Acct 311 Chapter 5 Cost-Volume-Profit Relationships

Which of the following represents the equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales?

selling price per unit = variable cost per unit + desired profit per unit

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales:

net operating income will increase by $0.70

To convert the margin of safety into dollars to the margin of safety in terms of the number of units sold, divid the margin of safety in dollars by the:

sales price per unit

The single point where the total revenue line crosses the total expense line on the CVP graph indicates:

profit equals zero and the break-even point

The break-even point is reached when the contribution margin is equal to:

total fixed expenses

At the break-even point:

the point at which the costs of producing a product equal the revenue made from selling the product net operating income is 0

The break-even point can be affected by:

-total fixed costs -sales mix -contribution margin per unit

A change in sales mix:

-from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase. -low-margin items to high-margin items can cause the reverse effect—total profits may increase even though total sales decrease. .

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals:

144,000 / .59 = 244,068

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by:

20 5 X 4 = 20

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is...

55 90-35 = 55

Orange You Going To Smile? sells oranges for $20 per crate. If the company's margin of safety is $180,000, the margin of safety in units is ______ crates.

9,000 180,000 / 20 = 9,000

A company's selling price is $90 per unit, variable cost per unit is $28 and total fixed expenses are $320,000. The number of unit sales needed to earn a target profit of 200,800 is:

90-28=62 320,000 + 200,800 = 520,800/62 = 8,400

JVL E has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable cost are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to break-even

98,000/ (50-15) = 2,800

The degree of operating leverage: a. is greatest at sales levels near the break-even point b. decreases as sales and profits rise c. is smallest at sales levels near the brea-even point d. in not a constant e. increases as sales and profits rise

A, B,D

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as:

CM ratio X change in sales - change in fixed expenses

A 15% increase in sales resulted in a 40% increase in net income for Company A and 60% increase in net income for Company B. Based on this which company has the greater operating leverage?

Company B

CVP is the acronym for __-__-__

Cost Volume Profit

Which of the following statements is correct?

The higher the margin of safety, the lower the risk of incurring a loss

True or false: The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

True

CVP analysis focuses on how profits are affected by:

a. total fixed costs b. break-even point c. mix of products sold d. unit variable cost e. selling price f. sales volume A,C,D,E,F

Contribution margin ratio is equal to _______________ __________________ divided by ___________.

contribution margin sales

To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the:

contribution margin per unit

Which of the following are assumptions of cost-volume-profit analysis?

-selling price is constant. the price of a product or service will not change as volume changes -costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per UNIT and the fixed costs are constant in TOTAL over the entire relevant range. -in multiproducr companies, the mix of products sold remains constant.

The profit graph allows users to easily identify:

-the sales volume required to reach the break-even point -the profit at any given sales volume

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by:

.35

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units net profit will be:

100,000 - 80,000 = 20,000/200 = 100 201-200 = 1 X 100= 100

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is:

470,000= 470,000 + 222,640 = 692,640/32 21,645

To calculate the degree of operating leverage, divide __________________ ________________ by net operating income.

contribution margin

Profit = (selling price per unit X quantity sold) - (____________ expense per unit X quantity sold) - ( ___________ expenses)

Variable fixed

The contribution margin equals sales minus:

all variable costs

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is:

$4,000 + 3,200 = 7200/ 1.5 (15.00 - 13.50) = 4800

Candle central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If candle central sells 500 units, which of the following statements would be true?

