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ACCT20200 Chapter Notes - Chapter 9: Earnings Before Interest And Taxes

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fuchsiahound508
3 Apr 2017
School
ND
Department
Accountancy
Course
ACCT20200
Professor
O' Tousa

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Document Summary

Chapter 9: flexible budgets and performance: activity variance for net operating income= very important. Sometimes, noi will increase more than the % increase calculated. This is because of the presence of fixed costs, which do not change when we apply an increase in activity level for the company: same idea applies to mixed costs. Mixed costs will increase by less the % calculated because only the variable portion is changing with activity level. Because of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity for the company: there is a leverage effect. The percentage changes in noi are ordinarily larger than the percentage increases in activity. Revenue and spending variances: how well did we control our revenues, our costs, and our profit? , revenue variance: The difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the company.

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Related Questions

Feather Friends,Inc., distributes a high-quality wooden birdhouse that sells for$20 per unit. Variable
costs are $8 per unit. Andfixed costs total $180,000 per year.
FEATHER FRIENDS, INC.
Unit price $20
Variable cost per unit 8
Annual fixed costs 180,000
Estimated sales increase $75,000
Operating results last year:
Sales $400,000
Less variable expenses 160,000
Contribution margin 240,000
Less fixed expenses 180,000
Net operating income $60,000
Expected percentage sales increase nextyear 20%
Units sold last year 18,000
percentage reduction in sales price 10%
Increase in advertising expense $30,000
Expected percentage increase in sales 33%
Increase in sales commission per unit $1
Required: Answer the following independentquestions.
1. What is the product's CM ratio?
2. Use the CM ratio todetermine the break-even point in sales dollars.
3. Due to an increase indemand, the company estimates that sales will increase by $75,000during the
year.By how much should net operating income increase (or net lossdecrease) assuming that fixed
costs do notchange?
4. Assume that the operatingresult for last were as stated above.
a.Compute the degree of operating leverage at the current level ofsales.
b.The president expects sales to increase by 20% next year. By whatpercentage should net
operatingincome increase?
5. Refer to the original data.Assume that the company sold 18,000 units last year. The salesmanager
isconvinced that a 10% reduction in the selling price, combined witha $30,000 increase in advertising,
wouldcause annual sales in units to increase by one-third. Prepare twocontribution income
statements, one showing the results of last year's operations andone showing the results of
operations if these changes are made. Would you recommend that thecompany do as the sales
managersuggest?
6. Refer to the original data.Assume again that the company sold 18,000 units last year. Thepresident
doesnot want to change the selling price. Instead, he wants to increasethe sales commission by $1
perunit. He thinks that this move, combined with some increase inadvertising, would increase annual
salesby 25%. By how much could advertising be increased with profitsremaining unchanged? Do not
prepare an income statement; use the incremental analysisapproach.

(TCO A) Wages paid to an assembly line worker in a factory are a(Points : 6) Prime Cost YES.....Conversion Cost YES. Prime CostYES.....Conversion Cost NO. Prime Cost NO....Conversion Cost NO.Prime Cost NO.....Conversion Cost YES. Question 2. 2. (TCO A) Thecosts of staffing and operating the accounting department atCentral Hospital would be considered by the department of surgeryto be (Points : 6) indirect costs. sunk costs. incremental costs.direct costs. Question 3. 3. (TCO A) The cost of lubricants used togrease a production machine in a manufacturing company is anexample of a(n) (Points : 6) period cost. direct material cost.indirect manufacturing cost. direct product cost. None of the aboveQuestion 4. 4. (TCO C) When the activity level is expected toincrease within the relevant range, what effects would beanticipated with respect to each of the following? (Points : 6)Fixed costs per unit decrease and variable costs per unit do notchange. Fixed costs per unit increase and variable costs per unitdo not change. Fixed costs per unit do not change and variablecosts per unit do not change. Fixed costs per unit do not changeand variable costs per unit increase. Question 5. 5. (TCO B) EmcoCompany uses direct labor cost as a basis for computing itspredetermined overhead rate. In computing the predeterminedoverhead rate for last year, the company included in direct laborcost a portion of indirect labor. The effect of thismisclassification will be to (Points : 6) overstate thepredetermined overhead rate. understate the predetermined overheadrate. have no effect on the predetermined overhead rate. Thiscannot be determined from the information given. Question 6. 6.(TCO B) Under a job-order costing system, the product beingmanufactured (Points : 6) is homogeneous. passes from onemanufacturing department to the next before being completed. can becustom manufactured. has a unit cost that is easy to calculate bydividing total production costs by the units produced. Question 7.7. (TCO B) The weighted-average method of process costing differsfrom the FIFO method of process costing in that theweighted-average method (Points : 6) can be used under anycost-flow assumption. does not require the use of predeterminedoverhead rates. keeps costs in the beginning inventory separatefrom current period costs. does not consider the degree ofcompletion of units in the beginning work-in-process inventory whencomputing equivalent units of production. Question 8. 8. (TCO C)The contribution margin ratio always decreases when the (Points :6) fixed expenses increase. fixed expenses decrease. variableexpenses as a percentage of net sales increase. variable expensesas a percentage of net sales decrease. Question 9. 9. (TCO C) Whichof the following would not affect the break-even point? (Points :6) Variable expense per unit Number of units sold Total fixedexpenses Selling price per unit Question 10. 10. (TCO D) In anincome statement prepared using the variable costing method, fixedmanufacturing overhead would (Points : 6) not be used. be used inthe computation of the contribution margin. be used in thecomputation of net operating income but not in the computation ofthe contribution margin. be treated the same as variablemanufacturing overhead.

