Chapter 6 smartbook

Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is

780

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

Citrus Fruits sells oranges for $20 per crate. If the company's margin of safety is $180,000, the margin of safety in units is

9,000

If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by

90

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

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 ______.

$1,800,000

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a ______.

$10,000 net operating loss

Ceramic Creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If Ceramic Creations sells 25,000 pots, net operating income will be ______.

$130,000

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is ______.

$168,000

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by ______.

$174,000

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

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

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 ______.

$2,200,000

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 ______.

$244,068

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is ______.

$301,100

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ______.

$380,000

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 ______.

$42,750

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

The degree of operating leverage = ______.

Contribution Margin / Net Operating Income

Which of the following statements is correct?

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

To calculate profit, multiply the ______ per unit by sales volume and subtract total fixed cost.

contribution margin

To calculate the degree of operating leverage, divide

contribution margin

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ______ approach.

contribution margin

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

contribution margin ÷ sales

A simpler form of the CVP graph is called the graph

profit

The single point where the total revenue line crosses the total expense line on the CVP graph indicates ______.

profit equals zero the break-even point

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total ______.

profit or loss

The contribution margin as a percentage of sales is referred to as the contribution margin or CM

ratio

The variable expense ratio equals variable expenses divided by ______.

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

To simplify CVP calculations, it is assumed that ______ will remain constant.

selling price

The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit.

selling price cost volume

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

selling price volume costs

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 ______.

$450 increase

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is ______.

$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

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 ______.

$909,677

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 equals ______.

(unit sales - unit sales to break even) x unit contribution margin

Solving for the sales level needed to attain a target profit of $ is the same process as solving for the sales level needed to break-even.

0

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

0

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ______.

16%

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is

19

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

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by ______.

20%

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $

21,6

Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is ______.

27%

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%

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is

3,2

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is ______.

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 ______.

4,800

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 ______.

40,000

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $

40,000

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 ______.

40,000 units and $400,000

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

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 $

5,000

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 ______.

53%

If a company has a variable expense ratio of 35%, its CM ratio must be

65

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 $

675,000

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 ______.

7,625

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

Baron's net income grows twice as fast as its sales. Adams has a higher degree of operating leverage than Baron.

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

Company B

CVP is the acronym for

Cost Volume Profit

Which of the following are assumptions of cost-volume-profit analysis?

Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant.

Operating leverage is the smallest at sales levels near the break-even point and increases as sales and profits rise.

False

Simple CVP analysis can be relied on for changes in volume outside the relevant range.

False

True or false: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.

False

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False

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

False

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

Sales Variable expenses

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ______.

a contribution margin equal to fixed costs reached the break-even point

CVP analysis is based on some that may be violated in practice, but the tool is still generally useful.

assumptions

Contribution margin ______.

becomes profit after fixed expenses are covered

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

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ______.

change in sales dollars × contribution margin ratio

After reaching the break-even point, a company's net operating income will increase by the per unit for each additional unit sold.

contribution margin

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 ______.

decrease by $16,000

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

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, 3,000

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

dollars

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

A company has reached its break-even point when the contribution margin fixed expenses.

equals

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

fixed, profit

A change in sales mix ______.

from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales

If operating leverage is high, a small percentage increase in sales produces a

higher

Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,000. If Tommy sells an additional 5,000 trains, profits will ______.

increase $120,000

Fantastic Frames sells units for $15 each. Variable costs total $6 per unit, and fixed costs total $90,000. If the number of units being sold increases by 2,000, net operating income will ______.

increase $18,000

A company is currently selling 10,000 units 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 ______.

increase by $24,000

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 ______.

increase by $4,000

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 ______.

increase by $6,000

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.

increase by $7,000

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using analysis

incremental

The contribution margin statement is ordinarily used by those ______.

inside the company only

The contribution margin statement is primarily used for ______.

internal decision making

The degree of operating leverage ______.

is not a constant decreases as sales and profits rise is greatest at sales levels near the break-even point

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

leverage

The margin of safety percentage is ______.

margin of safety in dollars ÷ total budgeted (or actual) sales in dollars

If the total contribution margin is less than the total fixed expenses, a ______ occurs.

net loss

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

net operating income

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.

net operating income will increase by $0.70 total contribution margin will increase by $0.70

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ______.

the sale of 12,000 putters results in net operating income of $380,000 the contribution margin per putter is $65.

The profit graph allows users to easily identify ______.

the sales volume required to reach the break-even point the profit at any given sales volume

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

CVP analysis focuses on how profits are affected by ______.

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

The break-even point is reached when the contribution margin is equal to ______.

total fixed expenses

Candle Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units ______.

total variable cost is $1,200 the variable cost per unit is $2.40

The contribution margin equals sales minus all ______ expenses.

variable

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

When a company only produces a single product, the total variable cost can be calculated with the equation ______.

variable cost per unit multiplied by quantity of units sold

CM ratio is equal to 1 - ______ ______ ratio.

variable expense

The contribution margin is equal to sales minus ______.

variable expenses

Profit = (selling price per unit × quantity sold) - ( expense per unit × quantity sold) - expenses.

variable, fixed