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ACC 410 Chapter Notes - Chapter 3: Contribution Margin, Variable Cost, Operating Leverage

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carminelocust386

14 May 2011

School

Ryerson University

Department

Course

Professor

Maurizio Di Maio

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Document Summary

Various concepts will be covered such as the unit contribution margin, the break-even point, the cm ratio, margin of safety, operating leverage, and the sales mix: the basics of cost-volume-profit (cvp) analysis. Cost-volume-profit (cvp) analysis is a key step in many decisions. Cvp analysis involves specifying a model of the relations among the prices of products, the volume or level of activity, the unit variable costs, the total fixed costs, and the mix of products sold. This model is used to predict the impact on profits of changes in those parameters: contribution margin. Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. It contributes towards covering fixed costs and then towards profit: unit contribution margin. When there is a single product, the unit contribution margin can be used to predict changes in the contribution margin and in profits (assuming there is no change in fixed costs) as a result of changes in unit sales.

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Related Questions

If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would:

b. remain the same.

d. increase or decrease, depending upon the percentage increase in wage rates.

Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio and the unit contribution margin are:

a. 53% and $7 per unit.

b. 47% and $11 per unit.

c. 52% and $11 per unit.

d. 47% and $8 per unit.

If sales are $500,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage?

d. 1.25

Which of the following describes the behavior of the fixed cost per unit?

a. Increases with increasing production

b. Remains constant with changes in production

c. Decreases with increasing production

d. Decreases with decreasing production

If variable costs per unit decreased because of a decrease in utility rates, the break-even point would:

b. increase or decrease, depending upon the percentage increase in utility rates.

d. remain the same.

Costs that vary in total in direct proportion to changes in an activity level are called:

a. differential costs.

b. fixed costs.

c. variable costs.

d. sunk costs

Which of the following conditions would cause the break-even point to increase?

a. Total fixed costs decrease

b. Unit variable cost decreases

c. Unit variable cost increases

d. Unit selling price increases

In cost-volume-profit analysis, all costs are classified into the following two categories:

a. discretionary costs and sunk costs

b. variable costs and fixed costs

c. mixed costs and variable costs

d. sunk costs and fixed costs

________ is the excess of sales over the cost of goods sold.

A) Gross margin

B) Contribution-margin ratio

C) Variable-cost ratio

D) Contribution margin

Answer:

Which statement is FALSE?

A) Each different sales-mix of products has a differentbreak-even point.

B) Changes in the sales-mix of products sold affects a company'snet operating profit.

C) Changes in the sales-mix of products sold affects a company'scontribution margin.

D) If the sales-mix of products sold changes, the break-evenpoint does not change.

Answer:

With mixed costs, the ________ element is unchanged over therelevant range and the ________ element varies proportionately withcost-driver activity.

A) variable cost; fixed cost

B) fixed cost; variable cost

C) fixed cost; step cost

D) step cost; variable cost

Answer:

The sales price is $30 per unit, the contribution margin is $8per unit and total fixed costs are $32,000. What is the break-evenpoint in units?

A) 857

B) 1,200

C) 2,000

D) 4,000

Answer:

If the selling price per unit increases, what is the effect onthe break-even point? (Assume no other changes.)

A) The break-even point increases.

B) The break-even point decreases.

C) The break-even point remains the same.

D) The break-even point is zero.

In cost-volume-profit analysis, the unit contribution margin is:

a. Sales price per unit less cost of goods sold per unit.

b. Sales price per unit less unit fixed cost per unit.

c. Sales price per unit less total variable cost per unit.

d. Sales price per unit less unit total cost per unit.

e. The same as the contribution margin ratio.

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