Chapter 5 Prep Video

Question 1

The following explains contribution margin ________.

Answer 1

sales minus variable cost

Question 2

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. Compute the profit from the sale of 100 bicycles ________.

Answer 2

$12,000

200 x 100 = 20000 contribution margin
- 8000 fixed expenses =
12,000.

Question 3

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle?

Answer 3

200

Unit Contribution Margin = Sales price per unit - Variable costs per unit.

Question 4

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

Answer 4

unit contribution margin

Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold.

Question 5

Break-even point is the level of sales at which ______.

Answer 5

total revenue equals total costs

Break-even point is the level of sales at which total revenue equals total costs and the profit is zero.

Question 6

What is represented on the X axis of a cost-volume-profit (CVP) graph?

Answer 6

Sales volume

In a CVP graph, unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis.

Question 7

What is usually plotted as a horizontal line on the CVP graph?

Answer 7

Fixed expenses

Fixed expenses remain constant over a relevant range of production. As such, fixed expenses are represented by a horizontal line that is parallel to the volume axis.

Question 8

What does the green line in the CVP graph indicate?

Answer 8

Total expenses

The red line starting from the origin is total revenue line.

Question 9

The profit graph is based on the following linear equation:

Answer 9

Profit = Unit CM x Q – Fixed Expenses.

The profit graph is based on the linear equation, because profit is equal to unit contribution margin times the quantity minus the fixed expenses.

Question 10

Cartier Corporation currently sells its products for $50 per unit. The company’s variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company’s contribution margin ratio?

Answer 10

60%

Contribution margin ratio = Contribution margin/Sales = ($50 − $20)/$50 = 60%.

Question 11

Cartier Corporation currently sells its products for $50 per unit. The company’s variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company’s variable cost ratio?

Answer 11

40%

Variable expense ratio = Variable expenses/Sales = $20/$50 = 40%.

Question 12

If sales increase by $50,000, what will be the net operating income for the company?

Sales	$	100,000
Variable expenses	 	50,000
Contribution margin	 	50,000
Fixed expenses	 	20,000
Net Operating income	$	30,000

Answer 12

$55,000

Contribution margin = $50,000/$100,000 = .50

Profit = (CM Ratio × Sales) − Fixed Expenses = (50% × $150,000) − $20,000= $55,000.

Question 13

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

Answer 13

Increase of $14,200

Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit

Increase in total contribution margin ($114 per unit × 300 units) $ 34,200
Less increase in fixed costs − 20,000
Change in net operating income $ 14,200

Question 14

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100 and decrease fixed expenses by $20,000. What is the net operating income after the changes?

Answer 14

Increase of $21,500

New contribution margin per unit = $175 − $100 = $75

New contribution margin = $75 × 1,300 units = $97,500

New fixed cost = $96,000 − 20,000 = $76,000

New net operating income = $97,500 − 76,000 = $21,500

Question 15

Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes?

Selling price	$	110,000	$	110	100	%
Variable expenses	 	60,000	 	60	55	%
Contribution margin	 	50,000	$	50	45	%
Fixed expenses	 	30,000	 	 	 	 
Net operating income	$	20,000

Answer 15

$25,000

New selling price = $110 − $10 = $100.

New sales level = 1,000 units × 150% = 1,500 units.

Net operating income = Sales of $150,000 (or 1,500 units × Selling price of $100 per unit) − Variable expenses of $90,000 (or 1,500 units × variable expense of $60 per unit) − Fixed expenses of $35,000 (or $30,000 + $5,000) = $25,000.

Question 16

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company’s fixed expenses are $5,000. What is the company’s break-even point in unit sales?

Answer 16

100 units

Unit CM = Selling price of $80 − Variable expense of $30 = $50. Unit sales to break-even = Fixed expenses of $5,000 ÷ $50 = 100 units.

Question 17

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company’s fixed expenses are $10,000. What is the company’s break-even point in sales dollars?

Answer 17

$25,000

Dollar sales to break-even = Fixed expenses of $10,000 ÷ CM Ratio of 0.40 = $25,000.

Question 18

What are the unit sales required to attain a target profit of $120,000?

The following information is extracted from the records of Johnson Corporation:
Target profit $ 120,000
Unit contribution margin $ 40
Fixed expenses $ 40,000
Contribution margin ratio (CM ratio) 0.40
Selling price $ 100

Answer 18

4,000 units

Unit sales to attain the target profit = (Target profit + Fixed expenses)/Unit Contribution margin. Substituting the values, unit sales = ($120,000 + $40,000)/$40 = 4,000 units.

Question 19

What are the sales dollars required to attain a target profit of $120,000?

