Exam 2 Flashcards
Units produced = Units Sold
True or False
True
____________ is the amount remaining from sales revenue after variable expenses have been deducted.
Contribution Margin
Contribution is used first to cover what?
Fixed expenses
Any remaining Contribution Margin contributes to _____________.
Net Operating Income
What is the level of sales at which profit is zero?
Break-Even
Selling price is _____.
Constant
Costs are _______ and can be accurately divided into variable and fixed elements.
Linear
In multi-product companies, the mix of products sold remains _______.
Constant
The contribution format income statement can be expressed in the follow equation:
Profit=(sales-variable expenses)-fixed expenses
Quantity sold(Q)
x Selling price per unit(P)
————————-
Sales (Q x P)
Quantity sold(Q)
x Variable expenses per unit(V)
———————————
Variable expenses (Q x V)
Profit=(Sales-Variable expenses)-Fixed expenses
Can also be expressed how?
Profit=(PxQ-VxQ)-Fixed expenses
Express the simple profit equation in term’s of the unit contribution margin
Unit CM=Selling price per unit-Variable expenses per unit
Unit CM=P-V
Express the CVP Relationship in Equation Form(3 forms):
Profit=(PxQ-VxQ)-Fixed expenses
Profit=(P-V)xQ-Fixed expenses
Profit = Unit CM x Q - Fixed expenses
What is calculated by dividing the total contribution margin by total sales?
Contribution Margin Ratio
What is the Contribution Margin Ratio?
CM per unit/SP per unit
*SP=selling price
CM=contribution margin
What can also be calculated by divining the contribution margin per unit by the selling price per unit?
Contribution Margin Ratio
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is
$1,300. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch?
a. 1.319
b. 0.758
c. 0.242
d. 4.139
CM Ratio=unit cm/unit sp
=($1.49-$0.36)/$1.49
=$1.13/$1.49
=$0.758
How can the relationship between profit and the CM ratio be expressed?
Profit=(CM ratio x Sales)-Fixed expenses
The variable expense ratio is the ratio of variable expenses to _______
Sales
What is the profit impact if Racing
Bicycle can use higher quality raw
materials, thus increasing variable costs
per unit by $10, to generate an increase
in unit sales from 500 to 580?
500 units 580 units
Sales 250,000 290,000
Less:Var. exp. 150,000 179,800
CM 100,000 110,200
Less:Fixed exp. 80,000 80,000
————————————
Net op. inc. $20,000 $30,200
Sales increase by $40,000 and net operating income increases by $10,200.
If RBC has an opportunity to sell 150
bikes to a wholesaler without disturbing sales to other customers or fixed
expenses, what price would it quote to
the wholesaler if it wants to increase
monthly profits by $3,000? The variable cost per bike is $300.
$ 3,000 ÷ 150 bikes = $ 20 per bike
Variable cost per bike = 300 per bike
————————————–
Selling price required = $320 per bike
What is the break-even in unit sales equation method?
Profits=Unit SM x Q - Fixed exp.
What are the profits at break-even points?
$0
What is unit sales to break-even point formula method?
Fixed expenses/CM per unit
What is the equation method for break-even in dollar sales?
Profit=CM ratio x sales - fixed exp.
What is the formula method of break-even in dollar sales?
Fixed exp./CM ratio
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129
Fixed expenses/CM Ratio
$1,300/0.758= $1,715
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups
=Fixed Exp./CM per unit
=$1,300/($1.49/cup - $0.36/cup)
=$1,300/($1.13/cup?
=1,150 cups
What is the equation method?
Profit=Unit CM x Q - Fixed exp.
What is the target analysis in terms of unit sales to attain the target profit formula method?
Target profit+Fix exp./CM per unit
What is the dollar sales to attain the target profit formula method?
Target profit+Fixed exp./CM ratio
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain target profits of $2,500 per month.
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups
=$2,500 + $1,300/($1.49 - $0.36)
=$3,800/$1.13
=3,363 cups
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine the sales dollars that must be generated to attain target profits of $2,500 per month.
a. $2,550
b. $5,013
c. $8,458
d. $10,555
=$2,500+$1,300/[($1.49-0.36)/$1.49]
=$3,800/0.758
=$5,013
What is the excess of budgeted sales over the break-even volume of sales?
