Ch 5: Cost-Volume-Profit Relationships

Break even point; net operating income will increase by the amount of the unit contribution margin for each additional unit sold; equation method or the formula method

when sales revenue = expenses and profit = 0; what happens when this point has been reached? What are the two methods for calculating this point?

8,400 (sales volume = [$320,000 +$200,800]/[$90-$28] = 8,400 units)

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?

Sales = $144,000/0.59 = $244,068

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 what?

Sales = ($975,000 +$195,000)/0.65 = $1,800,000

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total what?

variable, fixed, profit, a loss occurs

Contribution margin is the amount remaining from sales revenue minus ________________ expenses, and thus the amount available to cover f__________ expenses (COVERED FIRST), and then provide p_______. What happens if contribution margin doesn't cover the fixed expenses?

Profit = (Sales - Variable Expenses) - Fixed Expenses; Profit = (Selling Price x Quantity Sold - Variable expenses per unit x Quantity Sold) - Fixed Expenses aka Profit = Unit CM x Q - Fixed Expenses

Express the contribution format income statement in an equation; what is it if a company has only a SINGLE product?

unit

For a single-product company, the margin of safety in __________ form is calculated by dividing the margin of safety in dollars by the selling price per unit.

increase by $7,000 (current income = ($80 x 200) - $5,000 = $11,000. With the change in salary becomes a variable cost: ($80 - $20) x 200 x 150% = $18,000, an increase of $7,000 per month)

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will?

variable manufacturing cost per unit; any cost incurred by accepting the order

If a company with excess capacity has an opportunity to take an order in addition to its regular sales, the sales price per unit must cover which of the following costs?

Margin of Safety = $272,000/(100,000 x $17) = 16%

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, what is the margin of safety percentage?

1. F 2. Selling Price, costs, volume 3. Variable expenses 4. zero 5. $2,200 6. Unit CM, unit sales & Total Fixed Costs

PRACTICE: 1. T or F: CVP Analysis investigates company personnel policies, business values, and performance measures. 2. CVP analysis allows companies to easily identify the change in profit due to changes in (choose the ones that apply: 1. location, selling price, costs, volume, management. 3. The CM is equal to sales minus: _____________. 4. The break-even point is the level of sales at which the profit equals _________. 5. Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mug's profit was? 6. What is needed to calculate profit?

Total sales = $95 x 284 = $26,980

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 how much?

sales commission based off of contribution margin

Structuring Sales Commissions: how are conflicts of interest avoided with commissions?

1, 2, 4

The break-even point calculation is affected by (which of these, can be more than one): 1. costs per unit 2. sales mix 3. number of batched produced 4. selling price per unit

1. Use unit sales in the equation or formula method and then multiply by selling point 2. Profit = CM ratio x Sales - Fixed Expenses 3. Dollar Sales to Break Even = Fixed Expenses/CM ratio

What are the three methods for finding the break-even point in dollar sales?

profit or loss

What does the vertical distance between the total revenue line and the total expense line on a CVP graph represent?

Profit = Unit CM x Q - Fixed Expense (put $0 in for profit)

What is the equation method to find break-even point (relies on basic profit equation)?

Unit Sales to break even = Fixed expenses/Unit CM

What is the formula method to find break-even point (shortcut version)?

2, 3, 6

Which of the following are needed to solve for net operating income at any project sales volume above the break-even point? 1. Total contribution margin 2. contribution margin per unit 3. Break even unit sales 4. Number of units produced 5. total variable expenses 6. projected unit sales

operating leverage; multiplier, high

a measure of how sensitive net operatng income is to a given percentage change in dollar sales; acts as a m_______________ "If this is ________, a small percentage increase in sales can produce a much larger percentage increase in net operating income!"

degree of operating leverage: contribution margin/net operating income; % change in net operating income = degree of operating leverage x % change in sales the company with the higher proportion of fixed costs; No, it's greatest at sales levels near the break-even point and decreases as sales and profits rise break-even point, profit, small, volume

a measure, at a given level of sales, of how a percentage change in sales volume will affect profits. how do you calculate? What is the relationship between percentage change in sales and the percentage change in net operating income? If two companies have the same total revenue and same total expense but different cost structures, which company will a higher operating leverage? Is the degree of operating leverage constant? "If a company is near its _______________________________, then even small percentage increases in sales can yield large percentage increases in p________. This explains why management will often work very hard for only a ____ increase in sales ___________."

incremental analysis

an analytical approach that focuses only on those costs and revenues that change as a result of a decision

