Managerial Chapter 5 Self Test

Which of the following statements is correct?

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

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

selling price, cost, volume

At the break-even point:

total revenue equals total cost net operating income is zero

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 units 27,300/35=780 units

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales:

Total contribution margin will increase by $0.70 Net operating income will increase by $0.70

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the break-even point in unit sales?

7,625 units breakeven point= $305,000/$40=7,625

CVP analysis focuses on how profits are affected by:

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

Profit=(selling price per unit x quantity sold)-(________ expense per unit x quantity sold) - ______ expenses.

Profit=(selling price per unit x quantity sold)-(variable expense per unit x quantity sold) - fixed expenses.

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

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

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

$0.35

If a company has sales of $100,000 a contribution margin of $40,000 and fixed expenses of $50000 the company has

$10,000 net operating loss

Lance, inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is $____________.

$168,000 9000x$32=288,000-120,000=168,000

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 net operating income= (750-450)x120=36000

Using the high-low method, the fixed cost is calculated

After the variable cost per unit is calculated Using either high or low level of activity

When making a decision using incremental analysis consider the:

Change in cost resulting specifically from the decision Change in sales dollars resulting specifically from the decision

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

Change in sales dollars x contribution margin raito

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

Contribution Margin

Contribution margin ratio is equal to __________ _____________ divided by _________________

Contribution margin ratio is equal to Contribution Margin divided by Sales

CVP stand for

Cost Volume Profit

In a least-squares regression line, the intercept (a) of the line represents the total ________ cost

Fixed

Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying her $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:

Increase by $7,000 per month current net operating income=(100x250)-5750=19250. with the change salary becomes a variable cost and net operating income would be : (100-30)x250x150%=26250 an increase of 7000 per month

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

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

The contribution margin equals sales minus:

all variable costs

The variable cost per unit using the high-low method is calculated as:

change in cost divided by change in units (activity)

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

An income statement constructed under the ___ approach allows users to easily judge the impact on profits of changes in selling price, cost of volume

contribution margin

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

costs, management, volume, selling price

According to the CVP analysis model and assuming all else remains the same, profits would be increased by

decrease in the unit variable cost

When constructing a CVP graph, the vertical axis represents:

dollars

Which of the following are assumption of cost-volume-profit analysis

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

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

increase $18,000 change in net operating income=2000x(15-16)=18000

The statistic R2

is a measure of goodness of fit

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

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

net operating income

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

variable expenses/sales is the calculation for the

variable expense

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

zero

Net operating income can be calculated as:

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

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 90,000x7.50=675,000

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 $654,000/0.62=$909,677

to convert the formula for sales dollars required to attain a target profit to sales of dollars required to break-even, set target profit to $__.

0

When a company produces and sells multiple products:

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

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

$450 increase The current contribution margin is $39 per unit ($80-$41) or 19500(500x39)total. The new contribution margin would be $35 per unit (39-4)or 19950(570x35) an increase of $450

Plush and candy sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189 each. The variable expense for plush and cushy's chairs is

45% 85.05/189=45

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 incomeof $380,000. 12,000 unitsx$65contribution margin=$780,000-$400,000=$380,000 The contribution margin per putter is $65. $125-$60=$65.

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 operation income

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% 559,740/2,946,000=19%

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

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

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 fans. 470,000+222,640/32=21645

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 equates

244,068 144000/.59=244068

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

26980 95x284=$26980

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

40,000 (500,000x.68)-300,000=40000

blissful blankets hopes to achieve a profit this year of $520,000. Each blanket has a contribution margin of $21. Fixed costs for the company are $320,000. How many blankets does blissful blankets need to sell in order to achieve its target profit?

Target profit=(520,000+320,000)/21=40,000 blankets

The amount by which sales can drop before losses are incurred is the ________ of _______________.

The amount by which sales can drop before losses are incurred is the MARGIN of SAFETY.

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, which of the following statements would be true?

total variable cost is $1200 1440/600=2.40 per unit x 500 units = 1200 total variable costs the variable cost per unit is $2.40 1440/600=2.40 per unit and 2160/900=2.40 per unit

A company sold 20,000 units of its product at a selling price of $20. The variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is:

$180,000 contribution margin=20,000x($20-$11)=$180,000

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals:

$2,200,000 Sales=($564,000+$800,000)/.62=$2,200,000

A company has an opportunity to make a bulk sale that would no impact regular sals or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. the quotes price per unit for 500 units should be

$20 $11+$4500/500=$20

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

budgeted sales are $982,000, to 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=49800

Which of the following statements are true? When plotting a scattergraph, cost is the independent variable. Scattergraphs are a way to diagnose cost behavior. Plotting data on a scattergraph is an important diagnostic step. Scattergraps should be used after high-low or regression analysis is performed.

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