Chapter 5: Cost-Volume- Profit Relationships

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 Blank______. Multiple choice question. $600,000 $174,000 $426,000

$174,000 Reason: $600,000 × 29% = $174,000

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 Mugs' profit was ______. Multiple choice question. $2,200 $6,000 $3,800 $2,100

$2200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

retty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______. Multiple choice question. $40 $3,085 $3,800 $6,885

$3800 Reason: Total variable cost = 95 ×$40 = $3,800.

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

$5000

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 ______. Multiple choice question. $55 $880,000 Reason: Unit contribution margin= $90 -$35 = $55. $20.63 Reason: Unit contribution margin= $90 -$35 = $55. $10,000 Reason: Unit contribution margin= $90 -$35 = $55.

$55

Profit equals: Multiple choice question. (P × Q - V × Q) - fixed expenses. (P - V - fixed expenses) × Q. (P × Q + V × Q) - fixed expenses (P × Q - V × Q) + fixed expenses.

(P × Q - V × Q) - fixed expenses

linear equation

Profit + Unit CM X Q - Fixed expenses

incremental analysis

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

Break even and target profit analysis , manager use to_______

answer questions such as how much would we have to sell to avoid incurring a loss, or how much would we have to sell to make profit

To calculate profit, multiply the Blank______ per unit by sales volume and subtract total fixed cost. Multiple choice question. sales price variable cost gross margin contribution margin

contribution margin

Target Profit Analysis in Terms of Dollar Sales

dollar sales to attain the target profit = (target profit + fixed expenses) / CM ratio

The contribution margin as a percentage of sales is referred to as the contribution margin or CM____

ratio

Definition of Margin of Safety

the excess of budgeted or actual dollar sales over the break-even dollar sales. -is the amount by which sales can drop before losses are incurred. The higher them argin of safety, the lower the risk of not breaking even and incurring a loss

The equation of change in Contribution Margin shows

the impact on net operating income of change in the sales volume can be computed by multiplying the CM ratio by the corresponding gin changein dollar sales

the loss becomes steadily worse to

the left of the break even points as the sales volume decreases

CVP graph

the relationships among revenue , cost, profit, and volume highlights CVP relationships over wide ranges of activity - break-even chart -unit volume is represented on the horizontal (X) axis -dollars on the vertical (Y) axis

the Profit steadily increases to

the right of the break-even point as the sales volume increases

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be Blank______. Multiple choice question. $200 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100. $500 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100. $100 $400 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.

$100

Factors that determine when business has the better cost structure:

- the long-run trend in sales -year-to-year fluctuation in the levels of sales -the attitude of the owners toward the risks If the CM ratio is higher, and its profit will , therefore increase more rapidly as unit sales increases

Preparing the CVP Graph

1. Draw a line parallel to the volume axis to represent total fixed expenses. 2. Choose some volume of unit sales and plot the point representing total expense (fixed and variable) at the sales volume you have selected. After the point has been plotted, draw a line through it back to the point where the fixed expense line, intersects the dollars axis. 3. Again choose some sales volume and plot the point representing total sales dollars at the activity level you have selected.

To simplify CVP calculations,managers typically adopt the following assumptions with respect to these factors:

1. Selling price is constant. The price of a product/service will not change as volume change . 2. Costs are linear and can be accurately divided into variable and fixed components the entire relevant range. 3. In multi product companies, the mix of products sold remain constant

CVP's primary purpose is to estimate how profits are affected by the following five factors:

1. Selling prices 2. Sales volume 3. Unit variable 4. Total fixed costs 5. Mix of product sold

CVP model can be adjusted to take into account anticipated changes in______ that arise when the estimated sales volume falls outside the relevant range

1. selling prices 2. Variable falls unit 3. the sale mix 4. total fixed cost

Contribution Margin Ratio

CM Ratio = Contribution Margin/Sales

Break even in dollar sales

Three methods to find to the dollar sales to break even : 1. Solve for the break-even point in unit sales using the equation method or formula method, then simply multiply the result by the selling price. 2. Use the equation method to compute the break even point in dollar sales Profit=CM ratio X sales - Fixed expenses ex: 0=0.40 X Sales -35,000 0.4 X sales =0 +35,000 Sales=35,000/0.40 Sales= 87,5000 3. Use the formula method to compute the dollar sales needed to breakeven: Dollar sales to break even= Fixed expenses/CM ratio ex: 35,000/0.40= 87,500

Contribution Margin Ratio

a ratio computed by dividing contribution margin by sales - contribution margin as a percentage of sales

Multiple Select Question Select all that apply The contribution margin income statement allows users to easily judge the impact of a change in ______ on profit. Multiple select question. cost organizational structure volume selling price

cost volume selling price

Linear cost behavior

cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity

break-even point

the level of sales at which profit is zero

The break-even point is the level of sales at which the profit equals ______. (Enter only one word per blank.)

zero

Changes in Sale Mix can cause

-perplexing variation in a company's profits, a shift in the sales mix from high margin items to low-margin items can cause total profits to decrease even though total sales may increase. -A shift in the sales profit may increase even though total sales decrease, it is one thing to achieve a particular sales volume, it is quite another to sell the most profitable mix of products.

