Exam3

Question 1

The cost of goods sold for Michaels Manufacturing in the current year was $233,000. The January 1 finished goods inventory balance was $31,600, and the December 31 finished goods inventory balance was $24,200. Cost of goods manufactured during the period was:
a. $233,000
b. $225,600
c. $288,800
d. $240,400

Answer 1

b. $225,600

233000 - 31600 + 24200 = 225600

Question 2

A company manufactured 50,000 units of a product at a cost of $450,000. It sold 45,000 units at $15 each. The gross profit is:
a. $750,000
b. $240,000
c. $600,000
d. $270,000

Answer 2

d. $270,000

$450,000/50,000 units -> $9

$15-$9 -> $6

$6 * 45,000 units = 270,000

Question 3

Use the information below for Jensen Company to answer the question
Direct materials used
$245,000
Direct labor incurred
350,000
Factory overhead incurred
400,000
Operating expenses
275,000

Jensen Company’s period costs are
a. $245,000
b. $350,000
c. $400,000
d. $275,000

Answer 3

d. $275,000

(Period costs are all costs not included in product costs. Such as Operating Expenses)

Question 4

Use the information below for Jensen Company to answer the question
Direct materials used
$245,000
Direct labor incurred
350,000
Factory overhead incurred
400,000
Operating expenses
275,000

Jensen Company’s product costs are
a. $995,000
b. $920,000
c. $750,000
d. $720,000

Answer 4

a. $995,000

(Direct Materials used + Direct Labor Incurred + Factory Overhead Incurred)

Question 5

_____ costs are direct labor, direct materials, and factory overhead.
a. period
b. prime
c. product
d. conversion

Answer 5

c. product

Product cost refers to the costs incurred to create a product. These costs include direct labor, direct materials, consumable production supplies, and factory overhead. Product cost can also be considered the cost of the labor required to deliver a service to a customer.

Question 6

_____ costs are reported on the Income Statement.
a. period
b. prime
c. product
d. conversion

Answer 6

a. period

Period costs are any costs a company incurs indirectly related to the production process. This means they’re unrelated to the cost of one product or inventory costs for a business.

Therefore, companies include period costs in a financial statement during an assigned accounting period.

Question 7

_____ costs are direct materials and direct labor.
a. period
b. prime
c. product
d. conversion

Answer 7

b. prime

A prime cost is the total direct costs of production, including raw materials and labor.

Indirect costs, such as utilities, manager salaries, and delivery costs, are NOT included in prime costs.

Businesses need to calculate the prime cost of each product manufactured to ensure they are generating a profit.

Question 8

_____ costs are direct labor and factory overhead.
a. period
b. prime
c. product
d. conversion

Answer 8

d. conversion

Conversion costs is a term used in cost accounting that represents the combination of direct labor costs and manufacturing overhead costs. In other words, conversion costs are a manufacturer’s product or production costs other than the cost of a product’s direct materials.

Question 9

Wages paid to the employees directly involved in the manufacturing process is called:
a. direct labor
b. direct materials
c. factory overhead
d. operating expenses

Answer 9

a. direct labor

In accounting, direct labor (DL) costs are the costs associated with paying workers to make a product or provide a service. The workers must be clearly involved in producing the product or providing the service. Direct labor costs are one of the costs associated with producing a product or providing a service

Question 10

Materials directly involved in the manufacturing process is called:
a. direct labor
b. direct materials
c. factory overhead
d. operating expenses

Answer 10

b. direct materials

Direct materials are those materials and supplies that are consumed during the manufacture of a product, and which are directly identified with that product. Items designated as direct materials are usually listed in the bill of materials file for a product. The bill of materials itemizes the unit quantities and standard costs of all materials used in a product, and may also include an overhead allocation.

Question 11

Indirect materials and indirect labor incurred in the manufacturing process is called:
a. direct labor
b. direct materials
c. factory overhead
d. none of the above

Answer 11

c. factory overhead

Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor and direct materials. Factory overhead is normally aggregated into cost pools and allocated to units produced during the period. It is charged to expense when the produced units are later sold as finished goods or written off.

The allocation of factory overhead to units produced is avoided under the direct costing methodology, but is mandated under absorption costing. The allocation of factory overhead is required when producing financial statements under the dictates of the major accounting frameworks.

