
the sales volume level at which profits equal zero is the
break-even point
multiplying unit selling price x the number of units required to break-even is one way to calculate
break-even sales dollars
The variable cost per unit using the high-low method is calculated as
change in cost / change in unites (activity)
Using the contribution margin ratio, the impact on net income for a change in sales dollars is
change in sales dollars x contribution margin ratio
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
A change in profits that occurs due to a change in sales and fixed expenses may be calculated as
cm ratio x change in sales - change in fixed expenses
a change in profits that occurs due to a change in sales and fixed expenses may be calculated as
cm ratio x change in sales - change in fixed expenses
costs are separated into variable and fixed categories when using the ______________ approach
contribution
CM ratio =
contribution margin / sales
CVP is the acronym for
cost-volume-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(n)
decrease of $3,000
target profit analysis
estimates sales needed to earn a given profit; is similar to break-even analysis
to calculate the break-even point (in unit sales and dollar sales), managers can use the equation method or the __________ method
formula
simple CVP analysis is
generally not valid outside the relevant range
CM ratio = 1 _______ the variable expense ratio
minus
once all fixed expenses have been covered, the CM ratio defines the portion of each sales dollar contributing to
profits
the variable expense ratio is the ratio of variable expenses to
sales
the contribution margin (CM)
sales - variable expenses
to simplify CVP calculations, it is assumed that ____________ will remain constant
selling price
CVP analysis allows companies to easily identify the change in profit due to changes in
selling price volume product mix
estimating the sales volume required to earn a given amount of net income is known as
target profit analysis
A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a
the current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.
The rise-over-run formula for the slope of a straight line is the basis of
the high-low method
CVP analysis focuses on how profits are affected by
total fixed costs mix of products sold sales volume selling price unit variable cost
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
unit sales to attain the target profit = target profit + fixed expenses / unit CM ($975,000 + $195,000) / 0.65 = $1,800,000
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______.
unit sales to break even = fixed expenses / unit cm 305,000 / 40 - 7,625
Using the high-low method, the fixed cost is calculated
using either the high or low level of activity after the variable cost per unit is calculated
When using the high low method, the change in cost divided by the change in units equals
variable cost per unit
The equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is: selling price per unit =
variable cost per unit + desired profit per unit
wen using the high-low method, the slope of the line equals the
variable cost per unit of activity
variable expense ratio
variable expenses / sales