Contribution Margin

-the amount remaining from sales revenue after variable expenses have been deducted. -the amount available to cover fixed expenses and then to provide profit for the period -is used first to cover the fixed expense the fixed expenses, and then leftover remain goes toward profits -If CM is not sufficent to cover the fixed expenses, then a loss occurs for the period.

te's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ______. Multiple select question. the sale of 12,000 putters results in net operating income of $380,000 Reason: 12,000 units × $65 contribution margin = $780,000 - $400,000 = $380,000. lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit Reason: If variable costs decreased by $15, contribution margin would increase by $15 to $80 per unit. the contribution margin per putter is $65. Pete's Putters is unable to make a profit Reason: Pete's breakeven point is $400,000 ÷ $65 or 6,154 putters. If total sales are in excess of 6,154 putters, Pete's will make a profit.

-the sale of 12,000 putters results in net operating income of $380,000 -the contribution margin per putter is $65.

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is $__________.

168,000 (9000 x 32) -120000=168000

target profit analysisin Terms of Dollar Sales II

3 methods when quantifying the dollar sales needed to attain a target profit we can apply that use for calculating the dllar sales needed to break even: 1. Solving for the unit sale, needed to attain the target profit using the equation method or formula method and then simply multiply the result by the selling price ex: 750 speakers X $250 per speaker= 187,500 total 2. Use the equation method to compute the dollar sales needed to attain the target profit., its contribution margin ratio is % using the equation: Profit=CM ratio X Sales- Fixed expenes $40,000= 0.40 X Sales -$35,000 0.40 X Sales= $40,000 +35,000 Sales=$75,000/0.40 Sales=$187,500 3. Use the formula method to compute the dollar sales needed to attain the target method: Dollar sales to attain the target profit = (target profit + fixed expenses) / CM ratio

Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, the contribution margin ratio is Blank______. Multiple choice question. 66% 24% 90% 34%

34%

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was ______. Multiple choice question. $40 $3,085 $6,885 $3,800

3800

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

5000

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was Blank______. Multiple choice question. 38% 53% 47% 68%

53% Reason: $100,170 ÷ $189,000 = 53%

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income. - is not constant, its greatest at sales levels near the break-even point and decrease as sales and profit rise. -can be used quickly estimate what impact various percentage changes in unit sales will have on profit, without the necessity of preparing detailed contribution format income statement -management will often work every hard for only a small increase in sales because the effects of OL can be dramatic, if a company is near its break-even point, then even a small percentage increase in sales volume can cause a huge percentage increase in profits

Example of percentage change in net operating income

Bogside farm= 40,000/100,000 = 4 Sterling farm=70,000/100,000=7 the degree of OL for Bogside is 4, the farm 's net operating Income grows 4 times as fast as its sales Sterling farm's net operating income grows 7 times as fast as its sales. If the sale volume increase by 10%, then we can expect the net operating income of Bog Farm to increase 4 times this amount or 40 percent . the net operating income of Sterling farm to increase by 7 times this amount or 70%

Change in Contribution Margin

CM ratio x change in sales

Having defined the two terms, it bears emphasizing that the contribution margin ratio and variable expense ratio can be mathematically related to one another :

CM= Contribution margin/ Sales CM ratio= Sales-Variable expenses/Sales Cm ratio= 1- Variable expenses ratio

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit_____. ___

Contribution , margin

JVL Enterprises has set a target profit of $126,000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98,000. How many units does JVL have to sell to BREAK-EVEN? Multiple choice question. 2,800 3,600 6,400 1,960

Correct answer: $2800 Reason: $98,000 ÷ ($50 - $15) = 2,800

Chrissy's Cupcakes has $832,000 in sales and $265,000 in fixed expenses. Given a contribution margin ratio of 72%, Chrissy's profit (loss) is Blank______. Multiple choice question. $599,040 $334,040 $567,000 $(32,040)

Correct answer: $334,040 $599,040 Reason: (72% × $832,000) - $265,000 = $334,040 $334,040 $567,000 Reason: (72% × $832,000) - $265,000 = $334,040 $(32,040) Reason: (72% × $832,000) - $265,000 = $334,040

When a company sells one unit above the number required to break-even, the company's net operating income will ______. Multiple choice question. change from zero to a net operating profit decrease by the contribution margin per unit increase or decrease depending on total fixed costs increase by the sales price of the extra until sold

Correct answer:change from zero to a net operating profit Reason: Once the break-even point is reached, all fixed costs are covered. Reason: Variable expenses will still be incurred for each unit above the break-even point. After break-even the contribution margin becomes profit.

