Flashcards in Chapter 5 Prep Video Deck (80)

Loading flashcards...

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