Slide Set 6

Question 1

What is a sales mix?

Answer 1

Sales mix is the relative percentage in which a company sells its products.

Question 2

Calculate break-even sales for a mix in units

Answer 2

Companies can compute break-even sales for a mix of two or more products by determining the weighted-average unit contribution margin of all the products.

Question 3

Sales Mix

Break even point in units vs. Break even point in dollars

Answer 3

Break even point in units
► individual products
- Works well if the company has few products.
Calculates break-even point in terms of sales dollars for
► divisions or
► product lines,
► NOT individual products.
- Works well if the company has many products.

Question 4

Theory of Constraints

Answer 4

• Approach used to identify and manage constraints so as to achieve company goals.
• Company must continually
  ► identify its constraints and
  ► find ways to reduce or eliminate them, where appropriate.

Question 5

What is a Cost Structure?

Answer 5

Cost Structure is the relative proportion of fixed versus variable costs that a company incurs.

• May have a significant effect on profitability (like strategy and risk).
• Company must carefully choose its cost structure.

Question 6

high fix costs and the influence on Contribution margin and Break even point.

Answer 6

cost structure which relies on fixed costs is more sensitive to changes in sales.
high fix costs -> high contribution margin -> high break even -> risk rises

Question 7

Define high Operating Leverage

What happens when Sales revenues change?

Answer 7

• Higher fixed costs relative to variable costs cause a
  company to have higher operating leverage.
• When sales revenues are increasing, high operating leverage means that profits will increase rapidly.
• When sales revenues are declining, too much operating leverage can have devastating consequences.

Question 8

Degree of operating leverage

Answer 8

Provides a measure of a company’s earnings volatility.

Computed by dividing total contribution margin by net income.

Question 9

Under variable costing, product costs consist of:

Answer 9

• Direct Materials
• Direct Labor
• Variable Manufacturing Overhead

Question 10

The difference between absorption and variable costing is:

Answer 10

• Under both costing methods, selling and administrative expenses are treated as period costs.
• But Fixed Manufacturing overhead is traeted as period costs in variable costing and as product cost in absorption costing
• Companies may not use variable costing for external financial reports because GAAP requires that fixed manufacturing overhead be treated as a product cost.

Question 11

Net income measured under GAAP (absorption costing) is often used internally to

Answer 11

► evaluate performance,
► justify cost reductions, or
► evaluate new projects.

Question 12

Generally accepted accounting principles require that absorption costing be used for…

Answer 12

Generally accepted accounting principles require that absorption costing be used for the costing of inventory for external reporting purposes.

Question 13

Some companies have recognized that net income calculated using GAAP does not highlight differences between variable and fixed costs and may lead to poor business decisions. The result is…

Answer 13

These companies use variable costing for internal reporting purposes.

Question 14

Potential Advantages of Variable Costing

Answer 14

• The use of variable costing is consistent with cost–volume– profit analysis.
• Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales.
• The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.