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Questions and Answers

In a CVP graph, what is usually represented on the horizontal (X) axis?

Total fixed expenses

Unit volume (correct)

Dollars

Contribution margin

What does the unit contribution margin (Unit CM) express?

Total revenue at a specific volume

Total fixed expenses

Contribution per unit towards covering fixed costs (correct)

Profit at a specific volume

What does the CVP graph illustrate?

Contribution margin at different volumes

Total revenue at different volumes

Relationships among revenue, cost, profit, and volume (correct)

Total fixed expenses at different volumes

What does the equation for profit in CVP analysis typically include?

Unit selling price and unit variable cost Signup and view all the answers

When a company has only one product, how can the profit equation be further refined?

In terms of the unit contribution margin Signup and view all the answers

What is expressed graphically in a CVP graph?

Relationships among revenue, cost, profit, and volume Signup and view all the answers

What is the formula to calculate the predetermined overhead rate based on direct labor-hours?

$ ext{Predetermined overhead rate} = rac{ ext{Estimated total manufacturing overhead cost}}{ ext{Estimated total direct labor-hours}}$ Signup and view all the answers

What can inaccurately assigning manufacturing costs to jobs adversely influence?

Decision-making by managers Signup and view all the answers

What is a cost driver in the context of overhead costs?

A factor that causes overhead costs Signup and view all the answers

In job-order costing, what is used to allocate all manufacturing overhead costs to jobs?

Single predetermined plantwide overhead rate Signup and view all the answers

In the context of multiple predetermined overhead rates, what is used as the allocation base in the Milling Department?

Machine-hours Signup and view all the answers

What pricing method does Dickson Company use to establish selling prices for its jobs?

Cost-plus pricing Signup and view all the answers

What method is used to compute the number of units that must be sold to attain a target profit?

The equation method Signup and view all the answers

What does the margin of safety represent?

The excess of budgeted or actual sales dollars over the break-even volume of sales dollars Signup and view all the answers

What does cost structure refer to?

The relative proportion of fixed and variable costs in an organization Signup and view all the answers

What does operating leverage measure?

How sensitive net operating income is to percentage changes in sales Signup and view all the answers

How does structuring sales commissions based on contribution margin impact conflicts and profits?

It can eliminate conflicts and lead to higher profits Signup and view all the answers

How does the sales mix affect the break-even point and contribution margin?

It affects the break-even point and contribution margin Signup and view all the answers

What is the purpose of using predetermined overhead rates in job-order costing?

To apply overhead to jobs before the period begins based on estimated data. Signup and view all the answers

Which cost is related to manufacturing and can be inventoried in job-order costing?

Direct material cost Signup and view all the answers

What is used as the allocation base to assign manufacturing overhead to individual jobs in job-order costing?

Direct labor hours or machine hours Signup and view all the answers

How is the predetermined overhead rate computed in job-order costing?

Using a four-step process, including estimating total fixed and variable manufacturing overhead costs. Signup and view all the answers

Which type of costs are applied using a predetermined overhead rate in job-order costing?

Fixed and variable manufacturing overhead costs Signup and view all the answers

Why are predetermined overhead rates used in job-order costing?

Because actual overhead for the period may not be known until the end, inhibiting the ability to estimate job costs. Signup and view all the answers

What is the formula for calculating the contribution margin ratio (CM ratio)?

$CM hinspace ratio = \frac{Contribution hinspace margin hinspace per hinspace unit}{Selling hinspace price hinspace per hinspace unit}$ Signup and view all the answers

In break-even analysis, how are unit sales at break-even calculated using the formula method?

By dividing fixed expenses by contribution margin per unit Signup and view all the answers

What is the dollar sales at break-even computed using in break-even analysis?

Both the equation and formula methods Signup and view all the answers

In Example 1, what was the impact on net operating income when unit sales increased by 40 units with a $10,000 increase in advertising budget?

Decreased by $2,000 Signup and view all the answers

What is the variable expense ratio calculated as?

$Variable hinspace expense hinspace ratio = \frac{Variable hinspace expenses}{Sales}$ Signup and view all the answers

In Example 5, to increase monthly profits by $3,000, what price should RBC quote to sell 150 bikes to a wholesaler?

$320 per bike Signup and view all the answers

Study Notes

Contribution Margin and Break-Even Analysis

Contribution margin graph: plot total expenses and total sales at a chosen sales volume, draw lines to fixed expenses and the point of origin
Contribution margin ratio (CM ratio): calculated as contribution margin per unit divided by selling price per unit
Variable expense ratio: calculated as variable expenses divided by sales
Applications of contribution ratio: increase in sales volume will increase contribution margin
Example 1: Increasing unit sales by 40 units with a $10,000 increase in advertising budget decreased net operating income by $2,000
Example 2: Increase in unit sales from 500 to 580 with a $10 increase in variable costs per unit resulted in a $10,200 increase in net operating income
Example 3: Sales increased by $62,000, fixed costs increased by $15,000, and net operating income increased by $2,000 after reducing selling price and increasing advertising budget
Example 4: Switching from fixed salaries to sales commission resulted in a $12,375 increase in net operating income after increasing unit sales
Example 5: To increase monthly profits by $3,000, RBC should quote a price of $320 per bike to sell 150 bikes to a wholesaler
Break-even analysis: unit sales at break-even calculated using contribution margin formula and equation method
Formula method: a shortcut version of the equation method, each unit sold contributes towards covering fixed expenses
Dollar sales at break-even: computed using both the equation and formula methods

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Description

Test your knowledge of contribution margin and break-even analysis with this quiz. Explore concepts such as contribution margin graph, CM ratio, variable expense ratio, and applications of contribution ratio through practical examples. Also, delve into break-even analysis, including unit sales and dollar sales at break-even using formula and equation methods.