Accounting Chapter 2 Flashcards

Questions and Answers

If these results occur, what will happen to net operating income?

increase by $6,000

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease

What is one way to calculate break-even sales dollar?

Multiplying unit selling price times the number of units required to break-even.

What should be the quoted selling price per unit for the bulk sale opportunity?

20 Signup and view all the answers

What are the sales dollars to break-even for Company A with fixed costs of $564,000 and a contribution margin of 62%?

$909,677 Signup and view all the answers

To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to ______.

zero Signup and view all the answers

What would be the impact on total contribution margin if Sweet Dreams increases variable costs?

decrease of $3,000 Signup and view all the answers

What is the break-even point in units and dollars for Company A selling at $10 per unit with variable expenses of $5 and fixed expenses of $200,000?

40,000 units and $400,000 Signup and view all the answers

What is the total sales dollars needed to reach the target profit if 90,000 units are sold for $7.50 each?

$675,000 Signup and view all the answers

What are the sales dollars to break-even for Cakes by Jacki with $144,000 of fixed costs and a contribution margin ratio of 59%?

$244,068 Signup and view all the answers

What are the sales dollars needed for Company A to reach a profit of $800,000 with fixed costs of $564,000 and a contribution margin ratio of 62%?

$2,200,000 Signup and view all the answers

What is the margin of safety in dollars?

budgeted (or actual) sales minus break-even sales Signup and view all the answers

What is the margin of safety percentage?

margin of safety in dollars divided by total budgeted (or actual) sales in dollars Signup and view all the answers

What are the sales dollars needed to earn the target profit for Shonda's Shoes if she sells 450 pairs?

$42,750 Signup and view all the answers

What are the sales dollars needed to earn the target profit for Chitter-Chatter with a target profit of $975,000?

$1,800,000 Signup and view all the answers

What is the margin of safety in units for Polly's Day Planners?

780 Signup and view all the answers

The higher the margin of safety, the lower the risk of incurring a loss.

True Signup and view all the answers

What is known as the measure of how sensitive net operating income is to a given percentage change in sales dollars?

operating leverage Signup and view all the answers

What is the budgeted margin of safety in dollars when budgeted sales are $982,000 and break-even sales are $932,200?

$49,800 Signup and view all the answers

Which company has greater operating leverage if a 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase for Company B?

Company B Signup and view all the answers

What is the margin of safety percentage for Jump-It Corporation with sales of 100,000 units and a margin of safety of $272,000?

16% Signup and view all the answers

CVP analysis focuses on how profits are affected by which of the following?

Sales volume Signup and view all the answers

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

Sales = 1 Variable expenses = 2 Contribution margin = 3 Fixed expenses = 4 Net operating income = 5 Signup and view all the answers

Contribution margin is first used to cover _ expenses. Once the break-even point has been reached, contribution margin becomes __.

fixed expenses, profits Signup and view all the answers

Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, what is the net operating profit for sale of 501 units?

30 Signup and view all the answers

What is the break-even point?

zero Signup and view all the answers

According to the CVP analysis model, what increases profits?

decrease in the unit variable cost Signup and view all the answers

Total contribution margin equals?

fixed expenses plus net operating income Signup and view all the answers

Contribution margin becomes profit after what?

fixed expenses are covered Signup and view all the answers

When a company sells one unit above the number required to break-even, what happens to the company's net operating income?

changes from zero to a net operating profit Signup and view all the answers

A company has reached its break-even point when the contribution margin?

covers fixed expenses Signup and view all the answers

The break-even point is reached when the contribution margin is equal to?

total fixed expenses Signup and view all the answers

CVP analysis allows companies to easily identify the change in profit due to changes in?

costs, selling price, volume Signup and view all the answers

After reaching the break-even point, a company's net operating income will increase by the ____ per unit for each additional unit sold.

contribution margin Signup and view all the answers

What is the contribution margin (CM) ratio calculation?

contribution margin/sales Signup and view all the answers

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, what is the contribution margin ratio?

34% Signup and view all the answers

Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False Signup and view all the answers

The amount by which sales can drop before losses are incurred is called the?

margin of safety Signup and view all the answers

To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the?

contribution margin per unit Signup and view all the answers

What represents the equation that should be used in setting a target selling price for a special order bulk sale?

Selling price per unit = Variable cost per unit + Desired profit per unit Signup and view all the answers

Study Notes

Contribution Margin and CVP Analysis

CVP analysis examines the impact of selling prices, sales volume, unit variable costs, total fixed costs, and product mix on profits.
Contribution margin serves to cover fixed expenses first, then contributes to profit after the break-even point.