The following information is extracted from the records of Johnson Corporation:
Target profit $ 120,000
Unit contribution margin $ 40
Fixed expenses $ 40,000
Contribution margin ratio (CM ratio) 0.40
Selling price $ 100

Answer 19

$400,000

Sales dollars to attain the target profit = (Target profit + Fixed expenses)/Contribution margin ratio. Substituting the values, sales required = ($120,000 + $40,000)/0.40 = $400,000.

Question 20

What is Ralph Corporation’s margin of safety in dollars?

Summarized data for Ralph Corporation:
Selling price	$	200	per unit
Variable expenses	$	150	per unit
Fixed expenses	$	1,000,000	per year
Unit sales	 	25,000	per year

Answer 20

$1 million

Margin of Safety in dollars = Total budgeted (or actual) sales − Break-even sales = $5,000,000 ($200 per unit × 25,000 units) − $4,000,000 ($1,000,000/($50/$200)) = $1,000,000.

Question 21

What is Ralph Corporation’s margin of safety in percentage?

Summarized data for Ralph Corporation:
Selling price	$	200	per unit
Variable expenses	$	150	per unit
Fixed expenses	$	1,000,000	per year
Unit sales	 	25,000	per year

Answer 21

20%

Margin of Safety Percentage = Margin of Safety in dollars/Total budgeted (or actual) sales in dollars = ($5,000,000 − $4,000,000)/$5,000,000 = 20%.

Question 22

The measure of how sensitive net operating income is to a given percentage change in dollar sales is called _______.

Answer 22

operating leverage

Operating leverage of a company is a measure of how sensitive net operating income is to a given percentage change in dollar sales.

Question 23

Winter Corporation’s current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company’s degree of operating leverage?

Answer 23

3.00

Degree of operating leverage = Contribution margin/Net operating income = $300,000/$100,000 = 3.

Question 24

The current sales of Trent, Inc., are $400,000, with a contribution margin of $200,000. The company’s degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Inc.?

Answer 24

60%

Percentage change in net operating income = Degree of operating leverage × Percentage change in sales = 2 × 30% = 60%.

Question 25

Generally which of the following is the most accurate for managers to use to estimate the fixed and variable components of mixed cost?

Answer 25

least-squares regression

The least-squares regression is generally more accurate than the high-low method and the scattergraph.

Question 26

Which of the scattergraph plots above suggests a mixed cost relationship between direct labor-hours and manufacturing overhead?

Answer 26

(b)

The correct answer is (b). An upward sloping plot with an intercept above zero fits the mixed cost pattern.

dots going north-east.

Question 27

Using the high-low method, what is the variable cost?

 	Direct Labor-Hours	Maintenance Cost Incurred
January	5,000	$	2,900
February	4,000	 	2,500
March	7,000	 	3,200
April	8,000	 	3,400
May	3,000	 	2,100
June	9,000	 	4,000
July	6,000	 	3,100
August	2,000	 	1,900

Answer 27

$0.30 per direct-labor hour.

The variable cost is estimated by dividing the difference in cost between the high and low levels of activity ($4,000 − $1,900) by the change in activity (9,000 − 2,000) between those two points.

Question 28

When using least-squares regression, R^2 represents ________.

Answer 28

the measure of goodness of fit

R2 is the measure of goodness of fit in least-squares regression.

Question 29

Excel depicts the least-squares regression results using the equation form _______.

Answer 29

Y = bx + a

Instead of using the form Y = a + bX, Excel uses an equivalent form of the equation depicted as Y = bX+ a, reversing the two terms shown to the right of the equals sign.

Question 30

Place the following items in the correct order in which they appear on the contribution margin format income statement.

Answer 30

Sales - Vc = Cm - Fc = NI

Question 31

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:

Answer 31

Unit contribution margin = $90 - $35 = $55.

Question 32

What is needed to calculate profit?

Answer 32

Unit contribution margin, unit sales, and total fixed costs.

Question 33

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

Answer 33

total expense, and total fixed expense.

Question 34

The calculation of contribution margin (CM) ratio is:

Answer 34

cm / sales.

Question 35

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total:

Answer 35

sales

Question 36

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.

Answer 36

Net operating income will increase by 0.70

Total contribution margin will increase by 0.70.

Question 37

When constructing a CVP graph, the vertical axis represents:

Answer 37

dollars

Question 38

When preparing a CVP graph, the horizontal axis represents:

Answer 38

sales volume

Question 39

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

Answer 39

fixed, profit

Question 40

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

Answer 40

zer0

Question 41

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

Answer 41

Change from zero to a net operating profit

Question 42

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

Answer 42

$36,000

Net operating income = 750-450 x $120 = $36,000.

Question 43

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be $______.

Answer 43

$30

100 - 70 = 30. For every unit above break-even, profit increase by the contribution margin per unit.

Question 44

Elle’s Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month:

Answer 44

profits = 35 x (55-10) - 700 = 875
total sales = 35 x 55 = 1925
total variable costs = 35 x 10 = 350

Question 45

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:

Answer 45

90 - 35 = $55

Question 46

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

Answer 46

total fixed expenses.