The Tracey Companyhad the following information for its most recent period:
Total Unit %
Sales $1,000,000 $50 100%
Variable expenses 600,000 30 60%
Contribution margin 400,000 $20 40%
Fixed expenses 320,000
Net operating income $80,000
Average operating assets $500,000
Compute the company's returnon investment (ROI) for the period using the ROI
formula stated in terms ofmargin and turnover.
Net operating income $80,000 Correct!
Sales $1,000,000 Correct!
Average operating assets $500,000 Correct!
Margin 8.00% Correct!
Turnover 2.0 Correct!
ROI 16.00% Correct!
Required:
For each of the followingquestions, indicate whether the margin and turnover will
increase, decrease, or remainunchanged as a result of the events described, and then
compute the new ROI figure.Each case is separate so you should return to the original
data for yourcomputations.
Note: Formulas must be usedfor Margin, Turnover, and ROI. The other cells should be
formulas but I will allowtyped in numbers.
(a) The company achieves acost savings of $10,000 per period by using less costlymaterials.
Net operating income $90,000 Correct! Type Increase, Decrease, or
Sales $1,000,000 Correct! Unchanged in the space below
Average operating assets $500,000 Correct!
Margin 9.00% Correct! Increase Correct!
Turnover 2.0 Correct! Unchanged Correct!
ROI 18.00% Correct! Increase Correct!
(b) Using Lean Production, thecompany is able to reduce the average level of inventory by
$100,000. (The released fundsare used to pay off bank loans.)
Net operating income $80,000 Correct! Type Increase, Decrease, or
Sales $1,000,000 Correct! Unchanged in the space below
Average operating assets $400,000 Correct!
Margin 8.00% Correct! Unchanged Correct!
Turnover 2.500 Correct! Increase Correct!
ROI 20.00% Correct! Increase Correct!
(c) Sales are increased by$250,000; operating assets remained unchanged. (Remember,
if sales change, so willvariable expenses.)
Sales $1,250,000 Correct!
Variable expenses 750,000 Correct!
Contribution margin 500,000 Correct!
Fixed expenses 320,000 Correct!
Net operating income $180,000 Correct!
Net operating income $180,000 Correct! Type Increase, Decrease, or
Sales $1,250,000 Correct! Unchanged in the space below
Average operating assets $500,000 Correct!
Margin 14.40% Correct! Increase Correct!
Turnover 2.500 Correct! Increase Correct!
ROI 36.00% Correct! Increase Correct!
(d) The company issues bondsand uses the proceeds to purchase $125,000 in machinery
and equipment at the beginningof the period. Sales remain unchanged. The new, more
efficient equipment reducesproduction costs by $5,000 per period.
Net operating income $180,000 Try Again! Type Increase, Decrease, or
Sales $1,200,000 Try Again! Unchanged in the space below
Average operating assets $495,000 Try Again!
Margin ? Try Again! Increase Correct!
Turnover ? Try Again! Decrease Correct!
ROI ? Try Again! Decrease Correct!
(e) The company invests$180,000 of cash (received from accounts receivable) in a plot
of land that is to be held forpossible future use as a plant site.
Net operating income $0 Try Again! Type Increase, Decrease, or
Sales Try Again! Unchanged in the space below
Average operating assets Try Again!
Margin ? Try Again! unchanged Correct!
Turnover ? Try Again! Increase Correct!
ROI ? Try Again! increase Correct!
(f) Obsolete inventory carriedon the books at a cost of $20,000 is scrapped and written off
as a loss.
Net operating income Try Again! Type Increase, Decrease, or
Sales Try Again! Unchanged in the space below
Average operating assets Try Again!
Margin ? Try Again! Decrease Correct!
Turnover ? 2.083! Increase Correct!
ROI ? Try Again! Decrease

Correct!
I've answered some, I need help with theones I was not able to answer (The ones that say "Try Again").Please Show me the work don'tjust give me the answer