Managerial ACC ch 5

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

net operating income

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 (10,000 x ($10 - $6) - $35,000 = $5,000)

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit

decrease ( Sales - variable cost = contribution margin so an increase in variable cost per unit decreases contribution margin per unit )

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

The contribution margin is equal to sales minus ______

variable expenses

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

volume selling price costs

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

$0.35

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales rounded to the nearest dollar must be ______

$1,520,000 ( Sales = ($240,400 + $930,000) ÷ 0.77= $1,520,000 )

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 ( Sales = ($975,000 + $195,000)/0.65 = $1,800,000 )

A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be ______

$198,000 ( (26,000 - 17,000) × $22 = $198,000 )

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

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 net income would be a ______

$450 increase ( 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 )

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is ______

$49,800 ( $982,000 - $932,200 = $49,800 )

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 ( $1,630,000 - $935,000 = $695,000 )

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 ($184,000 - $85,000 = $99,000)

Profit equals ______

(P × Q) - (V × Q) - fixed expenses

When making a decision using incremental analysis consider the ______

- change in sales dollars resulting specifically from the decision - change in cost resulting specifically from the decision

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

At the break-even point ______

- total revenue equals total cost - net operating income is zero

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 )

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

34% ( ($1,452,000 - $958,320) ÷ $1,452,000 = 34% )

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is ______

36,000 ( (750 - 450) × $120 = $36,000 )

Adams, Inc. has sales of $100,000 with contribution 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 ___ for Adams, Inc. and ___ for Baron, Inc.

3; 2

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 ( Sales volume = ($4,000 + $3,200) ÷($15.00 - $13.50) = 4,800 bottles )

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 )

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 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 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

T/F - The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars

False ( BUDGETED SALES DOLLARS OVER BREAK-EVEN SALES DOLLARS )

T/F - Cost structure refers to the relative portion of product and period costs in an organization

False (it refers to FIXED & VARIABLE costs)

Contribution margin format income statement:

Sales Variable expenses Contribution margin Fixed expenses Net operating income

True statement:

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

T/F - Without knowing the future, it is best to have a cost structure with high variable costs

True ( it is not obvious which cost structure is better. Both have advantages and disadvantages )

A company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 per month on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. The company should ______

accept the idea because profit will increase by $24,000

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

contribution margin

The calculation of contribution margin (CM) ratio is ______

contribution margin ÷ sales

Contribution margin ratio is equal to ___ ___ divided by ___

contribution margin; sales/revenue

When constructing a CVP graph, the vertical axis represents ______

dollars

Once the break-even point has been reached, the sale of an additional unit will lead to an increase in contribution margin that is ______ the increase in net operating income

equal to

The term "cost structure" refers to the relative proportion of ___ & ___ costs in an organization

fixed & variable

Total contribution margin equals ______

fixed expenses plus net operating income

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

fixed; profit

If operating leverage is high, a small percentage increase in sales produces a ___ percentage increase in net operating income than if operating leverage is low

higher

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

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

leverage

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

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

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 (20,000 × ($20 - $11) = $180,000)

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 increase the selling price to $45 per unit. If this change is implemented, profits will ______

$24,000 ( An increase in selling price of $5 will increase the contribution margin $5 (from $27 to $32). 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 )

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

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is

21,645 ( Sales volume = ($470,000 + $222,640)/$32 = 21,645 fans )

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 blankets ( 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%

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% ( Contribution margin ratio = $100,170 ÷$189,000 = 53% )

Contribution margin ______

becomes profit after fixed expenses are covered

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

Adams, Inc. has sales of $100,000 with contribution 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

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% )

When a company sells one unit above the number required to break-even, the company's net operating income will ______

change from zero to a net operating profit

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units, net profit will be

$100 (For each unit sold above break-even, profit increases by the contribution margin per unit which is ($100,000 - $80,000)/200 or $100)

CVP analysis focuses on how profits are affected by ______

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

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

zero/nothing

The amount by which sales can drop before losses are incurred is the ___ of ___

margin of safety

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 ______

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