Question 12

Compute prime cost given the following data: direct materials, $ 47,500; direct labor, $ 96,300; factory overhead, $ 87,900; and selling expenses, $ 54,290.
a. $ 142,190
b. $ 285,990
c. $ 143,800
d. $ 184,200

Answer 12

c. $ 143,800

Cost of Goods Sold (CoGS) + Total Labor Cost = Prime Cost.

Question 13

Compute conversion costs given the following data: direct materials, $47,500; direct labor, $96,300; factory overhead, $87,900; and selling expenses, $54,290.
a. $ 142,190
b. $ 285,990
c. $ 143,800
d. $ 184,200

Answer 13

d. $ 184,200

Conversion Costs = Direct Labor Costs + Manufacturing Overheads.

Question 14

Partially completed inventory in the manufacturing process are called:
a. Cost of Goods Manufactured
b. Cost of Goods Sold
c. Finished Goods
d. Work in Process

Answer 14

d. Work in Process

Work in process (WIP) inventory is a term used to refer to partly finished materials within any production round. Work in process in production and supply chain management refers to the total cost of unfinished goods currently in production.

Question 15

Inventory that are completed, but not sold are called:
a. Cost of Goods Manufactured
b. Cost of Goods Sold
c. Finished Goods
d. Work in Process

Answer 15

c. Finished Goods

Finished goods are goods that have been completed by the manufacturing process, or purchased in a completed form, but which have not yet been sold to customers.

Goods that have been purchased in completed form are known as merchandise.

Question 16

Inventory that is completed and sold are called:
a. Cost of Goods Manufactured
b. Cost of Goods Sold
c. Finished Goods
d. Work in Process

Answer 16

b. Cost of Goods Sold

Costs of Goods Sold (COGS) represent the expenses involved into producing your goods over a certain period of time.

The COGS formula is: COGS = the starting inventory + purchases – ending inventory

Question 17

The primary goal of __________ accounting is to provide information to management.
a. Financial
b. Managerial
c. Finance
d. none of the above.

Answer 17

b. Managerial

Managerial accounting involves the presentation of financial information for internal purposes to be used by management in making key business decisions. Techniques used by managerial accountants are not dictated by accounting standards, unlike financial accounting.

Question 18

18. Predetermined Factory Overhead Rate is calculated as:

a. Estimated Total Factory Overhead Costs + Estimated Activity Base.

b. Estimated Total Factory Overhead Costs – Estimated Activity Base.

c. Estimated Total Factory Overhead Costs × Estimated Activity Base.

d. Estimated Total Factory Overhead Costs ÷ Estimated Activity Base.

Answer 18

d. Estimated Total Factory Overhead Costs ÷ Estimated Activity Base.

Predetermined overhead rate is used to apply manufacturing overhead to products or job orders and is usually computed at the beginning of each period by dividing the estimated manufacturing overhead cost by an allocation base (also known as activity base or activity driver). Commonly used allocation bases are direct labor hours, direct labor dollars, machine hours, and direct materials cost incurred by the process.

Question 19

Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300. The actual factory overhead costs for the year were $1,375,000. Determine the over- or underapplied amount for the year.
a. $17,500 overapplied
b. $17,500 underapplied
c. $118,250 overapplied
d. $118,250 underapplied

Answer 19

b. $17,500 underapplied

°**
OVER-APPLIED
Applied Overhead > Actual Overhead
UNDER-APPLIED
Applied Overhead < Actual Overhead

The over or under-applied manufacturing overhead is defined as the difference between manufacturing overhead cost applied to work in process and manufacturing overhead cost actually incurred by the entity during the period.

If the manufacturing overhead cost applied to work in process is more than the manufacturing overhead cost actually incurred during a period, the difference is known as over-applied manufacturing overhead. If, on the other hand, the manufacturing overhead cost applied to work in process is less than the manufacturing overhead cost actually incurred during a period, the difference is known as under-applied manufacturing overhead.

Question 20

A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual manufacturing overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the predetermined overhead rate per direct labor hour?
a. $12.00
b. $10.00
c. $12.57
d. $10.48

Answer 20

a. $12.00

$360000 ÷ 30000

Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated total units in the allocation base
Predetermined overhead rate = $360,000 /30,000 hours
= $12.00 per direct labor hour

Predetermined overhead rate is used to apply manufacturing overhead to products or job orders and is usually computed at the beginning of each period by dividing the estimated manufacturing overhead cost by an allocation base (also known as activity base or activity driver). Commonly used allocation bases are direct labor hours, direct labor dollars, machine hours, and direct materials cost incurred by the process.

