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46 Cards in this Set

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The format of a CVP income statement is Sales – Cost of goods sold – Operating expenses = Net Income.
false
The format of a CVP income statement is Sales – Variable costs – Fixed costs = Net Income (“Basic Concepts”).
Contribution margin ratio is contribution margin divided by sales.
true
Which one of the following is the format of a CVP income statement?
Sales – Variable costs – Fixed costs = Net income.
The format of a CVP income statement is Sales – Variable costs – Fixed costs = Net income ("Basic Concepts").
Croc Catcher calculates its contribution margin to be less than zero. Which statement is true?
Its selling price is less than its variable costs.
If contribution margin is less than zero, selling price is less than variable costs ("Basic Concepts").
The following information is available for Chap Company.


Sales

$350,000

Cost of goods sold

$120,000

Total fixed expenses

$60,000

Total variable expenses

$100,000

Which amount would you find on Chap’s CVP income statement?
Contribution margin of $250,000.
The CVP Income statement would show Sales $350,000 – Total variable expenses $100,000 = Contribution margin of $250,000 ("Basic Concepts").
______ is the amount of revenue that remains after deducting variable costs in a CVP income statement.
Contribution margin.
Contribution margin is the revenue that remains after subtracting variable costs from contribution margin (“Basic Concepts”).
Deighan Company had the following amounts from its income statement:


Sales revenue (800 units)

$80,000

Cost of goods sold -fixed

20,000

Cost of goods sold -variable

18,500

Selling expenses - fixed

7,000

Selling expenses - variable

6,000

Administrative expenses - fixed

5,000

Administrative expenses - variable

7,500

How much is Deighan's contribution margin?
$48,000Sales less variable costs equals contribution margin: $80,000 − $18,500 − $6,000 − $7,500 = $48,000 ("Basic Concepts").
In the month of April, Carly’s Carwash provided 3,000 car washes at an average price of $25. Fixed costs are $9,300 and variable costs are 85% of sales. Compute the contribution margin and the contribution margin ratio.
$11,250 and 15%
Sales are ($25 × 3,000) or $75,000. Contribution margin is [$75,000 × (1 - .85)] or $11,250. Contribution margin ratio is $11,250/$75,000 or 15% ("Basic Concepts").
Starwise Company had the following amounts from its income statement:


Sales revenue

$100,000

Cost of goods sold -fixed

32,000

Cost of goods sold -variable

25,000

Selling expenses - fixed

9,000

Selling expenses - variable

11,000

Administrative expenses - fixed

12,000

Administrative expenses - variable

8,000

How much is Starwise’s contribution margin?
$56,000
Sales less variable costs equals contribution margin: $100,000 − $25,000 − $11,000 − $8,000 = $56,000 ("Basic Concepts").
Given the following information, what is the contribution margin ratio?


Sales

$900,000

Variable expenses

400,000

Fixed Expenses

300,000

Net Income

200,000
56% contribution margin ratio is contribution margin)/sales ($900,000 – $400,000)/ $900,000) = 56% (“Basic Concepts”).
Margin of safety measures how far sales can drop before a company will be operating at a loss.
true
Which one of the following describes the break-even point?
It is the point where total sales equals total variable costs plus total fixed costs.
Gabriel Corporation has fixed costs of $180,000 and variable costs of $8.50 per unit.It has a target income $268,000. How many units must it sell at $12 per unit to achieve its target net income?
128,000 units.
Required sales in units equals $128,000 ($180,000 + $268,000)/ ($12 – $8.50) ("Target Net Income").
In the month of April, Carly’s Carwash provided 3,000 car washes at an average price of $25. Fixed costs are $9,300 and variable costs are 85% of sales. Compute the margin of safety ratio.
17.33%
Breakeven sales are [$9,300 ÷ (1 - .85)] or $62,000. The margin of safety is ($75,000 - $62,000) or $13,000. The margin of safety ratio is ($13,000 ÷ $75,000) or 17.33% ("Margin of Safety").
Sales mix is important for companies that sell only one product.
false
Sales mix is important for companies that sell multiple products (“Sales Mix”)
in general, a company should try to sell more low contribution margin products.
False
Net income will be greater if greater quantities of higher contribution units are sold (“Break-even Sales in Units”).
The formula for computing the break-even point in sales dollars for a company with multiple products or multiple divisions is fixed costs divided by weighted average contribution margin ratio.
true
Sales mix is:
a measure of the relative percentage in which a company’s products are sold.
Sales mix is the relative percentage in which a company sells its multiple products ("Sales Mix").
Net income will be:
greater if more higher-contribution margin units are sold than lower-contribution margin units.
Net income will be greater if more higher contribution margin units are sold than lower contribution units ("Break-Even Sales in Units").
In general, a company should sell more units of products with
a higher contribution margin.
A company should sell more units of products with a higher contribution margin in order to cover fixed costs and produce net income (“Break-even Sales in Units”).
If a company makes two products, R1 and R2, what is the formula for the weighted-average unit contribution margin?
(Unit Contribution Margin of R1 x Sales Mix Percentage of R1) + (Unit Contribution Margin of R2 x Sales Mix Percentage of R2).
In this case the formula for weighted-average unit contribution margin is (Unit Contribution Margin of R1 x Sales Mix Percentage of R1) + (Unit Contribution Margin of R2 x Sales Mix Percentage of R2) ("Break-Even Sales in Units").
If Morton Company expects to sell VCR’s at $100 a unit with variable costs of $60 per unit and DVD’s at $200 per unit with variable costs of $120 per unit, what is the weighted average contribution margin if the sales mix is 4 DVD’s for 1 VCR?
$72
Weighted average contribution margin is [($200 – $120) x (4/5)] + [ ($100 – $60) x (1/5)] or $64 + $8 = $72 (“Break-even Sales in Units”).
Yi Ling Company has 2 Divisions: Computers and Appliances. Given the following data, what is the break-even point in dollars?