Question 47

CVP analysis focuses on profits are affected by:

Answer 47

Sales volume, unit variable cost, mix of product sold, selling price, total fixed costs.

Question 48

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 this year is:

Answer 48

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

Question 49

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 $_____.

Answer 49

10 - 6 x 10000 - 35000 = 5000

Question 50

Which of the following statements are true?

• when plotting a scattergraph, the cost is the independent variable.
• scatter graphs are a way to diagnose cost behavior.
• scattergraphs should be used after high-low or regression analysis is performed.
• plotting data on a scattergraph is an important diagnostic step.

Answer 50

scatter graphs are a way to diagnose cost behavior.

plotting data on a scattergraph is an important diagnostic step.

Question 51

Cost behavior is considered linear whenever:

Answer 51

a straight line approximates the relationship between cost and activity.

Question 52

To calculate the degree of operating leverage, divide _______ ________ by net operating income.

Answer 52

contribution margin

Question 53

The amount by which sales can drop before losses are incurred is the __________ of _________.

Answer 53

margin; safety.

Question 54

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:

Answer 54

564,000 / 0.62 = 909,677.

Question 55

Company A has fixed costs of $546,000 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:

Answer 55

Sales = (564,000 / 800,000) / 0.62 = 2,200,000.

Question 56

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?

Answer 56

98,000 / ($50- $15) = 2800.

Question 57

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:

Answer 57

Sales Volume = (320,000 + 200,800) / 90 -28 = 8,400 units.

Question 58

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

Answer 58

cost, selling price, volume.

Question 59

Paula’s Perfumes has a target profit of $4000 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:

Answer 59

Sales volume = ($4000 + $3,200) / (15.00 - 13.50) = 4800 bottles.

Question 60

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

Answer 60

variable

Question 61

Which of the following is assumption of cost- volume profit analysis?

Answer 61

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

Question 62

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:

Answer 62

total variable cost is 1200
1,440 / 600 = 2.40 per unit x 500 units = 1200 total variable cost

• the variable cost per unit is 240
  $1440 / 600 = 2.40 per unit and $2160 / 900 = 2.40 per unit.

Question 63

Sweet Dreams sell 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 currently sells 1,200 pillows per month and excepts that the imrpoved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a ______ of ______.

Answer 63

decrease; 3000

[1500 x (25-19) - {1200 x {25 - 15 } = 3000

Question 64

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

Answer 64

zero

Question 65

Sniffles 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, Sniffles sales rounded to the nearest dollar must be:

Answer 65

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

Question 66

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 $______.

Answer 66

90,000 x 7.50 = $675,000.

Question 67

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as:

Answer 67

CM ratio x Change in sales - Change in fixed expenses.

Question 68

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will:

Answer 68

increase by 7000

current income: ($80 x 200) - $5000 = 11,000. With the change salary becomes a variable cost: (80-20) x 200 x 150%= 18,000 an increase of 7000 per month.

Question 69

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

Answer 69

after the variable cost per unit is calc

using either the high or low level of activity.

Question 70

a company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believed that spending $50,000 per month on advertising will;l allow them to increase the selling price to $45 and that sales will increase by 750 units per month. Which of the following statements is true?

Answer 70

the company should accept the idea because profit will increase by $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 x $32) - (10,000 x $27) - i the additional fixed costs of $50,000 = a profit increase of $24,000.

Question 71

Orange you going to smile? sells oranges for $20 per crate. If the company’s margin of safety is $180,000, the margin of safety in units is ________ crates.

Answer 71

180,000 / 20 = 9000

Question 72

When making a decision using incremental analysis consider the:

Answer 72

change in cost resulting specifically from the decision

- change in sales dollars resulting specifically from the decision.

Question 73

The margin of safety percentage is:

Answer 73

margin of safety in dollars divided by total budgeting (or actual) sales in dollars.

Question 74

sales total $500k and fixed costs total $300k. The cm ratio is 68%. Profit = $

Answer 74

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

Question 75

Company A sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.000 each. The variable expense ratio for plush and Cushy’s chairs is ________.

Answer 75

variable expense = $85.05 / $189 = 45%

Question 76

When using the high low method, the change in cost divided the by the change in units equals

Answer 76

the variable cost per unit.

Question 77

CVP is the acronym for

Answer 77

cost volume profit.

Question 78

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.

Answer 78

incremental

Question 79

Anne’s Antique store has a cm 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:

Answer 79

600.000 x 29% = 174,000.

Question 80

A company with a high ratio of fixed costs:

Answer 80

• is more likely to experience a loss when sales are down than a company with mostly variable costs.
• is more likely to experience greater profit when sales are up than a company with mostly variable cost.