Question 21

Upon completing a job, direct materials totaled $4,500; direct labor, $2,500; and factory overhead, $5,000. Units produced totaled 4,000. What is the cost per unit?
a. $2
b. $1
c. $3
d. $5

Answer 21

c. $3

$4,500 + $2,500 + $5,000. ÷ 4,000 = $3

To calculate the cost per unit, add all of your fixed costs and all of your variable costs together and then divide this by the total amount of units you produced during that time period.

Question 22

During the year, Bright Corporation applied factory overhead costs of $230,000 to production. At the end of the year, total overapplied factory overhead is $23,000. What was the amount of actual factory overhead cost incurred during the year?
a. $ 343,000
b. $ 207,000
c. $ 253,000
d. $ 230,000

Answer 22

b. $ 207,000

$230,000 - $23,000 = $ 207,000

Actual overhead is indirect factory costs that have been incurred. This is essentially all factory costs, except for direct material and direct labor costs. Actual overhead may differ from applied overhead, which can be based on a standard overhead rate that differs somewhat from the actual amount of overhead incurred.

Question 23

A _______ cost is a cost that has been incurred in the past and is irrelevant.
a. variable
b. opportunity
c. differential
d. sunk

Answer 23

d. sunk

A sunk cost, sometimes called a retrospective cost, refers to an investment already incurred that can’t be recovered. Examples of sunk costs in business include marketing, research, new software installation or equipment, salaries and benefits, or facilities expenses.

Question 24

A _______ cost is the revenue that is forgone from an alternative use of an asset.
a. opportunity
b. differential
c. sunk
d. variable

Answer 24

a. opportunity

Opportunity cost is the profit lost when one alternative is selected over another. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision

Question 25

The condensed income statement of Hayden Corp. for the past year is as follows: Product Sales T = $680,000 U= $320,000 Costs: Variable costs T= $540,000 U = $220,000 Fixed costs T = 145,000 U = 40,000 Total costs T = $685,000 U = $260,000 Income (loss) T = $ (5,000) U = $ 60,000 Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. If management discontinues product T, the fixed allocated to product T cannot be avoided. What is the amount of change in net income for the current year that will result from the discontinuance of Product T? a. $140,000 increase b. $5,000 increase c.$5,000 decrease d. $140,000 decrease

Answer 25

d. $140,000 decrease Product Sales T = $680,000 - Variable costs T= $540,000 = $140,000

Question 26

Jacoby Company received an offer from an exporter for 30,000 units of product at $30 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price $20 Unit manufacturing costs: Variable 12 Fixed 5 What is the increase in revenue from the acceptance of the offer? a. $ 900,000 b. $ 600,000 c. $ 360,000 d. $ 540,000

Answer 26

a. $ 900,000 Revenue is the money generated from normal business operations, calculated as the average sales price times the number of units sold. It is the top line (or gross income) figure from which costs are subtracted to determine net income. Revenue is also known as sales on the income statement.

Question 27

Jacoby Company received an offer from an exporter for 30,000 units of product at $30 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price $20 Unit manufacturing costs: Variable 12 Fixed 5 What is the increase in cost from the acceptance of the offer? a. $ 900,000 b. $ 600,000 c. $ 360,000 d. $ 540,000

Answer 27

c. $ 360,000 Variable Cost 12 * 30,000 = $360,000 Cost accounting is a process of assigning costs to cost objects that typically include a company's products, services, and any other activities that involve the company. Variable costs are expenses that change directly and proportionally to the changes in business activity level or volume, like direct labor, taxes, and operational Fixed cost includes expenses that remain constant for a period of time irrespective of the level of outputs, like rent, salaries, and loan payments.

Question 28

Jacoby Company received an offer from an exporter for 30,000 units of product at $30 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price $20 Unit manufacturing costs: Variable 12 Fixed 5 What is the amount of gain or loss from the acceptance of the offer? a. $ 900,000 b. $ 600,000 c. $ 360,000 d. $ 540,000

Answer 28

}•°•{(/json start) d. 540,000 (30000 * 30) [30000 units ordered @ $30] - 360000 [variable cost 12 * 30000 units] = 540,000 The original purchase price of the asset, minus all accumulated depreciation and any accumulated impairment charges, is the carrying value of the asset. Subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain. If the remainder is negative, it is a loss

Question 29

Costs that remain constant on a per-unit level as the level of activity changes are called: a. fixed costs. b. mixed costs. c. opportunity costs. d. variable costs.

