Accounting 222 Practice Exam 2 PDF

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Accounting 222 Practice Exam 2 Which of the following explains contribution margin? Sales minus fixed cost Fixed cost minus variable cost Sales minus variable cost minus fixed cost *Sales minus variable cost* Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. Compute the profit from the sale of 100 bicycles. *$12,000* $10,000 $20,000 $8,000

Total CM= $200*100 units=$20,000 CM-FC=Profit 20,000-8,000=12,000 Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle? $500 $300 *$200* $20,200 Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold. *unit contribution margin* unit selling price variable expense per unit fixed expense per unit Break-even point is the level of sales at which ______. total profits equal total costs total profits exceed total costs *total revenue equals total costs*

total sales equal projections Break-even point is the level of sales at which total revenue equals total costs and the profit is zero. What happens when sales are zero? If sales are zero, the company's loss will equal its fixed expenses. Each unit that is sold reduces the loss by the amount of the unit contribution margin. Once the break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin. What happens to unprofitable products? They are replaced with products that have a higher contribution margin. Team Corporation has sales of $1 million, fixed expenses of $200,000, and variable expenses of $650,000 for the month of March. What is the contribution margin ratio of the company for the month of March? 20% 65% 100% *35%* =$35,000/$100,000 Base Corporation has sales of $100,000, variable costs of $40,000, and fixed costs of $30,000 currently. The company is expecting a $36,000 increase in sales. What is the change in contribution margin for the company? Change in Contribution Margin = CM Ratio × Change in Sales = 60% × $36,000 = *$21,600*. If sales increase by $50,000, what will be the net operating income for the company? Sales: $100,000 VC: $50,000 CM: $50,000 FC: $20,000 NOI: $30,000 $25,000 *$55,000* $15,000

$50,000 50% CM * $50,000 increase= $25,000 change in CM new CM=$50,000+$25,000=$75,000 75,000-$20,000=NOI What is the contribution margin ratio and its uses? The CM ratio shows how the contribution margin will be affected by a change in total sales. The impact on net operating income of any given dollar change in total sales can be computed by applying the CM ratio to the dollar change. Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio? *40%* 60% 100% 20% Alpha Corporation is currently selling 500 skateboards per month. The unit selling price and variable expenses are $60 and $35 respectively. The fixed expenses amount to $5,000 per month. The company has an opportunity to make a bulk sale of 100 skateboards. This sale will not affect the company's regular sales or total fixed expenses. What unit price should be charged if the company is seeking a profit of $2,000 on the bulk sale? Unit price= Variable cost per skateboard + Desired profit per skateboard = $35 + ($2,000/100) = *$55*. Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes? Selling Price: $110,000 Total $110 per unit VC: 60,000 Total 60 per unit CM: 50,000 ; 50 FC 30,000 NOI: $20,000 #of units: 1000 New selling price = $110 - $10 = $100. New sales level = 1,000 units x 150% = 1,500 units. Net operating income = Sales of $150,000 (or 1,500 units × Selling price of $100 per unit) - Variable

expenses of $90,000 (or 1,500 units × variable expense of $60 per unit) - Fixed expenses of $35,000 (or $30,000 + $5,000) = *$25,000*. Variable Cost Ratio the variable cost ratio is the ratio of variable expenses to sales. The effect of changes in variable costs, fixed costs, selling price, and volume can be computed on an incremental basis or on a total basis. CVP concepts can be applied to study the impact of changes in variable costs, fixed costs, selling price, and sales volume. CVP concepts can also be used to determine the selling price the company can quote on special orders. Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales? 63 units 167 units 50 units *100 units* =5000/(80-50) Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars? *$25,000* $2,500 $250 $16,667 =10,000/.4 The target profit is zero in break-even analysis. True What are the unit sales required to attain a target profit of $120,000? Target Profit: $120,000 Unit CM: $40 Fixed Expenses: $40,000 CMR: 40% Selling Price: $100

