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Chapter 20: 18 E (page 1087)

Using terminology Match the following terms with the correct definitions:

1. Costs that do not change in total over wide ranges of volume.

2. Technique that estimates profit or loss results when conditions change.

3. The sales level at which operating income is zero.

4. Drop in sales a company can absorb without incurring an operating loss.

5. Combination of products that make up total sales.

6. Net sales revenue minus variable costs.

7. Describes how a cost changes as volume changes.

8. Costs that change in total in direct proportion to changes in volume.

9. The band of volume where total fixed costs and variable cost per unit remain constant.

a. Breakeven point

b. Contribution margin

c. Cost behavior

d. Margin of safety

e. Relevant range

f. Sales mix

g. Fixed costs

h. Variable costs

i. Sensitivity analysis

Short Answer

Expert verified
  1. g.
  2. i.
  3. a.
  4. d.
  5. f.
  6. b.
  7. c.
  8. h.
  9. e.

Step by step solution

01

Meaning of cost-volume profit analysis

The cost-volume-profit (CVP) may be a planning tool that describes the relation between cost, volume, and costs and their effects on profit and losses.

02

Matching terms with correct definitions

1. Costs that don鈥檛 change in total over wide ranges of volume.

g. Fixed cost

2. Technique that estimates profit or loss results when conditions change.

i. Sensitivity analysis

3. The sales level at which operating income is zero.

a. Breakeven point

4. Drop by sales a corporation can absorb without incurring an operating loss

d. Margin of safety

5. Combination of products that form up total sales.

f. Sales mix

6. Income revenue minus variable costs.

b. Contribution margin

7. Describes how a value changes as volume changes.

c. cost behavior

8. Costs that change in total in direct proportion to changes in volume.

h. Variable costs

9. The band of volume where total fixed costs and variable cost per unit remain constant.

e. Relevant range

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Most popular questions from this chapter

Before you begin this assignment, review the Tying It All Together feature in the chapter.

Best Buy Co., Inc. is a leading provider of technology products. Customers can shop at more than 1,700 stores or online. The company is also known for its Geek Squad for technology services. Suppose Best Buy is considering a particular HDTV for a major sales item for Black Friday, the day after Thanksgiving, known as one of the busiest shopping days of the year. Assume the HDTV has a regular sales price of \(900, a cost of \)500, and a Black Friday proposed discounted sales price of \(650. Best Buy鈥檚 2015 Annual Report states that failure to manage costs could have a material adverse effect on its profitability and that certain elements in its cost structure are largely fixed in nature. Best Buy, like most companies, wishes to maintain price competitiveness while achieving acceptable levels of profitability. (Item 1A. Risk Factors.)

Requirements

1. Calculate the gross profit of the HDTV at the regular sales price and at the discounted sales price.

2. Assume that during the November/December holiday season last year, Best Buy sold an average of 150 of this particular HDTV per store. If the HDTVs are marked down to \)650, how many would each store have to sell this year to make the same total gross profit as last year?

3. Relative to Sales Revenue, what type of costs would Best Buy have that are fixed? What type of costs would be variable?

4. Because Best Buy stated that its cost structure is largely fixed in nature, what might be the impact on operating income if sales decreased? Does having a cost structure that is largely fixed in nature increase the financial risk to a company? Why or why not?

5. In the Tying It All Together feature in the chapter, we looked at the cost of advertising. Is advertising a fixed or variable cost? If the company has a small margin of safety, how would increasing advertising costs affect Best Buy鈥檚 operating income? What would be the effect of decreasing advertising costs?

Following is the income statement for Marrow Mufflers for the month of June 2018:

MARROW MUFFLERS

Contribution Margin Income Statement

Month Ended June 30, 2018

Net Sales Revenue (140 units _ \(250) \) 35,000

Variable Costs (140 units _ \(50) 7,000

Contribution Margin 28,000

Fixed Costs 11,500

Operating Income \) 16,500

Requirements

1. Calculate the degree of operating leverage. (Round to four decimal places.)

2. Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.)

3. Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 40%.

Scotty鈥檚 Scooters plans to sell a standard scooter for \(55 and a chrome scooter for \)70. Scotty鈥檚 purchases the standard scooter for \(30 and the chrome scooter for \)40. Scotty鈥檚 expects to sell one standard scooter for every three chrome scooters. Scotty鈥檚 monthly fixed costs are \(23,000.

Requirements

1. How many of each type of scooter must Scotty鈥檚 Scooters sell each month to break even?

2. How many of each type of scooter must Scotty鈥檚 Scooters sell each month to earn \)25,300?

3. Suppose Scotty鈥檚 expectation to sell one standard scooter for every three chrome scooters was incorrect and for every four scooters sold two are standard scooters and two are chrome scooters. Will the breakeven point of total scooters increase or decrease? Why? (Calculation not required.)

Determining mixed costs鈥攖he high-low method

The manager of Trusty Car Inspection reviewed the monthly operating costs for the past year. The costs ranged from \(4,300 for 1,300 inspections to \)3,900 for 900 inspections.

Requirements

1. Use the high-low method to calculate the variable cost per inspection.

2. Calculate the total fixed costs.

3. Write the equation and calculate the operating costs for 1,000 inspections.

4. Draw a graph illustrating the total cost under this plan. Label the axes, and show the costs at 900, 1,000, and 1,300 inspections.

Complete the table below for the missing amounts:

A B C

Number of units 2,064 units (d) 2,570 units

Sales price per unit \( 250 \) 125 $ (g)

Variable costs per unit (a) 50 4,528

Contribution margin per unit 125 (e) (h)

Total contribution margin (b) 1,567,500 (i)

Contribution margin ratio (c) (f) 20%
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