Answer 29

d. variable costs. Variable costs are costs that change as the quantity of the good or service that a business produces changes. Variable costs are the sum of marginal costs over all units produced. They can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost.

Question 30

Costs that vary in total in direct proportion to changes in an activity level are called a. fixed costs b. sunk costs c. variable costs d. differential costs

Answer 30

c. variable costs Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary depending on the volume of activity. The costs increase as the volume of activities increases and decrease as the volume of activities decreases.

Question 31

A cost that has characteristics of both a variable cost and a fixed cost is called a a. variable/fixed cost b. mixed cost c. discretionary cost d. sunk cost

Answer 31

b. mixed cost A mixed cost is a cost that contains both a fixed cost component and a variable cost component. It is important to understand the mix of these elements of a cost, so that one can predict how costs will change with different levels of activity.

Question 32

For purposes of analysis, mixed costs are a. classified as fixed costs b. classified as variable costs c. classified as period costs d. separated into their variable and fixed cost components

Answer 32

d. separated into their variable and fixed cost components You can categorize your business costs as fixed, variable and mixed based on how they change in response to your sales or production output. Fixed costs remain the same no matter how many units you produce or sell. Variable costs are directly tied to your sales and production. They fluctuate as your output increases and decreases. Mixed costs are a combination of your fixed and variable costs. Although the fixed portion of a mixed cost remains the same, the variable portion changes along with your sales or production.

Question 33

The three most common cost behavior classifications are a. variable, product, and sunk costs b. fixed, variable, and mixed costs c. variable, period, and differential costs d. variable, sunk, and opportunity costs

Answer 33

b. fixed, variable, and mixed costs Fixed Costs Fixed costs include things such as rent, insurance, salaries, and property taxes, which stay constant in your relative range. In some instances, though, expanding your inventory can drive up these costs. For example, say your crochet company has one warehouse to store its finished blankets and the rent on the warehouse costs $500 per month. By paying a fixed cost of $500 per month, you have the space to store a set number of blankets. If you need greater space, your fixed cost of rent may increase. Variable Costs Variable costs change as the number of products you produce changes. Imagine your small business crochets blankets. If you need to make more blankets, you must purchase more yarn. In this instance, yarn represents a variable cost because its final total cost fluctuates depending on many blankets you produce. Because you can easily control variable coasts, you can slow or stop blanket production to reduce expenses when you reach the end of your relevant range or the amount of blankets you typically make. In some cases, though, making products beyond the relevant range drives your price per unit down. For example, this might occur if suppliers offer you yarn discounts when you purchase larger quantities. Mixed Costs Mixed costs refer to expenses that include both fixed and variable costs. Typically, mixed costs arise when your small business incurs a fixed flat charge plus an additional activity-based fee. Say your crochet company has a contract with a shipping company to transport its blankets. For this service, you pay a fixed cost of $75 per month plus a variable cost of $5 for every shipment you send, regardless of how many packages you submit for transport to customers. This means your crochet company incurs mixed costs for delivery of its blankets. Step Costs When your fixed costs change at certain points, they’re considered step costs. To clarify, imagine you need more space for your blankets than your warehouse rental can hold. To accommodate your extra production, you rent more space for an additional $500. This takes your fixed costs beyond the relevant range and into the category of step costs, as the change in the way you do business creates extra expenses. Usefulness of Cost Classifications By tracking variable, fixed, step, and mixed costs, you get a clear picture of how your costs typically behave, which helps you when it comes to figuring out per-unit pricing. Because you measure these costs internally and log them as expenses, you build cost behaviour into your pricing standards behind the scenes. This ensures you know how much you need to make per unit to break even and make a profit. Having this information on hand especially helps when you wish to expand your operations. To measure cost behaviour patterns, you first need to track and categorize your expenses into classifications and then look for your relevant range, or the spot where revenue and expenses balance exactly as you expect. Accounting software such as QuickBooks Online makes it simple to track and record cost behaviour classifications along with every aspect of your small business’s financial life. More than 4.3 million customers use QuickBooks to manage their finances. Join them today to help your business thrive for free.

