Definitions
These costs change in total in direct proportion to changes in activity level but remain constant per unit
Variable Costs
The x in the y=vx+f formula stands for
Variable cost per unit
These costs stay constant in total within a relevant range but change on a per unit basis as activity level changes
Fixed Costs
The sales level at which operating income is zero
Breakeven
The two factors required for information to be relevant for decision making are
Must pertain to the future and must differ among alternatives
The measure of how responsive a company’s operating income is to changes in volume is known as
Operating Leverage Factor
The value of operating income in breakeven analysis is always
$0
The income statement format most useful for management decisions is
How many units must a company sell to reach their target profit of $50,000 if they sell their product for $20, variable costs per unit of $12, and fixed expenses of $70,000? (Be ready to show your work on your board!)
15,000 units
The pricing model used by price-takers is
The excess of sales revenue over variable expenses is known as
Contribution Margin
Expected sales - breakeven sales is used to calculate
Margin of Safety
The r square value for a perfectly straight line that fits all points of data perfect is
1
The total contribution margin for a company that sells 2,000 units of a product with a $50 sales price and $35 of variable expenses is (Be ready to show your work on your board!)
$30,000
A company can buy a product for $15 from a supplier or they can make the product using $9 direct materials, $5 direct labor, and $3 variable MOH. Should the company make or buy the product? (Be ready to show your work on your board!)
Buy costs $15
Make costs $17 (9+5+3)
They should buy the product
The most accurate method to analyze cost behavior
Regression Analysis
Total contribution margin divided by total sales revenue is used to calculate
Contribution margin ratio
Using the high low method, a company has the following data: High activity 25,200 units at a cost of $209,600 and low activity 13,250 units at a cost of $114,000. What is the variable cost per unit (Be ready to show your work on your board!)
$8 per unit
Operating income for a company that sells 5,000 units of a product with a sales price of $25, variable cost per unit of $13 per unit, and fixed expenses of $20,000 is (Be ready to show your work on your board!)
$40,000
A company is considering discontinuing a line of products. The sales revenue from the line of products is $500,000 and the variable expenses are $350,000. If the product line is discontinued the company could save $90,000 of fixed expenses. Should the company discontinue the product line? (Be ready to show your work on your board!)
Save $90,000 but lose 150,000 contribution margin (500,000-350,000)
They should not discontinue the product.
All manufacturing-related costs (fixed and variable) are considered to be part of the cost of the product
Absorption Costing
Calculate the total cost for a company selling 10,000 units of a product with a $15 variable cost per unit and $70,000 of fixed expenses (Be ready to show your work on your board!)
$220,000
Using the high-low method, a company has the following data: High activity 15,500 unis with a cost of $50,000 and low activity 10,500 units with a cost of $40,000. Create a total cost line formula in the y=vx+f format (solve for v and f). (Be ready to show your work on your board!)
V = $2 per unit
F = $19,000
Y = 2x + 19,000
Operating income for a company that has a product with a sales price of $40, variable costs per unit of $24, monthly sales of $350,000, and fixed expenses of $50,00 is (Be ready to show your work on your board!)
$90,000
If a company has a product they can sell as is for $10,000 or process further and sell for $25,000 but the cost of further processing is $12,000. What is the difference in operating income for both options and should the company sell as is or process further? (Be ready to show your work on your board!)
Sell as is $10,000
Process further $13,000
Difference in operating income is $3,000 higher if they process further
They should process further