Total fixed costs

$500,000

Sales-mix percentage

.40 for Computers


.60 for Appliances

Contribution margin ratio

.45 for Computers


.35 for Appliances
$1,282,051.
he break-even point in dollars is $1,282,051 or ($500,000/[(.45 x .40) + (.35 x .60)] (“Break-even Sales in Dollars”).
When a company sells multiple products, the breakeven point in sales dollars is computed by:
dividing the total fixed costs by the weighted average contribution margin ratio.
he breakeven point in sales dollars for multiple products is total fixed costs divided by the weighted average contribution margin ratio (“Break-even Sales in Dollars”).
Linburgh Inc manufactures model airplanes and repair kits. The planes account for 80% of the sales mix, and the kits the remainder. The variable cost ratio for the planes is 85% and 70% for the kits. Fixed costs are $99,000. Compute the breakeven point in sales dollars.
$550,000
The weighted-average contribution margin ratio is [(.80 × .15) + (.20 × .30)] or .18. The breakeven point in sales dollars is ($99,000 ÷ .18) or $550,000 ("Break-Even Sales in Dollars").
Determining the sales mix with limited resources requires determining the products with the highest contribution margin.
false
Determining the sales mix with limited resources requires determining the products with the highest contribution margin per unit of limited resource (“Determining Sales Mix with Limited Resources”).
If the contribution per unit is $15 and it takes 3.0 machine hours to produce the unit, the contribution margin per unit of limited resource is:
$5.
Contribution margin per unit of limited resource is contribution margin per unit divided by units of limited resource needed for the product. So, the answer is $15/3.0 = $5 per machine hour ("Determining Sales Mix with Limited Resources").
If a company has limited resources:
the sales mix is determined by computing contribution margin per unit of limited resource.
When a company has limited resources the sales mix is determined by computing contribution margin per unit of limited resource (“Determining Sales Mix with Limited Resources”).
Genesis Company manufactures digital televisions and computer monitors. The limiting resource for the company is 7,200 hours per month. Televisions have a contribution margin per unit of $400 and computer monitors have a contribution margin per unit of $100. Machine hours per unit for televisions and monitors are 0.80 and 0.25, respectively. If Genesis is able to increase machine capacity to 7,500 hours and increase the production of only one of these products, what amount of contribution margin is available under each alternative for the additional 300 hours?


Digital TVs

Computer Monitors
$150,000
$120,000
Contribution margin per unit of limited resource for TVs = $400 ÷ 0.80 = $500; $500 x 300 additional hours = $150,000 contribution margin; Contribution margin per unit of limited resource for Monitors = $100 ÷ 0.25 = $400; $400 x 300 additional hours = $120,000 contribution margin (“Determining Sales Mix with Limited Resources”)
Valerio Company sells Mountain Bikes and Racing Bikes. The Mountain Bikes sell for $300 and have variable costs of $125. The Racing Bikes sell for $450 and have variable costs of $275. Valerio Company has limited machine hours for production. If Mountain Bikes take 2 machine hours and racing bikes take 2.5 machine hours which product should be emphasized if capacity (machine hours) is increased and sufficient demand exists for each product?
mountain Bikes.
Mountain bikes should be emphasized since they produce the higher contribution margin of $87.50 per machine hour [($300 - $125)/2]. Racing Bikes produce a contribution margin of only $70 per machine hour [($450-$275)/2.5] (“Determining Sales Mix with Limited Resources”).
In order to maximize profits when limited resources are available a company should concentrate on the producing products with:
the highest contribution margin per unit of limited resource.

