Chapter 4 - Cost Volume Profit
If fixed costs are equal to 0, what is the relationship between a company's contribution margin and operating income?
What is: They are equal
Define relevant costing and explain why it's important to utilize this concept in business.
What is:
Dollars that are in the future and different between alternatives.
Why: 1. Focus on only important factors that matter to the decision.
2. Don't waste time.
Give a real world example of both structured and unstructured data
Structured data has some organization to it, such as a pivot table or excel file. A real world example would be a customer database downloaded to Excel.
Unstructured data is not organized, such as sound bites from telephone recordings
If production volume decreases:
A. Fixed costs per unit increase
B. Average cost per unit decreases
C. Variable cost per unit decreases
D. Variable cost per unit increases
A.
example: $50,000 fixed costs, 10,000 units
Fixed costs are $5 per unit
If production decreases to 5,000 units, fixed costs don't change. New unit cost is $50,000 / 5,000 = $10
Emma's posters has the following information:
Sales $6,750
Variable cost per unit $5
Fixed costs $1,900
Operating income $1,100
What is the sales volume?
750 units - WORK backwards (start at operating inc)
Sales $6,750
VC 3,750 (6,750 - 3000)
CM $3,000 (OI 1,100 + FC 1,900)
Fixed costs 1,900 (given)
Operating inc 1,100 (given)
As variable costs are $3,750 and the cost per unit is $5, quantity = $3,750/5 = 750
The opportunity cost of holding significant inventory includes what?
- Missed investments in other businesses;
- Missed rental income on the space
etc.
What is the difference between data analytics and big data?
Data analytics is the study of analyzing data and discovering patterns while big data refers to the kind of data generated from a variety of sources.
A cost function is:
a. a way to identify the cost object when there is a physical relationship between the items being measured.
b. a mathmatical depiction of how a cost changes within different activity levels
c. a process of allocating costs to the cost object
d. the description of how to calculate the breakeven point
b.
Retro Records was to earn an after tax profit of $112,500. The unit selling price is $20 and the variable cost per unit is $8. Fixed costs are $180,000 and the company's tax rate is 25%. How many records must Retro sell to achieve its income target?
27,500 records
Pretax profit = $112,500 / .75 = $150,000
150,000 + $180,000 = $330,000 /
$12 (CM unit = $20 - 8)
= 27,500 records
Pella Industries currently produces 1,000 units of a part needed for its product, incurring the following costs:
Direct Materials $50,000
Direct Labor 16,000
Variable Overhead 32,000
Fixed Overhead 18,000
If Pella Industries purchases the component externally, $10,000 of the fixed costs can be avoided. At what external price per unit for would Pella be indifferent between choosing to outsource (buy) instead of insource (make)?
Make
DM $50,000
DL 16,000
OH 32,000
Fixed OH 18,000
Total 116,000
Buy:
Purchase price XXXX
Fixed costs 8,000
Total to spend 116,000
Total purchase $108,000 / 1000 = 108
The management for Lyra Corp. has decided to work towards streamlining processes. If management would like to gain insight into their collections processes, then what information would be best to use for this goal?
A) A sample of purchase orders from the shipping department
B) An accounts receivable aging report from the accounting department
C) Customer credit applications obtained from the company's website
D) Customer feedback from a survey sent out from the customer service department
B.
What is the difference between Cost of Goods Manufactured and Cost of Goods Sold?
A. COGM calculates the cost of materials, labor and overhead added to the production process; COGS measures cost of goods completed.
B. COGM measures cost of goods leaving finished goods; COGS measures cost of goods completed.
C. COGM measures cost of goods completed; COGS measures cost of goods leaving finished goods
D. COGM measures materials entering production; COGS measures materials that are completed.
C. COGM - goods completed
COGS - goods sold
Emanuel's Electronics Co. has the following results for the month: Revenues equal $6,500, contribution margin equals $3,900, and fixed costs equal $3,300. Revenues are expected to grow by 10% next month. Using the principle of degree of operating leverage (DOL) and based on the projected revenue increase, what can Emanuel's Electronics expect in operating income next month?
$990
The DOL is calculated as contribution margin divided by operating income, or $3,900 ÷ $600 = 6.5. The sales increase of 10% must be multiplied by the DOL of 6.5 to get the multiplier to apply to operating income expected under 10% sales growth. That means operating income must be multiplied by 1.65 to arrive at expected operating income under the new revenue assumption. New operating income = $600 × $1.65 = $990.
Helmer's Rockets manufactures a standard and premium model. Weekly demand is 100 units for the standard, and 70 for the premium model. The following per unit data apply:
Standard Premium
Contribution margin $18 $20
MH required 3 4
Labor hours required 6 10
There are only 496 machine hours available per week. How many rockets of each type should Helmer produce?
100 standard, 49 premium Standard Premium
CM/CR $6 (1st) $5
Demand 100
* MH needed/unit 3
= MH used 300
Left over MH 196
/ MH per unit 4
Premium rockers made = 49
The management at Hellar Corp. is compiling data for their analytics team. Hellar is a factory that produces candy canes, and they are very interested in what changes in the next few years will reduce costs. Which category of data analytics will be the most useful for this purpose, and why?
Perscriptive, because because management wants to use historical data to see how changes would impact future performance
What are the four financial statements?
Income statement, Balance Sheet, Statement of Cash flows and Statement of Changes in Shareholder's Equity
Minke Medical Machines sells three types of hospital equipment. Information on these machines is as follows:
Xray 50% of total sales CM/U $600
MRI 30% of total sales CM/U $400
CT Scan 20% of total sales CM/U $700
Total fixed costs for the year are $2,240,000. Based on this information, what would the expected break-even point for Minke Medical Machines be for the year?
4,000 units
The weighted average contribution margin is $560 as calculated here: ($600 × .50) + ($400 × .30) + ($700 × .20) = $300 + $120 + $140 = $560 WACM. This WACM is then divided into the annual fixed costs to determine the annual break-even point; $2,240,000 ÷ $560 = 4,000 units.
Clinton sells 2 products, A and B, is is considering dropping Product B. If product B is dropped, sales of product A are expected to increase 40%. Equipment rental will decrease $300 per month if product B is dropped. What is the impact of dropping Product B?
A B Total
Sales $10,000 $8,000 $18,000
Variable COS 4,500 3,200 7,700
Equipment rental 300 2,600 2,900
Allocated overhead 1,000 2,100 3,100
Operating income $4,200 $100 $4,300
$2,300 decrease in income
Clinton income without Product B
Sales $14,000 (40% increase from A)
Variable COS 6,300 (40% increase from A)
Equip rent 2,600 (300 decrease)
Overhead 3,100 (no change - fixed)
Operating income $2,000
This is $2,300 lower than the income including B
Data analytics has four broad categories that range in value and complexity. Each of the four category types strives towards raising questions that assist decision makers in their efforts to gather relevant data. Which of the following is an example of a question answered by descriptive analytics?
A. Why have our customers stopped ordering a certain category of products?
B. How would hiring additional staff impact the bonus potential of existing employees?
C. Why did the direct material cost increase over the past year?
D. What are the selling price trends of a single product across the United States?
D. A is Diagnostic, B is predictive, C is diagnostic
When using cost volume profit, what is one of the first steps?
A. Calculate the breakeven point
B. Calculate operating leverage
C. Calculate pretax operating income
D. Calculate variable and fixed costs
D. You need to calculate variable and fixed costs to use CVP.