Chapter 1 Flashcards
The ability of fixed costs to magnify changes in sales to create disproportionate changes in profitability is called
Operating leverage
When calculating a percentage change, the _________ measure is the starting point.
Base measure
The possibility that sacrifices may exceed benefits is called
Risk
As activity level decreases, total variable cost
will decrease
A cost that does not change in total as activity level changes is a(n)
Fixed cost
Subtracting fixed costs from contribution margin equals
Net income
To magnify small changes in revenue into dramatic changes in profitability, managers apply
Operating leverage
Given contribution margin of $500, net income of $100, and fixed costs of $400, the magnitude of operating leverage is
Contribution margin/net income
500/100 = 5
Assume a company reported gross margin of $900 in Year 1 and $700 in Year 2. The percentage change in profitability from Year 1 to Year 2 i
(700-900) / 900 = 22.2
A cost that has both a fixed and variable component is called
mixed costs
A company pays their sales staff a salary of $6,000 a month plus a 5% commission on sales. If sales for the month equals $12,000, the total cost of the sales staff for the month is
6000 + (0.05 * 12000) = 6600
A cost that changes in total as activity level changes is a(n)
Variable cost
The contribution margin represents the amount available to
cover fixed costs and thereafter to provide a profit
The levels of activity over which the definitions of fixed and variable costs are valid is commonly called the
relevant range
Given contribution margin of $1,300, net income of $100, and fixed costs of $1,200, the magnitude of operating leverage is
1300/100 = 13
The point at which profit equals zero is called the
Break-even point
A cost that has both a fixed and variable component is called a
Mixed
The sales price of a product is $20.00 per unit; the variable cost is $7.50 per unit; and fixed costs total $10,000. How many units must be sold to break even?
20N - 7.5N - 10000 = 0
12.5N - 10000 = 0
12.5N = 10000
N = 10000/12.5 = 800
A company has a maintenance contract with a fixed fee of $1,200 per month plus $75 per hour for each maintenance hour used. In a month where 20 maintenance hours are used, the total
1200 + (75 * 20) = 2700
If a product has a unit contribution margin of $12, a sales price of $20 and total fixed costs of $1,000, its variable cost per unit must be
sales price - contribution margin = 20 - 12 = 9
As activity level increases, variable cost per unit
Does not change
If the sales price of a product is $10 per unit; the variable cost is $4 per unit; and fixed costs total $1,200, how many units must be sold to earn a profit of $1,800?
10N - 4N - 1200 = 1800
6N = 3000
N = 3000/6
N = 500
If the contribution margin per unit is $100 and fixed costs total $1,000, how many units must be sold to earn a profit of $10,000?
(1000 + 10000)/100 = 110
At the breakeven point, profit equals
Zero
The amount at which actual sales can fall short of expectations before a company begins to incur losses is called the
Margin of Safety
The sales price of a product is $100 per unit; the variable cost is $20 per unit; and fixed costs total $800. How many units must be sold to break even?
100N - 20N - 800 = 0
80N = 800
N = 800/80
If a company has budgeted sales of $15,000 and break-even sales of $9,000, the margin of safety is
(15000 - 9000) / 15000 = 0.4 = 40%
A item with a sales price of $15 per unit and variable cost of $11 per unit has a contribution margin of
SALES PRICE PER UNIT - VARIABLE COST PER UNIT = 15 - 11
If the sales price of a product is $10 per unit; the variable cost is $5 per unit; and fixed costs total $1,000, the company will earn a profit of $5 if
10N - 5N - 1000 = 5
5N = 1005
N = 1005/5
N = 201
If the contribution margin per unit is $200 and fixed costs total $1,000, how many units must be sold to earn a profit of $1,000?
200n - 1000 = 1000
N = 2000/200
N = 10