Question 34

As production increases, the fixed cost per unit a. increases b. decreases c. remains the same d. either increases or decreases, depending on the variable costs

Answer 34

b. decreases Fixed costs do not vary with the production level. Total fixed costs remain the same, within the relevant range. However, the fixed cost per unit decreases as production increases, because the same fixed costs are spread over more units.

Question 35

As production increases, variable costs per unit a. stay the same b. increase c. decrease d. either increase or decrease, depending on the fixed costs

Answer 35

a. stay the same The variable cost of production is a constant amount per unit produced. As the volume of production and output increases, variable costs will also increase. Conversely, when fewer products are produced, the variable costs associated with production will consequently decrease.

Question 36

Costs that remain constant in total dollar amount as the level of activity changes are called a. fixed costs b. mixed costs c. product costs d. variable costs

Answer 36

a. fixed costs A fixed cost is a cost that remains constant; it does not change with the output level of goods and services. It is an operating expense of a business, but it is independent of business activity. An example of fixed cost is a rent payment.

Question 37

Cost behavior refers to the manner in which a cost a. changes as the related activity changes b. is allocated to products c. is used in setting selling prices d. is estimated

Answer 37

a. changes as the related activity changes Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. In cost accounting and managerial accounting, three types of cost behavior are usually discussed: Variable costs. The total amount of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity. Fixed costs. The total amount of a fixed cost will not change when an activity increases or decreases. Mixed or semivariable costs. These costs are partially fixed and partially variable. Understanding how costs behave is important for management's planning and controlling of its organization's costs, and for cost-volume-profit analyses (including the calculation of a company's break-even point).

Question 38

Which of the following costs is a mixed cost? a. salary of a factory supervisor b. utility costs of $3 per kilowatt-hour c. rental costs of $1,000 per month plus $0.50 per machine hour of use d. straight-line depreciation on factory equipment

Answer 38

c. rental costs of $1,000 per month plus $0.50 per machine hour of use Mixed or semivariable costs. These costs are partially fixed and partially variable.

Question 39

ABC Co. manufactures pens. During the most productive month of the year, 3,650 pens were manufactured at a total cost of $84,550. During its slowest month, the company made 1,250 pens at a cost of $46,150. Calculate the variable cost using the high-low method of cost estimation. a. $ 36.92 b. $ 23.16 c.$ 16.00 d. None of the above

Answer 39

c.$ 16.00 ($84,550 - $46,150) ÷ (3,650 - 1,250) = $16 High-low method formula The high-low method provides a simple way to split fixed and variable components of combined costs using a few formula steps. First you calculate the variable cost component and fixed cost component, then plug the results into the cost model formula. Variable cost per unit = (Highest activity cost − Lowest activity cost) ÷ (Highest activity units − Lowest activity units) Once you have the variable cost per unit, you can calculate the fixed cost. Fixed cost = Highest activity cost − (Variable cost per unit x Highest activity units) or Fixed cost − Lowest activity cost − (Variable cost per unit x Lowest activity units) Then use all the results to calculate the high–low cost using this formula: High-low cost = Fixed cost + (Variable cost + Unit activity)

Question 40

ABC Co. manufactures pens. During the most productive month of the year, 3,650 pens were manufactured at a total cost of $84,550. During its slowest month, the company made 1,250 pens at a cost of $46,150. Calculate the total fixed cost using the high-low method of cost estimation. a. $25,650 b. $28,300 c. $26,150 d. $27,800

Answer 40

c. $26,150 **** High-low method formula The high-low method provides a simple way to split fixed and variable components of combined costs using a few formula steps. First you calculate the variable cost component and fixed cost component, then plug the results into the cost model formula. Variable cost per unit = (Highest activity cost − Lowest activity cost) ÷ (Highest activity units − Lowest activity units) Once you have the variable cost per unit, you can calculate the fixed cost. Fixed cost = Highest activity cost − (Variable cost per unit x Highest activity units) or Fixed cost − Lowest activity cost − (Variable cost per unit x Lowest activity units) Then use all the results to calculate the high–low cost using this formula: High-low cost = Fixed cost + (Variable cost + Unit activity)

Question 41

ABC Co. manufactures pens. During the most productive month of the year, 3,650 pens were manufactured at a total cost of $84,550. During its slowest month, the company made 1,250 pens at a cost of $46,150. Calculate the total cost for producing 2,450 pens using the high-low method of cost estimation. a. $ 84,550 b. $ 65,350 c. $ 46,150 d. None of the above

