Chapter 5 SmartBook

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

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False The margin of safety is the excess of the budgeted (or actual) sales dollars over break-even sales dollars.

CVP analysis focuses on how profits are affected by ______.

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

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

variable

variable expenses / Sales is the calculation for the _____ _____ ratio.

variable expense

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 ______.

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

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 ______.

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

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is ______.

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

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 ______.

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

Place the following items in the correct order in which they appear on the contribution margin format income statement.

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

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?

2,800 $98,000 ÷ ($50 - $15) = 2,800

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is ______.

29% Variable expense ratio = $245,050 ÷$845,000 = 29%

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is ______.

40,000 Sales volume = ($520,000 + $320,000) ÷ $21 = 40,000 blankets

Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is _____%.

45 85.05 / 189 = .45

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 $_____.

5000

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

False

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

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

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

False Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

Which of the following statements are true?

Plotting data on a scattergraph is an important diagnostic step. Scattergraphs are a way to diagnose cost behavior.

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

Sales Variable expenses

Which of the following statements is correct?

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

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

Cost behavior is considered linear whenever ______.

a straight line approximates the relationship between cost and activity

The contribution margin equals sales minus ______.

all variable costs

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

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

contribution margin

Contribution margin ratio is equal to _____ _____ divided by _____.

contribution margin sales

The degree of operating leverage = ______.

contribution margin ÷ net operating income

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

contribution margin ÷ sales

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 ______.

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

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

decrease in the unit variable cost

When constructing a CVP graph, the vertical axis represents ______.

dollars

When a company produces and sells multiple products ______.

each product most likely has a unique contribution margin. a change in the sales mix will most likely change the break-even point each product most likely creates a unique total of fixed costs.

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

engineering

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

fixed profit

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

fixed variable

Total contribution margin equals ______.

fixed expenses plus net operating income

A company's current sales are $300,000 and fixed expenses total $225,000. 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 ______.

increase by $6,000 Change in net operating income = $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 ______.

increase by $7,750 Change in net operating income = ($735,000 - $700,000) × 45% - $8,000 = $7,750

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

least-square 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

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

leverage

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

linear cost

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

net operating income

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total ______.

sales

The variable expense ratio is the ratio of variable expense to ______.

sales

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

sales mix

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

sales mix

When preparing a CVP graph, the horizontal axis represents ______.

sales volume

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

selling price costs volume

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

the high-low method

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

Profit = (selling price per unit * quantity sold) - (_____ expense per unit * quantity sold) - ( ___________ expenses)

variable fixed

The contribution margin is equal to sales minus ______.

variable expenses

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

zero

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 ______.

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

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.

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 ______.

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