Break-even Point

The break-even point occurs at sales levels where profit equals zero, meaning total revenue equals total costs.
Contribution margin must cover fixed expenses for a business to reach break-even; once achieved, any additional unit sold increases net operating income.

Profit Calculations

Net operating profit for 501 units sold with a selling price of $100 and variable costs of $70 is $30.
Profit can be calculated via the formula: (Selling Price × Quantity) - (Variable Cost × Quantity) - Fixed Expenses.

Contribution Margin Ratio

The contribution margin ratio is calculated as contribution margin divided by sales, aiding in the analysis of profit changes due to sales fluctuations.
A contribution margin ratio of 53% means that for every $1 increase in sales, net operating income will increase by $0.53.

Profit Impact of Sales and Costs

Changes in sales and fixed expenses impact profit. For example, a sales increase of $35,000 with a 45% contribution margin ratio results in a $15,750 increase in net operating income.
Decreasing unit variable costs will generally enhance profits, with a greater contribution margin available to cover fixed expenses.

Variable Expenses and Selling Price Relationship

Variable expense ratio is derived from variable expenses divided by sales; a lower ratio indicates greater profitability on sales.
The selling price per unit minus variable costs equals contribution margin per unit, influencing overall profit.

Target Profit and Product Sales

To achieve targeted profit goals, companies need to calculate necessary sales volume based on contribution margin and fixed costs.
For instance, selling 35 elephants at a profit margin of $45 each yields total profits of $875, demonstrating how fixed costs and volume intertwine.

Special Cases and Strategies

In bulk sales where fixed expenses remain unchanged, selling price considerations can focus on variable costs and desired profit without including fixed costs.
Calculating changes in total contribution margins can often help forecast impacts of production shifts, such as switching materials to improve quality.

Important Formulas

Break-even point in units = Fixed Costs / (Selling Price - Variable Costs).
Net profit calculation involves direct contributions from sales volume and adjustments for any new expenses.

Decision-Making Tools

Incremental analysis considers only relevant costs and revenues for specific decisions, excluding unchanged variables.
Contribution margin format income statements are essential for internal decision-making, facilitating insight into profits resulting from various operational changes.

General Understanding

A company's sales mix, comprising the relative proportion of different products sold, significantly affects the overall profitability and must be considered in break-even analysis.
Changes in fixed or variable costs and their effects on pricing strategy directly influence a company’s contribution margin and overall financial health. ### Break-even Point and Sales Calculations
Break-even point for Company A is 40,000 units or $400,000, calculated as $200,000 fixed expenses divided by $5 variable expenses per unit.
To achieve a target profit of $180,000, a company must sell 90,000 units, resulting in total sales of $675,000 at a selling price of $7.50 per unit.
Cakes by Jacki requires $244,068 in sales to break even, determined from fixed costs of $144,000 and a contribution margin ratio of 59%.
Company A needs sales of $2,200,000 to achieve a profit of $800,000, utilizing a contribution margin ratio of 62 against fixed costs of $564,000.

Margin of Safety

Margin of safety in dollars is calculated as budgeted (or actual) sales minus break-even sales.
Margin of safety percentage is derived by dividing the margin of safety in dollars by total budgeted (or actual) sales in dollars.

Sales and Profit Calculations

To earn a target profit, Shonda's Shoes must make $42,750 from selling 450 pairs at $95 each.
Chitter-Chatter needs to generate $1,800,000 in sales to meet a target profit of $975,000 with a contribution margin ratio of 65% and fixed costs of $195,000.

Margin of Safety in Units and Risks

Polly's Day Planners has a margin of safety of $27,300, equivalent to 780 units when calculated based on $927,500 in sales with planners priced at $35.
A higher margin of safety indicates reduced risk of incurring losses.

Operating Leverage

Operating leverage measures the sensitivity of net operating income to percentage changes in sales dollars.
A 15% increase in sales for Company A leads to a 40% increase in net income, while Company B sees a 60% increase, indicating that Company B has greater operating leverage.

Budgeted Margin of Safety

For a company with budgeted sales of $982,000 and break-even sales of $932,200, the budgeted margin of safety in dollars equals $49,800, determined by subtracting break-even sales from budgeted sales.

Margin of Safety Percentage Example

Jump-It Corporation's margin of safety percentage stands at 16%, calculated from a margin of safety of $272,000 and total sales of $1,700,000 (100,000 units sold at $17 each).

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Description

Test your knowledge of key concepts in Chapter 2 of Accounting. This quiz covers CVP analysis, contribution margins, and the order of items in a contribution margin income statement. Ideal for students looking to reinforce their understanding of these fundamental accounting principles.