CVP Graph; break-even chart; X = unit volume & Y = dollars 1. parallel, fixed expenses 2. sales 3. sales, dollars, origin; where the total revenue and total expense lines cross; the company earns a profit and the size of the profit increases as sales increse

highlights the relationships among revenue, cost, profit, and volume over a wide range of activity; also called a ___________________ ______; What's represented on the X axis & the Y axis? Three Steps: 1. Draw a line ____________________ to the volume axis to represent total ___________ ______________________ 2. Choose some volume of unit ______ and plot the point representing total expense at the sales volume you've selected 3. Again choose some sales volume and plot the point representing total s_______ d___________ at the activity level you have selected. Draw a line through this point back to the o_______ *the break-even point is where? What happens if sales are above the break-even point?

cost-volume-profit analysis; selling, volume, variable, fixed; 1. Selling price is constant (does not change as volume changes) 2. Costs are linear and can be accurately divided into variable and fixed elements. The variable element is constant per unit, the fixed element is constant in total over the entire relevant range. 3. In multi-product companies, the mix of products sold remains constant.

the analysis of the impact of different pricing alternatives on the business's profitability; primary purpose is to estimate how profits are affected by 5 factors: 1. s_________ prices 2. sales v________ 3. Unit v_____________ costs 4. Total f_______ costs 5. Mix of products sold; What 3 assumptions are typically adopted with respect to these factors?

margin of safety; lower; margin of safety in dollars = total budgeted (or actual) sales - break-even sales; can be expressed as a percentage: margin of safety % = margin of safety in dollars/ total budgeted (or actual) sales in dollars; can be expressed in terms of the number of units sold = margin of safety of dollars/ selling price per unit)

the excess of budgeted or actual sales dollars over the break-even volume of sales dollars (the amount by which sales can drop before losses are incurred) "the higher the margin of safety, the ____________ the risk of not breaking even and incurring a loss" What's the formula? How is this expressed in a single-product company?

1. increase by $6,000 ($70,000 x 30% - $15,000 = $6,000 increase) 2. decrease, 3000 ([1,500 x (25 - 19) ] - [1200 x (25-15)] = (3,000)) 2. 2,800 (98,000/(50-15) = 2800) 3. Unit Sales to attain a target profit = (Target profit + fixed expenses)/Unit Contribution Margin

PRACTICE: 1. A company's current sales are $300,000 and fixed expenses total $225,000. The Contribution Margin Ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will: ? 2. 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 per month 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) ______________________ (increase/decrease) of $ _______________________________. 3. JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 perunit and fixed costs total $98,000. How many units does JVl have to sell to Break-Even? 4. What is the formula used to calculate the sales volume needed to achieve a target profit?

1. 34% [(1,452,000-958,320)/1452000] 2. multiply, sales

PRACTICE: 1. Given sales of $1,452,000, variable expenses of $958,320, and fixed expenses of $354,000, the CM ratio is? 2. To calculate the impact on net income using the contribution margin ratio, ____________ the change in ___________ by the CM ratio.

Target Profile Analysis; 1. Equation: Profit = Unit CM x Q - Fixed Expense 2. Formula: Units Sales to attain the target profit = Target profit + Fixed Expenses / Unit CM

a key use of CVP analysis; estimates what sales volume is needed to achieve a specific target profit; what's the two equations?

Contribution Margin Ratio; CM Ration = Contribution Margin / Sales; Shows how the CM will be affected by a change in total sales. A ratio of 40% means that for each dollar increase in sales, total CM will increase by $0.40 ($1 sales x CM ratio of 40%). Net operating income. Change in CM = CM ration x Change in Sales; 1. Profit = CM ratio x Sales - Fixed Expenses 2. Change in Profit = CM Ratio x Change in Sales - Change in Fixed Expenses

the contribution margin as a percentage of sales; what is the ratio? What does it show? What does a ratio of 40% mean? What also increases by the same amount if CM increases? How do you express the effect of a change in sales on the CM? How can the relationship between profit and the CM Ratio be expressed? (2)

profit Graph

the graph based on the equation: Profit = Unit CM x Q - Fixed Expenses (plot two points and connect them)

variable expense ratio = variable expenses/sales (in a single product analysis, it can be computed by dividing the variable expenses per unit by the unit selling price) CM ratio = 1 - Variable expense ratio

the ratio of variable expenses to sales; how is it computed? What useful equation can this lead too?

sales mix, profits; when high-margin rather than low-margin items make up a relatively large proportion of total sales; if the sales mix changes, then the break-even point will also usually change

the relative proportions in which a company's products are sold (try to achieve mix that will yield the greatest p______); when will profits be greatest? If this changes, what else usually changes?