Chapter 6 - Managerial Accounting
When preparing a CVP graph, the slope of the total cost line represents ______.
variable cost per unit
CVP analysis can help answer the question of _____.
how net income can be increased
The weighted average unit contribution margin is the average unit contribution margin of multiple products weighted according to ______.
percentage of units sold
According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases.
price
A company sells two products. Product A sells for $10.00 per unit and Product B sells for $8.00 per unit. Variable costs are $3.00 for Product A and $2.50 for Product B. If the sales mix is 70% Product A and 30% Product B, the weighted average contribution margin is ______.
$6.55 ; Reason: $7.00 × 70% + $5.50 × 30% = $6.55
Seth's Speakers had actual sales of $1,630,000. If break-even sales equals $935,000, Seth's margin of safety in dollars is ______.
$695,000 ; Reason: $1,630,000 - $935,000 = $695,000
The amount that each unit sold contributes to fixed costs and profit is ______.
unit contribution margin
Sweet Dreams sells 15,000 pillows per year for $25 per unit. Variable cost per unit is $14. Sweet Dreams wants to improve customer satisfaction by using higher quality direct materials which will increase the variable cost per unit to $19. Fixed costs per year total $90,000. If sales increase by 5,000 units per year, what price will Sweet Dreams have to charge to earn the same profit it is earning now ($75,000 per year)?
$27.25 ; Reason: Costs + Target Profit: ($19 × 20,000 + $90,000 + $75,000) = $545,000 ÷ 20,000 units = $27.25
Jacki's Jewels sells 10,000 necklace & earring sets per year. Fixed costs are $80,000 and variable costs are $20 per set. Jacki is planning to increase the quality of the stones, which will increase variable costs by $8 per set and increase sales by 25%. If Jacki increases the quality of the stones, what price will she need to charge to attain her target profit of $60,000 per year?
$39.20 ; Reason: Costs + Target Profit = ($28 x 12,500 + $80,000 + $60,000) = $490,000 ÷ 12,500 sales in units or $39.20 per set.
The break-even point can be affected by ______
- product mix - sales mix - total fixed costs
In the profit equation, total ______ is a function of the number of units sold (Q).
- sales revenue - variable costs
Contribution margin equals sales minus ______.
- variable manufacturing costs - variable selling and administrative costs
CVP analysis can be useful in deciding ______.
- which services to offer - what price to charge for goods or services - what cost structure to implement - which products to offer - what marketing strategy to use
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; Reason: $98,000 ÷ ($50 - $15) = 2,800
Given sales of $110,000, a contribution margin of $75,000 and net operating income of $30,000, operating leverage is ______.
2.5 ; Reason: $75,000 ÷ $30,000 = 2.5
Desks by Daisy sells a student desk for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell ______ desks per month in order to break-even.
250
Given net operating income of $50,000, contribution margin of $150,000 and sales of $300,000, the degree of operating leverage of _______.
3
A company sells 15,000 units of product per month. The sales price per unit is $5.00, variable costs are $2.80 per unit and and total fixed costs equal $3,000. The contribution margin ratio is ______.
44% ; Reason: ($5.00 - $2.80) ÷ $5.00 = 44%
Given sales of 10,000 units per month, sales price per unit of $4.00, variable costs of $1.80 per unit and and total fixed costs of $5,000, the contribution margin ratio is _______%.
55
Given fixed costs of $30,000, variable costs of $2.00 per unit, and a contribution margin of $5.00 unit, ______ units have to be sold in order to break even.
6,000
A company sells two products. Product A sales total $28,000 and Product B sales total $12,000. Total contribution margin is $18,000 for Product A and $9,000 for Product B. The weighted average contribution margin ratio is ______%.
67.5
Tess's Tidbits sells three different snack packs. The weighted average contribution margin is $15.00 and total fixed costs are $20,000 per month. Of her total sales, 40% are for the deluxe snack pack, 35% are standard snack packs and 25% are mini snack packs. In order to earn the target profit of $10,000 per month, Tess needs to sell ______ deluxe snack packs each month.