Profits will be maximized when a company produces those products with the highest contribution margin per unit of limited resource ("Determining Sales Mix with Limited Resources").
Marten Corp. has a limited number of machine hours available to produce its three products A11, B22, and C33. Determine the order that these products should be produced given the following data:



A11

B22

C33


Unit sales price

$14

$36

$10


Unit variable costs

6

32

3


Machine hours per unit

5

4

2
C33, A11, B22
The unit contribution margins are A11 ($14 - $6) or $8; B22 ($36 - $32) or $4; and C33 ($10 - $3) or $7. The contribution margins per machine are A11 ($8 ÷ 5 MH) or $1.60; B22 ($4 ÷ 4 MH) or $1.00; and C33 ($7 ÷ 2 MH) or $3.50. Therefore, the proper order of production is C33, A11, B22 ("Determining Sales Mix with Limited Resources").
Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.
true
The degree of operating leverage:
affects a company’s break-even point.

can be computed by dividing total contribution margin by net income.

provides a measure of the company’s earnings volatility.

All of these answer choices are correct.
All of the statements about operating leverage are true ("Operating Leverage").
A high degree of operating leverage:
exposes a company to greater earnings volatility risk.
A high degree of operating leverage exposes a company to greater earnings volatility risk ("Degree of Operating Leverage").
A company with high operating leverage:
has a greater proportion of fixed costs to variable costs.
High operating leverage means a company has higher fixed costs relative to variable costs (“Operating Leverage”).
The degree of operating leverage is computed by dividing
contribution margin by net income.Contribution margin divided by net income yields degree of operating leverage (“Degree of Operating Leverage”).
If Company A has a higher proportion of fixed costs relative to variable costs than Company B:
Company A has a higher break-even point than Company B.

Company A has greater risk compared to Company B.

All of these answer choices are correct.

Company A is more sensitive to changes in sales than Company B.
A company with a higher proportion of fixed costs relative to variable costs has a higher break-even point, is more sensitive to changes in sales and has greater risk (“Cost Structure and Operating Leverage”).
The margin of safety ratio is:
higher for a company with lower operating leverage.
A company with a lower operating leverage has a higher margin of safety ratio (“Effect on Margin of Safety”).
The degree of operating leverage can be computed as:
contribution margin divided by net income.
The degree of operating leverage is contribution margin divided by net income ("Degree of Operating Leverage").
Donovan Company had sales of $50,000, fixed costs of $30,000 and a variable cost ratio of 25%. If sales increase by 6% next year, net income will increase by:
$2,250
Contribution margin is [$50,000 × (1 - .25)] or $37,500. Net income is ($37,500 - $30,000) or $7,500. The degree of operating leverage is ($37,500 ÷ $7,500) or 5. The percentage increase in profits is (5 × .06) or 30%. The increase in profits is ($7,500 × .30) or $2,250 ("Degree of Operating Leverage").
variable costing treats fixed manufacturing overhead as product costs.
false

Under variable costing, only direct materials, direct labor and variable manufacturing overhead costs are considered product costs (“Absorption Costing versus Variable Costing”).
Fixed manufacturing overhead costs are recognized as:
product costs under absorption costing.
Under absorption costing fixed manufacturing overhead costs and variable manufacturing overhead costs are both product costs ("Absorption Costing Versus Variable Costing").
Net income computed under absorption costing will be:
higher than net income under variable costing when units produced are greater than units sold.
Net income is higher under absorption costing than under variable costing when units produced exceed units sold ("Variable Costing Example").
Absorption costing treats which of the following items as product costs
Absorption costing treats direct labor costs and both variable and fixed manufacturing overhead as product costs so this is the best answer (“Absorption Costing versus Variable Costing”).
Variable manufacturing overhead.

All of these answer choices are correct.

Direct labor.

Fixed manufacturing overhe
If Valdez Company produces 100,000 units and sells 95,000 units, which costing method will produce a higher net income for the year?
Neither method.
When units produced are greater than units sold, net income will be higher under absorption costing since more fixed costs will remain in inventory (“Absorption Costing versus Variable Costing”).