chapter 5

CVP stands for

Cost Volume Profit

What does contribution margin mean?

The contribution margin represents the revenue that a company gains by selling each additional unit of a product or good.

When answering "what-if" questions, which of the following statements is true?

The projected sales may be influenced by changes in unit sales and/or changes in the selling price

Operating leverage acts as a multiplier so with a high operating leverage, a small percentage increase in unit sales can produce_______________-

a much larger percentage increase in net operating income.

Barrons has an operating leverage of 4 and Wilkens has an operating leverage of 3. If sales decrease, the company that will experience the greatest drop in profits is---------

barrons

Costs are separated into variable and fixed categories when using the ---------- approach

contribution

The degree of operating leverage = _______

contribution margin ÷ net operating income

The degree of operating leverage Blank______.

decreases as sales and profits rise is not a constant is greatest at sales levels near the break-even point

Estimating the fixed and variable components of a mixed cost using the ____________________ , approach involves a detailed analysis of what cost behavior should be

engineering

Simple CVP analysis can be relied on for changes in volume outside the relevant range.

false

In a least-squares regression line, the vertical intercept (a) of the line represents the total----cost

fixed

A change in sales mix Blank______.

from high-margin to low-margin items may decrease profits despite an increase in sales from low-margin to high-margin items may increase profits despite a decrease in sales

Simple CVP analysis is Blank______.

generally not valid outside the relevant range

What are we looking for with target profit analysis?

helps us to know how much in dollar sales a company will need to reach a certain profit point.

A measure of how sensitive net operating income is to a given percentage change in unit sales is known as operating-------------

leverage

What does Degree of Operating Leverage mean?

measures the sensitivity of a company's operating income to its sales

CM ratio = 1 ______ the Variable expense ratio

minus

Operating leverage is a measure of how sensitive Blank______ is to a given percentage change in unit sales.

net operating income

Once all fixed expenses have been covered, the CM ratio defines the portion of each sales dollar contributing to Blank______.

profits

The variable expense ratio is the ratio of variable expense to Blank______.

sales

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

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

Estimating the sales volume required to earn a given amount of net income is known as

target profit analysis

What is Sales Mix

the relative proportions in which a company's products are sold

In a CVP graph, the horizontal axis represents Blank______.

unit sales

Using the high-low method, the fixed cost is calculated Blank______.

using either the high or low level of activity after the variable cost per unit is calculated

The contribution margin equals sales minus all Blank______ expenses.

variable

ina CVP graph, unit volume is usual represented on the _____ axis

x

in a CVP graph dollars are on the ___ axis

y

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is Blank______

29%

If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by

90%

Unit sales to break even =

Fixed expenses ÷ CM per unit Correct

Dollar sales to break even

Fixed expenses ÷ CM ratio Correct

Which of the following statements is true when performing "what-if" analysis?

If the projected increase in contribution margin exceeds any projected increase in total fixed expenses, then the projected profit must increase too.

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

In multi product companies, the sales mix is constant. Costs are linear and can be accurately divided into variable and fixed elements.

The percentage of the variation in cost that is explained by activity is Blank______

R^2

What five factors go into a Cost-Volume-Profit (CVP) analysis?

Selling prices. Sales volume. Unit variable costs. Total fixed costs. Mix of products sold.