800
Which of the following is NOT a method used for basic CVP analysis?
Break-even analysis
The weighted-average _____ _____ _____ is based on the relative percentage of total sales revenue in dollars, not units.
Contribution margin ratio
Degree of operating leverage equals ______.
Contribution margin ÷ Net operating income
The extent to which a company uses fixed costs (as opposed to variable costs) in its operations is called ______ ______.
Cost structure
When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will ______.
Decrease
The break-even point is reached when total revenue is ______ total costs.
Equal to
True or false: CVP analysis is only used for break-even and target profit analysis.
False
True or false: Cost structure refers to how a company uses product and period costs in an organization.
False
True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.
False
True or false: The terms operating leverage and financial leverage refer to the same concept.
False
How much contribution margin is generated per dollar of sales revenue is the contribution margin ________.
Ratio
When multiple products are sold, the break-even point depends on the _____ mix.
Sales
When constructing a CVP graph, the ______ of the line represents variable cost per unit.
Slope
An extension of break-even analysis that allows managers to determine units or sales needed to achieve an earning's goal is called _____ ______ analysis.
Target profit
The equation for the profit equation method is ______.
Total Sales Revenue - Total Variable Costs - Total Fixed Costs = Profit
Methods that can be used to model the relationship between revenues, costs, profit and volume include the ______ contribution margin method and the contribution ______ ____ method.
Unit ; margin ratio
The break-even point is the level of sales at which the profit equals ______.
Zero
The goal of break-even analysis is to find the level of sales where profit is equal to ______.
Zero
Contribution margin equals sales minus ______.
all variable costs
The difference between break-even analysis and target profit analysis is the ______.
amount that profit is set to
If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ratio will ______.
both increase
Solving for the sales level needed to achieve a profit of zero is ______ analysis.
break-even
The contribution margin stated as a percentage of sales dollars is the ______.
contribution margin ratio
Decisions about whether to use fixed or variable costs to run a business impact a company's ______.
operating leverage
A company sells a product for $80 per unit and has a contribution margin ratio of 45%. Fixed costs total $180,000. Sales dollar to break even equals ___.
$400,000 ; Reason: $180,000 ÷ 45% = $400,000
Given budgeted sales of $982,000, break-even sales of $932,200, and fixed expenses of $429,000, the budgeted margin of safety in dollars is ______.
$49,800 ; Reason: $982,000 - $932,200 = $49,800.
Which of the following are assumptions of cost volume profit analysis?
- In multi-product companies, the sales mix is constant. - All costs can be classified as either fixed or variable. - Production volume is equal to sales volume.
CVP ______.
- allows managers to see how changing one variable can impact another - can be used for "what-if" analysis - can be used to make many different decisions
Multi-product target profit analysis ______.
- is calculated the same way as single product analysis - depends upon the sales mix
The weighted average unit contribution margin ______.
- is used instead of the single product contribution margin in multi-product break-even analysis - is based on the relative percentage of each unit sold - assumes that the percentage of each product sold is constant
Given total fixed costs of $35,000 and a contribution margin ratio of 40%, $______ of revenue must be earned to break even.
87,500 ; $35,000/40%= $87,500
Larson's Ltd. sells its product for $12.00 per unit. The contribution margin per unit is $8.00 and fixed costs are $75,000. Larson has to sell to ______ units to break even.
9,375; Reason: $75,000 ÷ $8.00 = 9,375 units
The amount each unit sold contributes towards fixed costs and profit is the unit _____ ______.
Contribution margin
To calculate the degree of operating leverage, divide ______ ______ by net operating income.
Contribution margin
Decisions about the use of debt versus equity affects a company's ______ ______.
Financial leverage
The excess of the budgeted (or actual) sales dollars over break-even sales is called the ______ of ______.
Margin ; safety
Decisions about whether to use fixed or variable costs to run a business affects a company's ______ leverage.
Operating