- the variable cost per unit is $2.40 1,440/600 = 2.40 2,160/900 = 2.40 -total variable cost is $1,200 1,440/600 = 2.40 X 500 = 1,200

If a company has sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000 the company has a:

-10,000 net operating loss 40,000-50,000 = -10,000

When making a decision using incremental analysis consider the:

a. change in cost resulting specifically from the decision b. change in sales dollars resulting specifically from the decision c. old income statement in comparsion to the new income statement d. volume that would occur reguardless of the decision A,B

Company A has sales of $500,000, variable costs of #350,000, and fixed costs of $150,000. Company A has:

a. incurred a net operating loss b. earned a net operating profit c. reached the break-even point d. a contribution margin equal to fixed costs C,D

When a company produces and sells multiple products:

a. the sales mix has no effect on the company's profit b. each product most likely has a unique contribution margin c. a change in the sales mix will most likely change the break-even point d. each product most likely creates a unique total of fixed costs. B,C,D

CVP analysis is based on some ________ that may be violated in practice, but the tool is still generally useful.

assumptions

Sweet dreams sells pillows for 25 each. Variable costs are 15 per pillow. the company is considering improving the quality of materials which will increase variable costs to 19. The company currently sells 1,200 pillows permonth and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) _______ of $__________.

decrease of 3,000 25-15 = 10 X 1,200 = 12,000 25-19 = 6 X 1,500 = - 9,000 3,000

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating _____________.

leverage

if the total contribution margin is less than the total fixed expenses, then a __ will occur

net loss

CVP analysis allows companies to easily identify the change in profit due to changes in:

selling price sales volume unit variable costs total fixed costs mix of products sold

Net operating income can be calculated as:

(unit sales - unit sales to break even) x unit contribution margin

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by:

174,000 600,000 X .29= 174,000

Plush sells high-end desk chairs. The variable expenses per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Plush's chairs is ________%

189/85.05 = .45%

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is ___________ %. (enter number as a whole number

19% 559,740 / 2,946,000=.19

A company's break-even point is 17,000 units. If the cont4ribution margin is 22 per unit and 26,000 units are sold, net operating profit will be:

198,000 26000 - 17000 = 9000 X 22 = 198000

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If the company has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals

2,200,000 800,000 + 564,000 = 1,364,000/.62 = 2,200,000

Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals $_______.

26980 95 X 284 = 26,980

Vivian's Violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000, Vivian's Violins net operating income is:

99,000 184,000 - 85,000 = 99,000

The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit. a. organizational structure b. volume c. cost d. selling price

B,C,D

AN income statement constructed under the _______ approach allows users to easily judge the impact on profits of changes in selling price, cost or volume.

contribution margin

After reaching the break-even point, a company's net income will increase by the __________ ________ per unit for each additional unit sold.

contribution margin

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per units and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will:

decrease by $2,000 new contribution margin is 6,000 10X10,000 = 100,000- (10,000X4) = 60,000- 30,000 = 30,000 (10X11,000) - (11,000X4) = 66,000 - 38,000 =28,000 30,000 - 28,000 = 2,000

True or false: Knowledge of previous sales is necessary when using incremental anaylsis to evaluate a change in profits

false

Place the following items in the correct order in which they appear on the contribution margin format income statement. net operating income sales contribution margin fixed expenses variable expenses

sales variable expenses contribution margin fixed expenses net operating income

The relative proportions in which a company's products are sold is referred to as _____ __________.

sales mix

When preparing a CVP graph, the horizontal axis represents:

sales volume (unit volume)

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

380,000 30,000 X ($40-$19) - 250,000 = 380,000

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $ _________.

40,000 500,000 X .68 = 340,000 - 300,000 = 40,000

A product has a selling price of $10per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units ae sold, net operating income will be $________.

5,000 10-6 = 4 X10,000 = 40,000 - 35,000

Gifts Galore has $189,000 of sales revenue from wrapping paper sales last year. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was:

53% 100,170/189,000 = .53

Seth's Speakers had actual sales of $1,630,000. If break-even sales equals $935,000, Seth's margin of safety in dollars is:

695,000 1,630,000 - 935,000=695,000

To calculate profit, multiply the _____________ per unit by sales volume and subtract total fixed cost

contribution margin

The contribution margin statement is primarily used for:

internal decision making

Contribution margin is first used to cover ________ expenses. Once the break-even point has been reached, contribution margin becomes ______.

fixed profit