Ch 19 Concepts
The relative percentage in which a company sells its multiple products
sales mix
In an equipment replacement decision, the book value of the old equipment is considered a
sunk cost
Mario sells custom hats for $35. The hats have variable costs of $10 and fixed costs of $15. What is the contribution margin AND contribution margin ratio?
cm = 25 (35-10)
cmr = 71.4% (25/35)
Kenzie owns a Zhu Zhu pet manufacturing plant. She could produce anywhere from 0 to 500,000 Zhu Zhus, but based on experience, she typically makes between 10,000 and 35,000.
What is this typical range of activity called?
relevant range
Operating leverage is extent to which a company's net income reacts to a given change in __________.
sales revenue
If incremental revenues from additional processing are less than the incremental variable costs (in a sell or process further decision). You should...
sell
Josh has a t-shirt company that has total fixed costs of $350,000. The t-shirts sell for $10 with variable costs of $5. What is the total sales dollars necessary to break even?
cm = 5
cmr = 50%
BE sales dollars = 350,000/50% = $700,000
John's variable costs in total and per unit for two months are as follows. The activity increased in october.
September unit = 2.1
October unit = 2.1
September total = 84,000
October total = 126,000
What kind of cost is this?
variable cost
A company with ____ operating leverage will experience a steep increase in net income with a given increase in sales.
High operating leverage
In an incremental make or buy analysis you should always choose the lowest cost alternative.
False, because in a make/buy decision you should also consider opportunity costs.
Meredith CO. has sales of $270,000, variable costs of $45,000, and fixed costs of $78,000. Mercury's degree of operating leverage is
1.53
cm = 270k - 45k = 225k
NI = 225k-78k = 147k
degree of operating leverage = 225k/147k = 1.53
Companies will set a ______ above the break even point. Then, they will be able to calculate how many sales or units they need to achieve it.
target net income
Manufacturing cost per unit will be lower under which costing method
variable costing or absorption costing.
variable costing since it only includes variable manufacturing costs. Absorption includes both fixed and variable
(t/f) If a company is operating with excess capacity available, the incremental costs of a special order will likely include variable manufacturing costs and fixed costs.
False, because they have the ability to make more product (variable) but their fixed costs will remain the same (no incremental difference)
At the break-even point of 3,000 units, variable costs are $170,000, and fixed costs are $95,000. What is the unit selling price?
$88.33 (with rounding)
95000/ (sp - 56.7) = 3,000 units
unit vc = 170000/3 = 56.7
What does the high-low method help us to find?
The amount of the fixed and variable portions of the mixed cost. AND Total cost equation
Fixed costs will need to be divided by WHAT to find the break even point in sales dollars? What about sales units?
1) weighted average CM ratio
2) weighted average contribution margin
You should always replace equipment (rather than keep it) before the end of its useful life?
False, this depends on all of the incremental costs associated with the equipment.
Nolan Co.'s fixed costs are $800,000 per year and its unit selling price of $21,000. Nolan's variable costs are 60% of selling price. What is the company's break-even point in sales dollars?
$2,000,000
cm = 21,000-(21,000*.6) = 8,400
cmr = 8,400/21,000 = 0.4
BE = 800000/.4 = $2,000,000
Colby sells 2,000 baseballs for $5 each this year. At the beginning of the year he calculated that his break even point in sales dollars were $1000. What is his margin of safety?
actual sales = 2000*5 = 10,000
MOS = 10,000-1,000 = $9,000