The Margin of safety in dollars
What is the formula for margin of safety in dollars?
Total sales - Break-even sales
What is the margin of safety that can be expressed in terms of the number of units sold? The margin of safety at RBC is $50,000, and each bike sells for $500.
=$50,000/$500
=100 bikes
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the
margin of safety expressed in cups?
=Total sales - Break-even sales
=2,100 cups - 1,150 cups
=950 cups
What term refers to the relative proportion of fixed and variable costs in an organization?
Cost Structure
What is a advantage of a high fixed cost structure?
Income will be higher in good years compared to companies with lower proportion of fixed costs
What is a disadvantage of a high fixed cost structure?
Income will be lower in bad years compared to companies with lower proportion of fixed costs
What is a measure of how sensitive net operating income is to percentage changes in sales? It is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits?
Operating Leverage
What is the formula for degree of operating leverage?
CM / Net Operating Income
Figure the degree of operating leverage. Sales $250,000 Less: Var. Exp. 150,000 CM. 100,000 Less: Fixed Exp. 80,000 Net Inc. 20,000
=CM / Net Op. Inc.
=100,000/20,000
=5
Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage?
=CM/Net Op. Inc.
=$2,373/$1,073
=2.21
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net operating income increase?
=% Inc. in sales x Degree of Op. Lev.
=20.0% x 2.21
=44.20%
Commissions based on sales dollars can lead to ___________ in a company.
Lower Profits
What is the relative proportion in which a company’s products are sold?
Sales Mix
What are the variable costing product cost from the following?
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Direct materials, Direct labor, Variable manufacturing overhead
Direct materials, direct labor, variable selling and admin. exp., and variable manufacturing overhead are what kind of cost in absorption costing?
Product or Period
Product Costs
What are the variable costing period cost from the following?
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Fixed manufacturing overhead, Variable selling and admin. exp., Fixed selling and admin. exp.
What are the absorption costing product cost from the following?
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Direct materials, Direct labor, Variable manufacturing overhead, Fixed manufacturing overhead
What are the absorption costing period cost from the following?
Direct Materials
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Variable Selling and Administrative Expenses
Fixed Selling and Administrative Expenses
Variable selling and admin. exp., Fixed selling and admin. exp.
Which method will produce the highest values for work in process and finished goods inventories?
Absorption costing
T or F
Units produced = Units sold
True
T or F
Units produced > Units sold
True
T or F
Units produced < Units sold
True
Variable costing categorizes costs as _______ and ________ so it is much easier to use this income statement format for CVP analysis.
Fixed and variable
Variable costing income is only affected by changes in _________.
unit sales
As a general rule, when sales go _____, net operating income goes _____, and vice versa.
Up, Up
Absorption costing income is influenced by changes in ______________________.
Unit sales and units of production
Net operating income can be increased simply by producing _____ units even if those units are not sold.
More
A _____ is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
Segment
What arises because of the existence of a particular segment and would disappear over time of the segment itself disappeared?
Traceable fixed costs
What arises because of the overall operation of the company and would not disappear if any particular segment were eliminated?
Common fixed costs
What is computed by subtracting the traceable fixed costs of a segment from its contribution margin?
Segment margin
The segment margin is the __________ of the long-run profitability of a segment.
Best gauge
_________ should not be allocated to the divisions. These costs would remain even if one of the divisions were eliminated.
Common costs
Fixed costs that are traceable to one segment can become common if the company is divided into ______ segments.
Smaller
Costs assigned to a segment should include all costs attributable to that segment from the company’s entire ______.
Value chain
How much of the common fixed cost of $200,000 can be avoided by eliminating the bar?
None of it
-a common fixed costs cannot be eliminated by dropping one of the segments
Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet?
$20,000
-the bar would be allocated 1/10 of the cost or $20,000
The profit was $44,000 before
eliminating the bar. If we eliminate
the bar, profit drops to $30,000.
Should the bar be eliminated?
No
Fixed manufacturing costs must be assigned to products to properly match revenues and costs in what costing?
Absorption costing
Fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced in what costing?
Variable costing
Companies must report segmented results to shareholders using the ______ that are used for internal segmented reports.
same methods
