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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’t 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

Following is a list of costs for a furniture manufacturer that specializes in wood tables. Classify each cost as variable, fixed, or mixed relative to the number of tables produced and sold.

1. Wood used to build tables

2. Depreciation on saws and other manufacturing equipment

3. Compensation for sales representatives paid on a salary plus commission basis

4. Supervisor’s salary

5. Wages of production workers

England Productions performs London shows. The average show sells 1,300 tickets at\(60 per ticket. There are 175 shows per year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of65, each earning a net average of \)340 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)728,000.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows England Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $5,687,500. Is this profit goal realistic? Giveyour reasoning.

4. Prepare England Productions’s contribution margin income statement for175 shows performed in 2018. Report only two categories of costs: variableand fixed.

The contribution margin income statement of Sugar Lips Donuts for August 2018 follows:

Sugar Lips sells three dozen plain donuts for every dozen custard-filled donuts. A dozen plain donuts sells for \(4.00, with total variable cost of \)1.80 per dozen. A dozen custard-filled donuts sells for \(8.00, with total variable cost of \)3.60 per dozen.

Requirements

1. Calculate the weighted-average contribution margin.

2. Determine Sugar Lips’s monthly breakeven point in dozens of plain donuts and custard-filled donuts. Prove your answer by preparing a summary contribution margin income statement at the breakeven level of sales. Show only two categories of costs: variable and fixed.

3. Compute Sugar Lips’s margin of safety in dollars for August 2018.

4. Compute the degree of operating leverage for Sugar Lips Donuts. Estimate the new operating income if total sales increase by 30%. (Round the degree of operating leverage to four decimal places and the final answer to the nearest dollar. Assume the sales mix remains unchanged.)

5. Prove your answer to Requirement 4 by preparing a contribution margin income statement with a 30% increase in total sales. (The sales mix remains unchanged.)

What is contribution margin?

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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