final

Question 1

operating leverage formula

Answer 1

operating leverage = contribution margin/net operating income

Question 2

contribution margin formula and definition

Answer 2

contribution margin = sales revenue - variable costs

the amount available to cover fixed costs and generate profits

Question 3

contribution margin ratio formula and definition

Answer 3

contribution margin ratio = contribution margin/sales

or

contribution margin ratio = unit contribution margin/unit sales price

tells managers the amount from each sales dollar that is contributing margin

Question 4

desired units formula

Answer 4

desired units = (total fixed costs + desired net income) / unit contribution margin

Question 5

desired sales revenue formula

Answer 5

(Total fixed costs + desired net income) / contribution margin ratio

Question 6

before tax net income formula

Answer 6

before tax net income = after tax net income / (1-tax rate)

Question 7

How do we treat fixed costs under the absorption and variable costing method

Answer 7

absorption: fixed costs in included in (absorbed into) cost of goods manufactures

variable: stands on its own

Question 8

Characteristics of variable costs
when there are no units, what it looks like
when the units go up, what happens to variable cost

Answer 8

-costs that are incurred for every unit of activity
-when variable costs go up, units go up
-change in direct proportion to the number of units
-If there’s no units, then there’s no variable cost

Question 9

When is absorption costing used

Answer 9

-external decision making
-required by GAAP

Question 10

When is variable costing used

Answer 10

internal financial reporting

Question 11

Fixed costs- definition and examples

what does the graph look like?

Answer 11

Costs that do not chang in total despite changes in volume of activity
-property taxes and insurance
-straight-line depreciation and maintenance
-lease payments
salaries of managers

graph: flat line that intersects the y-axis

Question 12

what are the 2 types of fix costs and what do they mean

Answer 12

1) committed fixed costs
- lease payments (can’t get out of it, signed contract)

2) discretionary fixed costs
- eliminate (fire) a manager, we can get rid of him and his salary that we would have had to pay as a fixed cost

Question 13

what are the advantages and disadvantages of variable costing

Answer 13

advantages:
-managers avoid making “death spiral” decisions
-cost information is readily available for CVP analysis

disadvantages:
-not acceptable for external reporting (only used internally)
-more costly to maintain

Question 14

product or period?

Answer 14

Question 15

where does inventory go

Answer 15

balance sheet

Question 16

where does COGS go

Answer 16

income statement

Question 17

what is the break-even point

Answer 17

when sales revenue equals costs (total+fixed)

Question 18

what is Reed’s drink of choice

Answer 18

Dr. Pepper

Question 19

what is Reed’s jersey number

Answer 19

66

Question 20

What is Reed’s kid’s name

Answer 20

grayson

Question 21

what happens when production = sales

Answer 21

there is no difference in reported income. the income statement does not change

Question 22

what happens if production>sales

Answer 22

absorption net income is greater than variable net income. (net income is higher under the absorption method)

Question 23

what happens if production < sales

Answer 23

absorption net income is less than variable net income. (net income is higher under the variable costing method)

Question 24

what are the phases of decision making

Answer 24

planning –> execution –> evaluation (planned vs actual)

Question 25

what does each rank decide? 1. upper management2 2 middle management 3. lower management

Answer 25

1. long term goals 2. intermediate goals 3. short term goals

Question 26

what are the three basic assumptions of break-even analysis (must be true)

Answer 26

1. total fixed costs and the unit variable costs are constant over the relevant range 2. the selling price per unit remains constant (prices can' change in the middle of the month) 3. the sales mix remains constant

Question 27

basic break even formula and definition

Answer 27

(sales price x units sold at break-even) = (unit variable costs x units sold at break-even) + total fixed costs how much we have to sell to cover fixed costs

Question 28

break-even units formula

Answer 28

break-even units = total fixed costs / unit contribution margin

Question 29

break-even sales revenue formula

Answer 29

break-even sales = total fixed costs / contribution margin ratio

Question 30

what do managers need to consider when dropping unprofitabole segments

Answer 30

qualitative factors such as employee morale and customer patronage

Question 31

what are the costs to consider when making decisions

Answer 31

relevant costs future costs opportunity costs

Question 32

what is an opportunity cost

Answer 32

future benefits forfeited due to a particular choice. it is the benefit I give up for the decision I make today

Question 33

what is the margin of safety

Answer 33

how much cushion a company as after breaking even

Question 34

margin of safety units formula

Answer 34

margin of safety units = actual sales units - break-even sales units

Question 35

margin of safety $ formula

Answer 35

margin of safety $ = actual sales revenue - break-even revenue