ACCT 2101 Chapter 6
The formula for target sales is:
(Total fixed costs + Target profit)/ contribution margin ratio
The formula for target units is:
(Total fixed costs + Target profit)/ unit contribution margin
The profit equation is:
(Unit Price x Q)-(Unit Variable Costs x Q)- Total Fixed costs= Profit
The formula for break-even point in terms of units is:
Total fixed costs/ Unit contribution margin
The margin of safety is the difference between:
actual sales and break even sales
Degree of operating leverage is used to:
calculate profit change given sales change
Degree of operating leverage is calculated as:
contribution margin divided by profit
Which of the following is not a key assumption of cost volume profit? - costs may be fixed, variable, mixed or step - production and sales are equal - changes in total cost are strictly due to changes in activity - total costs and revenues can be depicted with a straight line
costs may be fixed, variable, mixed or step
A firm with a higher degree of operating leverage would be considered less risky than a comparable firm with a lower degree of operating leverage.
false
Cost volume profit analysis can only be performed for companies that sell only one product.
false
Cost-volume-profit analysis assumes that total costs behave in a curvilinear fashion
false
Degree of operating leverage is calculated by dividing sales by profit.
false
In multiproduct cost volume profit analysis, a break even point must be calculated separately for each product.
false
On a CVP graph, the break even point is the point at which the contribution margin line crosses the total cost line.
false
The margin of safety is a positive number at the break even point.
false
The margin of safety is the difference between actual sales and budgeted sales.
false
The margin of safety is the point where zero profit is earned.
false
The target sales level equals fixed costs plus variable costs divided by the contribution margin ration.
false
To determine the number of units needed to earn a target profit, divide the target contribution margin by the contribution margin per unit.
false
Cost structure refers to:
how a company uses variable versus fixed costs
The margin of safety tells managers:
how much sales could drop before the firm no longer earns profits
What component of the profit equation should be set equal to zero to find the breakeven point?
profit
If production does not equal sales..
the conclusions it draws from a CVP analysis will not be as sound as they would be if production equaled sales
The break-even point is:
the point where zero profit is earned
In multiproduct cost volume profit analysis, an assumption made in addition to those used in single product CVP analysis is that:
the sales mix remains constant
If a firm sells more than one product, the breakeven point in units represents:
the sum of the units of all products required to break even
Profit is indicated on a cost volume profit graph by:
the vertical difference between the revenue line and the cost line
The formula for break even point in terms of revenue is:
total fixed costs/contribution margin ratio
An important assumption in multiproduct cost volume profit analysis is the sales mix remains constant.
true
Break even units can be found by dividing fixed costs by unit contribution margin.
true
Contribution margin is equal to fixed costs at the break even point.
true
Cost-volume-profit analysis assumes that all costs can be accurately described as either fixed or variable.
true
Managers can use cost volume profit analysis to evaluate changes in cost structure.
true
Managers can use cost volume profit analysis to evaluate changes in price.
true
Target units equals fixed costs plus target profit divided by the unit contribution margin.
true
The break even point is the point at which profit equals zero.
true
The degree of operating leverage can be multiplied by a change in sales to determine change in profit.
true