400,000 units 400 units 1,600 units *4,000 units* $120,000+$40,000/40 Margin of Safety the amount by which sales can drop before losses are incurred. Lower Margin of Safety, the higher the risk of the company not breaking even, and the higher the risk of the company incurring a loss. Lower Margin of Safety is concerning bc company is more vulnerable to downturn is sales. How do you increase margin of safety? Increasing Total Sales, decreasing Costs, or Both. What is Ralph Corporation's margin of safety in dollars? Selling Price: $200 per unit Variable Cost: $150 per unit Fixed Costs: $1,000,000 per year Unit sales: $25,000 units per year $4 million $5 million *$1 million* $2.2 million Margin of Safety in dollars = Total budgeted (or actual) sales - Break-even sales = $5,000,000 $4,000,000 = $1,000,000. Total Sales: $200*25,000= $5,000,000 CMR:200-150= $50/200= 25% Break-even Sales: FC/CMR= 1,000,000/.25= $4,000,000 Margin of Safety in $: 5,000,000-4,000,000=1,000,000 What is Ralph Corporation's margin of safety in percentage? Selling Price: $200 per unit Variable Cost: $150 per unit Fixed Costs: $1,000,000 per year

Unit sales: $25,000 units per year 20% 100% 80% 50% Margin of Safety Percentage = Margin of Safety in dollars / Total budgeted (or actual) sales in dollars = ($5,000,000 - $4,000,000) / $5,000,000 = 20%. Operating Leverage Tool used to increase NOI. Measure of how sensitive NOI is to a given % change in dollar sales. Measures impact of fixed vs variable costs in business Relationship between FC and Operating Leverage Increase in FC = Increase in Operating Leverage= Greater NOI Relationship between Sales and Degree of Operating Leverage Increase in Sales = Decrease in Degree of Operating Leverage = further away company moves from break even point Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage? *3.00* 0.60 2.00 1.67 =$300,000/$100,000 The current sales of Trent, Inc., are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Inc.? 24% 30% *60%* 25% =2*.3

What is the degree of operating leverage for Rite Corporation? Sales: $300,000 Variable Cost: $150,000 CM: $150,000 Fixed Cost: $50,000 NOI: $100,000 2.00 *1.50* 0.33 0.67 What is Operating Leverage? Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales. The degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is not a constant; it is greatest at sales levels near the break-even point and decreases as sales and profits rise, assuming everything else is equal. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Calculate the increase or decrease in net operating income. Per Unit of Sales: Percent: Selling price $90 100% Variable expenses $63 70% Contribution margin $27 30% Current Sales;Sales with Additional Advertising Budget; Difference Sales $180,000 $189,000 $9,000 Variable expenses $126,000 $132,300 $6,300 Contribution margin $54,000 $56,700 $2,700 Fixed expenses $30,000 $35,000 $5,000 Net operating income $ 24,000 $21,700 $(2,300) *OR*

Expected total contribution margin: $189,000 × 30% CM ratio $56,700

Present total contribution margin: $180,000 × 30% CM ratio $54,000 Incremental contribution margin $2,700 Change in fixed expenses: Less incremental advertising expense $5,000 Change in net operating income $ (2,300) Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $2 per unit. The marketing manager believes that the higher-quality product would increase sales by 10% per month. Calculate the change in total contribution margin. Expected total contribution margin with the higher-quality components: 2,200 units × $25 per unit= $55,000 Present total contribution margin: 2,000 units × $27 per unit= $54,000 Change in total contribution margin $1,000 Contribution Margin amount remaining from sales revenue after variable expenses are deducted. Covered Fixed costs and Profit. Break Even Point Sales level where profit is $0. NOI will increase by the unity CM for each additional unit sold Absorption costing all costs are product costs. DM, DL, FOH, VOH Variable Costing ONLY variable costing costs. DM, DL, VOH What is the unit product cost for the month of February, using the absorption costing method? FOH per month= $140,000 units produced in Feb= 5

