ch 5

Degree of Operating Leverage

Contribution Margin / Net Operating Income

CM ratio

Contribution Margin / Sales

becomes a profit after fixed expenses are covered

contribution margin

net operating income

contribution margin - fixed expenses

contribution margin ratio formula

contribution margin per unit / selling price per unit

after reaching the break-even point, a company's net operating income will increase by the

contribution margin per unit for each additional unit sold.

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

cost, volume, selling price

breakeven point

fixed costs/(price-variable costs)

the amount by which sales can drop before losses are incurred is the

margin of safety

when preparing a CVP graph, the horizontal axis represents

sales volume

variable expense ratio

variable expenses/sales

contribution margin format income statement

sales variable expenses contribution margin fixed expenses net income

profit

(selling price per unit x quantity sold)-(variable expense per unit x quantity sold)-fixed expenses contribution margin x sales volume - total fixed costs

which of the following are assumptions of cvp analysis

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

the higher the margin of safety

the lower the risk of incurring a loss

Cm margin is 77%, fixed expenses are $240,400. To achieve a target profit of $930,000, sales rounded to the nearest whole dollar must be

(240,400 + 930,000)/.77 = 1,520,000

a company's break even point is 17,000 units, contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be

(26,000-17,000) x $22 = $198,000

a company sold 750 units with CM of $120 per unit. Has break even of 450 units, what is Net op income?

(750-450) x 120 = 36,000

144,000 of fixed costs per year, CM ratio =59%

144,000/.59 = $244,068

variable expense per chair is 85.05, chairs sell for 189.00. whats variable expense ratio

45%

sales total $500,000, fixed cost $300,000, CM ratio 68% Profit???

500,000 x .68 - 300,000

margin of safety

actual sales - break even sales cm/net operating income

changes in contribution margin

cm ratio x change in sales sales increase, cm increases

according to the cvp analysis model and assuming all else remains the same, profits would be increased by

decrease in the unit variable cost

when the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision being made using

incremental

company has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. CM ration is 62%.

sales= (564,000/800,000)/.62 = $2,200,000

to simplify CVP calculations, what remains constant?

selling price

to simplify CVP calculations, which of the following is assumed to remain constant?

selling price

CVP analysis focuses on how profits are affected by

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

at the break-even point

total revenue equals total cost net operating income is zero

variable expense ratio

total variable expenses / total sales

832000 in sales, 265000 in fixed expenses. Contribution margin ratio is 72%. chrissys profit is

Cm ratio x sales -fixed expenses

when a company sells one unit above the number required to break-even, the company's net operating income will:

change from zero to a net operating income

contribution margin is first used to cover

fixed expenses

once the break-even point has been reached, contribution margin becomes

profit