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1

The following explains contribution margin ________.

sales minus variable cost

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 ________.

$12,000

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

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?

200
Unit Contribution Margin = Sales price per unit - Variable costs per unit.

4

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

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.

5

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

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.

6

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

Sales volume

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

7

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

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.

8

What does the green line in the CVP graph indicate?

Total expenses


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

9

The profit graph is based on the following linear equation:

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.

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?

60%

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

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?

40%

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

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

$55,000



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

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

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?

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

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?

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

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

$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.

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?

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.

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?

$25,000

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

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

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.

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

$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.

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

$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.

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

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%.

22

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

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.

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?

3.00

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

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.?

60%

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

25

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

least-squares regression

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

26

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

(b)

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


dots going north-east.

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

$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.

28

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

the measure of goodness of fit

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

29

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

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.

30

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

Sales - Vc = Cm - Fc = NI