FOH units=140,000/5=$28,000 DM= 40,000 DL= 10,000 VOH=2,000 =$52,000 +28,000 = *80,000* What is the unit product cost for the month of February, using the variable costing method? DM= 40,000 DL= 10,000 VOH=2,000 =*$52,000* Product vs Period Costs Product: Direct Materials, Direct Labor, Variable Manufacturing Overhead Period Period:Fixed Selling and Administrative Expenses, Variable Selling and Administrative Expenses,Fixed Manufacturing Overhead different ways in which variable costing and absorption costing treat fixed manufacturing overhead. nder variable costing, direct materials, direct labor, and the variable portion of manufacturing overhead are treated as product costs. So, only those manufacturing costs that vary with output are treated as product costs under variable costing. Fixed manufacturing costs are expensed as period costs. Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. In each month, fixed manufacturing overhead cost is divided by the number of units produced to determine the fixed manufacturing overhead cost per unit under absorption costing. Variable Income Statement Format Sales Revenue -Variable Production expenses (DM, DL, VOH) -Variable Selling and Administrative =Contribution Margin -FOH -Fixed selling and administrative =NOI Absorption Costing Income Statement

Sales Revenue -COGS (DM, DL, VOH, FOH) =Gross PRoofit -Selling and administrative expenses (including variable and fixed selling admin. expenses =NOI Differences between income statements 1. variable i/s categorizes costs according to behavior(variable vs fixed) 2. abs categorizes by function (manufacturing vs selling and administrative) Calculating Sales Revenue Selling price per unit * units sold Calculating Unit Product cost (Variable) DM+DL+VOH Calculating Unit Product Cost (Absorption) DM+DL+VOH+FOH FOH=Fixed manufacturing overhead/ units produced Variable selling and administrative expenses variable selling and arm. expenses per unit * # of units sold Variable COGS #of units sold * variable unit product cost The variable costing contribution format income statement categorizes costs based on their function. false In absorption costing, fixed manufacturing overhead is recorded as a product cost. true in an absorption costing income statement, in addition to direct materials and direct labor, cost of goods sold also includes:

Variable manufacturing overhead and fixed manufacturing overhead Which of the following is an example of a common fixed cost? Salary of the Fritos product manager at PepsiCo. *Salary of the CEO of Apple, Inc.* Maintenance cost for the building in which Boeing 747's are assembled for Boeing, Inc. Advertising campaigns of the computer division of Sony Corporation. A true common fixed cost would disappear if a segment was entirely eliminated. false The use of absorption costing for segmented income statements results in: *omission of upstream and downstream costs.* failure to trace costs directly. inappropriate use of allocation base. arbitrary division of common costs among segments. Only manufacturing costs are included in product costs under absorption costing. Many companies also use absorption costing for their internal reports such as segmented income statements. As a result, such companies omit from their profitability analysis part or all of the "upstream" costs in the value chain and the "downstream" costs, which consist of marketing, distribution, and customer service. Max, Inc., has two divisions, South Division and North Division. South Division's sales, contribution margin ratio, and traceable fixed expenses are $500,000, 60%, and $100,000 respectively. What is the segment margin for the South Division? $200,000 Bovine Corporation has two divisions: televisions and mobile phones. The mobile phone division has a contribution margin of $600,000. The company's common fixed costs and total traceable fixed costs are $100,000 and $500,000 respectively. What is the segment margin of the mobile phone division, assuming the traceable fixed costs of the television division are $300,000? The traceable fixed costs of the mobile phone division is $200,000 ($500,000 total traceable fixed costs minus $300,000 traceable fixed costs of television division). Thus, the mobile phone segment margin is $400,000 ($600,000 contribution margin minus the $200,000 traceable fixed costs). Cost-Volume-Profit (CVP)