Answer 41

¤b.$ 65,350 **** High-low method formula The high-low method provides a simple way to split fixed and variable components of combined costs using a few formula steps. First you calculate the variable cost component and fixed cost component, then plug the results into the cost model formula. Variable cost per unit = (Highest activity cost − Lowest activity cost) ÷ (Highest activity units − Lowest activity units) Once you have the variable cost per unit, you can calculate the fixed cost. Fixed cost = Highest activity cost − (Variable cost per unit x Highest activity units) or Fixed cost − Lowest activity cost − (Variable cost per unit x Lowest activity units) Then use all the results to calculate the high–low cost using this formula: High-low cost = Fixed cost + (Variable cost + Unit activity)

Question 42

Contribution margin is a. the excess of sales revenue over variable cost b. another term for volume in the "cost-volume-profit" analysis c. profit d. the same as sales revenue

Answer 42

a. the excess of sales revenue over variable cost A business's contribution margin – also called the gross margin – is the money left over from sales after paying all variable expenses associated with producing a product. Subtracting fixed expenses, such as rent, equipment leases, and salaries from your contribution margin yields your net income, or profit. C=P-V C = unit margin P = unit revenue V = unit variable cost

Question 43

The difference between the current sales revenue and the sales at the break-even point is called the: a. contribution margin. b. margin of safety. c. price factor. d. operating leverage.

Answer 43

b. margin of safety. In break-even analysis, the term margin of safety indicates the amount of sales that are above the break-even point. In other words, the margin of safety indicates the amount by which a company's sales could decrease before the company will have no profit.

Question 44

The relationship of a company's contribution margin to operating income is measured by a. contribution margin b. margin of safety c. operating leverage d. price factor

Answer 44

c. operating leverage Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue. To calculate operating leverage, divide an entity's contribution margin by its net operating income. The contribution margin is sales minus variable expenses There are several different formulas for calculating operating leverage: Operating Leverage Formula 1: Fixed Costs / (Fixed Costs + Variable Costs) The problem with this one is that most companies don’t spell out what is a fixed vs. variable cost in their filings. Operating Leverage Formula 2: % Change in Operating Income / % Change in Sales Operating Leverage Formula 3: Net Income / Fixed Costs Operating Leverage Formula 4: Contribution Margin / Operating Margin In practice, we tend to use the second formula: the % change in operating income divided by the % change in sales, because it’s the easiest one to apply when you have limited information. However, the other formulas can be useful if you have additional insight into the company’s fixed vs. variable costs.

Question 45

contribution margin ratio

Answer 45

The contribution margin ratio of a business is the total revenue of the business minus the variable costs, divided by the revenue. Contribution Margin Ratio = (Sales Income - Total Variable Costs) / Sales Revenue.

Question 46

the break even in units

Answer 46

Break-even point in units = Fixed costs ÷ Contribution margin per unit. Your break-even point in units will tell you exactly how many units you need to sell to turn a profit. If you're able to sell more units beyond this point, you'll be making a profit.

Question 47

the break even in sales dollars

Answer 47

To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

Question 48

Target Profit

Answer 48

Target Profit = Price x Quantity – [Fixed Costs (FC) + Average Variable Cost (AVC) x Quantity]

Question 49

the margin of safety in dollars

Answer 49

margin of safety in dollars. The excess of budgeted or actual sales dollars over the break-even volume of sales dollars. The amount by which sales can drop before losses are incurred. The higher this is, the lower the risk of not breaking even and incurring a loss. In accounting, the margin of safety is calculated by subtracting the break-even point amount from the actual or budgeted sales and then dividing by sales; the result is expressed as a percentage. Margin of Safety = (Current Sales Level – Breakeven Point) / Current Sales Level x 100 The margin of safety formula can also be expressed in dollar amounts or number of units: Margin of Safety in Dollars = Current Sales – Breakeven Sales Margin of Safety in Units = Current Sales Units – Breakeven Point

Question 50

the operating leverage

Answer 50

Operating Leverage measures the proportion of a company's cost structure that consists of fixed costs rather than variable costs. Degree of operating leverage = [number of units x (price per unit - variable cost per unit)] / number of units x (price per unit - variable cost per unit) - fixed operating costs