ACC 310F Chapter Notes - Chapter 2: W. M. Keck Observatory, Contribution Margin, Fixed Cost

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blackeagle417

7 Feb 2017

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Using cvp relation to make short- term decisions. Cvp relation helps organizations make short-term decisions. Decrease the price of perlast to increase demand. Decreasing the selling price per pound reduces the unit contribution margin; the change reduces price, but not the unit variable cost. Because each pound sold contributes less to profit, Sierra"s overall profit will increase only if the reduction in the unit contribution margin is more than offset by the additional sales volume that price cuts typically generate. Purchase new inspection technology to reduce the unit variable cost of perlast. Unit contribution margin will increase because sierra expects the inspection technology to reduce the unit variable cost. So, each pound of perlast sold will contribute more to profit. However, this option also increases fixed costs. Only profitable if the increased contribution margin exceeds the increase in fixed costs. Offer different grades of perlast to meet specific needs of individual market segments.

Related Questions

1 An increase in fixed costs will cause the break-even point to decrease True False

2 Rental of equipment at $5,000 per month plus $6 for each machine hour used over 9,000 hours is a type of mixed cost. True False

3 Conversion costs are made up of direct labor and factory overhead True False

4 Which of the following would be classified as a variable cost?

Straight-line depreciation on production equipment

Copy lease payment of $500 per month plus $0.01 per copy

Fabric for use in quilts to be produced.

None of the above

5.Mixed costs:

have both the characteristics of fixed costs and variable costs.

change in relation to the passage of time.

cannot be accurately plotted on a graph.

None of the above

6 What is the correct formula to calculate the contribution margin ratio?

Fixed Costs / Unit Contribution Margin

(Sales - Variable Costs) / Sales

(Fixed Costs + Target Profit) / Unit Contribution Margin

None of the above

7 The budget process begins with which of the following?

Production budget

Sales budget

Cash Budget

Budgeted Income Statement

8 If the cost of materials purchased in the period is $200,000, and $185,000 is used in the manufacturing process, then:

the unused $15,000 is a period cost.

the unused $15,000 is part of work-in-process inventory in the period.

the unused $15,000 is classified as materials inventory

the unused $15,000 is part of finished goods inventory on the balance sheet.

9 Which statement(s) is True about the uses of managerial accounting?

Managerial accounting is used to support long-term planning decisions.

Managerial accounting helps a company evaluate the performance of company decisions.

Managerial accounting helps users run the day-to-day operations of the business.

All of the above

10 A budgeting system that requires managers to estimate sales and other operating expenses as though operations are being started for the first time is:

static budgeting.

flexible budgeting

zero based budgeting

None of the above

Fixed costs for Flag Stamp Co. are $250,000. The selling price per unit is $20.00, and variable costs are $15.00.

The contribution margin ratio is ? (state whole number only - no decimals).

Fixed costs for Flag Stamp Co. are $300,000. The selling price per unit is $20.00, and variable costs are $15.00. The break-even sales (in units) are ?

Assume sales are $750,000, variable costs are 70% of sales, and income from operations is $100,000. What is the contribution margin ratio and fixed cost, respectively?

The following costs were incurred in August:

Direct Materials $25,000

Direct Labor $20,000

Manufacturing (Factory) Overhead $25,000

Selling and Administrative Expenses $40,000

(1) What is the amount of the prime costs?

(2) What is the amount of the period costs?

(3) What is the amount of the conversion costs?

(4) What is the amount of the product costs?

If Ragged Edge Arts sells quilts and paintings, and it has estimated selling 50 quilts at $250 each and 42 paintings at $500 each, what are the estimated sales for next year?

crimsonelephant756

3-44.

Comprehensive CVP analysis

(LO 1, 2, 3, 5) âI'll never understand this accounting stuff,â Blake Dunn yelled, waving the income statement he had just received from his accountant in the morning mail. âLast month, we sold 1,000 stuffed State University mascots and earned $6,850 in operating income. This month, when we sold 1,500, I thought we'd make $10,275. But this income statement shows an operating income of $12,100! How can I ever make plans if I can't predict my income? I'm going to give Janice one last chance to explain this to me,â he declared as he picked up the phone to call Janice Miller, his accountant.

âWill you try to explain this operating income thing to me one more time?â Blake asked Janice. âAfter I saw last month's income statement, I thought each mascot we sold generated $6.85 in net income; now this month, each one generates $8.07! There was no change in the price we paid for each mascot, so I don't understand how this happened. If I had known I was going to have $12,100 in operating income, I would have looked more seriously at adding to our product line.â

Taking a deep breath, Janice replied, âSure, Blake. I'd be happy to explain how you made so much more operating income than you were expecting.â

Required

(a)

Assume Janice's role. Explain to Blake why his use of operating income per mascot was in error.

(b) Using the following income statements, prepare a contribution margin income statement for March.

	Februaryâ	Marchâ
Sales revenue	$25,000	$37,500
Cost of goods sold	10,000	15,000
Gross profit	15,000	22,500
Rent expense	1,500	1,500
Wages expense	3,500	5,000
Shipping expense	1,250	1,875
Utilities expense	750	750
Advertising expense	750	875
Insurance expense	400	400
Operating income	$â6,850	$12,100

(c)

Blake plans to sell 500 stuffed mascots next month. How much operating income can Blake expect to earn next month if he realizes his planned sales?

(d)

Blake wasn't happy with the projected income statement you showed him for a sales level of 500 stuffed mascots. He wants to know how many stuffed mascots he will need to sell to earn $3,700 in operating income. As a safety net, he also wants to know how many stuffed mascots he will need to sell to break even.

(e)

Blake is evaluating two options to increase the number of mascots sold next month. First, he believes he can increase sales by advertising in the university newspaper. Blake can purchase a package of 12 ads over the next month for a total of $1,200. He believes the ads will increase the number of stuffed mascots sold from 500 to 960. A second option would be to reduce the selling price. Blake believes a 10% decrease in the price will result in 1,000 mascots sold. Which plan should Blake implement? At what level of sales would he be indifferent between the two plans?

(f)

Just after Blake completed an income projection for 1,200 stuffed mascots, his supplier called to inform him of a 20% increase in cost of goods sold, effective immediately. Blake knows that he cannot pass the entire increase on to his customers, but thinks he can pass on half of the 20% increase while suffering only a 5% decrease in units sold. Should Blake respond to the increase in cost of goods sold with an increase in price?

(g)

Refer back to the original information. Blake has decided to add stadium blankets to his product line. He has found a supplier who will provide the blankets for $32, and he plans to sell them for $55. All other variable costs currently incurred for selling mascots will be incurred for selling blankets at the same rate. Additional fixed costs of $350 per month will be incurred. He believes he can sell one blanket for every three stuffed mascots. How many blankets and stuffed mascots will Blake need to sell each month in order to break even?

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ACC 310F Chapter Notes - Chapter 2: W. M. Keck Observatory, Contribution Margin, Fixed Cost

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