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain Primary Purpose of CVP to estimate how profits are affected by: 1. selling prices 2. sales volume 3. unit variable cost 4. total fixed costs 5. mix of product costs CVP assumptions 1. Selling price is constant. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit. The fixed element is constant in total over the entire relevant range. 3. In multi product companies, the mix of products sold remains constant. Contribution Margin (textbook) Sales Revenue - Variable Expenses it is the amount available to cover fixed expenses and then to provide profits for the period If CM is not sufficient to cover fixed costs, then a loss occurs for the period CM rule #1 For each addition unit sold, NOI increases by the unit CM Break Even When enough units are sold so that the CM can cover all of the companies fixed expenses, and there is neither a profit or loss (NOI=$0) BEP level of sales at which profit is 0. Once BEP has been reached, NOI will increase by the amount of the unit CM for each additional unit sold Increase in NOI after break even is reached

Increased number of units sold x unit CM = Increase in NOI Profit formula (Sales - VC)- FC Sales Formula Sales price per unit x quantity sold (P x Q) Variable Cost Formula Variable cost per unit x quantity sold Unit CM formula Sales price per unit - variable cost per unit CM Ratio CM as a % of sales. Shows how the CM will be affected by a change in total sales. CM/Sales (total and unit) **For each dollar increase in sales, total CM will increase by the CMR** Change in CM formula CM ratio x Change in sales The impact of any given dollar change in total sales can be computed by applying the CM ratio to the dollar change. Incremental analysis considering only the costs and revenues that will change if the new program is implemented. Unit Sales to Break Even Formula Total Fixed Costs/Unit CM Dollar Sales to Break Even Total Fixed Costs/CMR

Target Profit Analysis estimate what sales volume is needed to achieve a specific target profit. Unit sales to attain the TP (Target Profit + Fixed Costs)/Unit CM Dollar sales to attain target profit (Target Profit + Fixed Costs)/CMR Margin of Safety (textbook) the excess of budgeted or actual sales dollars over the break-even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss Margin of safety in dollars Total Sales-Breakeven Sales reduction in sales of Margin of safety dollars would result in just breaking even Margin of Safety Percentage Margin of Safety in Dollars/Total Sales in dollars Higher VC and Lower Fixed Costs Greater profit stability and will be more protected from losses during bad years, but have a lower net operating income during good years Lower VC and Higher FC Wider swings in net income as sales fluctuate, Greater profit in good years and greeter losses in bad years Operating Leverage (text) a measure of how sensitive NOI is to a given percentage change in dollar sales. Acts as a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in NOI.

Degree of operating leverage CM/NOI a measure of how a percentage change in sales volume will affect profits (noi). quickly estimates what impact carious percent changes in sales will have on profits, without the necessity of preparing detailed income statements. Percentage change in NOI formula Degree of operating leverage x %change in sales Sales Mix the relative proportions in which a company's products are sold. The idea is to achieve the combination that will yield the greatest profits. Changes in sales mix a shift in the sales mix from high-margin items to low-marginitems can cause total profits to decrease even though total sales may increase. a shift in the sales mix from low-margin items to high-margin items can cause total profits to increase even though total sales decrease. Segment a part or activity of an organization about which managers would like cost, revenue, or profit data 3 Key concepts about variable and absorption income statements 1. both income statement formats include product costs and period costs, although they define these cost classifications differently. 2. Variable costing income statements are grounded in the contribution format. They categorize expenses based on cost behavior--- variable expenses are reported separately from fixed expenses. Absorption costing income statements ignore variable and fixed cost distinctions. 3. Variable and Absorption NOI differ from one another because they account for fixed overhead differently Variable Costing (direct/marginal costing)

only those manufacturing costs that vary with output are treated as product costs. Includes DM, DL and VOH. FOH is not treated as a product cost under this method. IT is treated as a period cost like selling and administrative expenses, and is expensed entirely in each period. COGS does not containing any FOH costs. Absorption Costing (full cost) treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. The cost of a unit of product consists of DM, DL, VOH and FOH. It allocates a portion of FOH ...