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is Blank______. Multiple choice question. ($64,000) ($10,000) $36,000 $54,000

Correct= 36,000 ($64,000) Reason: Net operating income = (750 - 450) × $120 = $36,000. ($10,000) Reason: Net operating income = (750 - 450) × $120 = $36,000. $54,000 Reason: Net operating income = (750 - 450) × $120 = $36,000

CVP is the acronym for - - -. (Enter only one word per blank.)

Cost Volume Profit

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

Cost-volume profit analysis

Multiple Select Question Select all that apply Which of the following are assumptions of cost-volume-profit analysis? Multiple select question. Costs are linear and can be accurately divided into variable and fixed elements. Fixed costs per unit stay the same within the relevant range. Variable costs per unit increase over the relevant range of activity. In multi product companies, the sales mix is constant.

Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant. Reason: Fixed costs in total stay the same within the relevant range. Reason: Variable costs per unit remain constant over the relevant range of activity.

Sale Mix

Definition: a relative proportions in which a company's products are sold and is computed by expressing the sales of each product as a percentage of total sales -the idea is to achieve the combination, or mix that will yield the greatest profits. profit will depend to some extent on the company's sales mix and greater if high-margin rather than low-margin item make up a relatively large proportion of total sales

Formula: Degree of Operating Leverage

Degree of operating leverage= Contribution margin/net operating income

The formula for the margin of salefty in dollar is

Margin of safety in dollars= total budgeted (or actual) sales-Break even sales

The margin of safety can be expressed in percentage form:

Margin of safety percentage= Margin of safety in dollars/ Total budgeted (or actual) sales in dollars ex: Sales (at the current volume of 400 speakers)- Break even sales (at 350 speakers)=Margin of safety in dollars 100,000-87,500= 12,500 margin of safety in dollars/Total sales= 12,500/100,000= 12.5% This margin of safety means that at the current level of sales and with the company's current prices and cost structure, a reduction in sales of 12,500 or 12.5 % would result in just breaking even .

Example of Loss profit on Contribution Income statement

Name: Acoustic Concepts, Inc. statement: contribution Income Sales of 1 Speaker Sales (1 speaker) $250 $250 price per unit Variable expenses: ($150) ($150 price per unit) Contribution margin $100 $100 price per unit Fixed expense: (35,000) Net operating income: $(34,900)

example of Contribution income statement

Name: Acoustic Concepts, Inc. statement: contribution Income Time: For the month of June Sales (400 speakers) $100,000 $250 price per unit Variable expenses: ($60,000) ($150 price per unit) Contribution margin $40,000 $100 price per unit Fixed expense: (35,000) Net operating income: $5000

The contribution format IS can be expressed in equation form:

Profit= (Sales - Variable expenses) - Fixed expense

The relationship b/t profit and the CM ratio can also be expressed using the following equation:

Profit= CM ratio X Sales - Fixed expenses or in terms of change, Change in profit= CM ratio X changes in Sales - Change in fixed expenses

Unit CM= Selling price per unit - Variable expenses per unit = P-V Profit = (P X Q - V X Q) - Fixed expenses Profit= (P-V) Q - Fixed expenses Profit= Unit CM X Q - Fixed expenses

Profit= Unit CM X Q - Fixed expenses Simple profit equation in terms of the unti contribution margin ( Unit CM)

The Equation Method of Break Even point

Profit= Unit CM X Q-Fixed expenses use CM form to perform the break even calculation ex: CM is 100, fixed expense are 35,000, what is the break even point 0=100 XQ -35,000 1000 XQ=0 +35,000 Q=35,000/100 Q=350 will break even or earn zero profit at a sales volume of 350 speaker a month

Net operating income equals: Multiple choice question. dollar sales - dollar sales to break even. (dollar sales - dollar sales to break even) × unit contribution margin. unit sales × unit contribution margin. (unit sales - unit sales to break even) × unit contribution margin.

Right answer :(unit sales - unit sales to break even) × unit contribution margin. dollar sales - dollar sales to break even. Reason: To calculate net operating income this would have to be multiplied by the contribution margin ratio (%). unit sales × unit contribution margin. (dollar sales - dollar sales to break even) × unit contribution margin. Reason: If using dollar sales instead of unit sales, you would multiply by the contribution margin ratio (%), not the unit contribution margin.

Contribution margin: Multiple choice question. is first used to cover variable expenses. is not affected by changes in activity. equals sales minus fixed expenses. becomes profit after fixed expenses are covered

Right answer: becomes profit after fixed expenses are covered -is first used to cover variable expenses. Reason: Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses. -is not affected by changes in activity. Reason: Because contribution margin is a variable amount, it is affected by changes in activity. -equals sales minus fixed expenses. Reason: Contribution margin equals sales minus variable expenses.

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n): Multiple choice question. decrease in unit selling price. change in sales mix. increase in total fixed cost. decrease in the unit variable cost

Right answer:decrease in the unit variable cost Reason: A decrease in unit selling price would decrease profits. change in sales mix. Reason: A change in sales mix would only be correct if the change was a shift toward the more profitable product(s). increase in total fixed cost. Reason: An increase in total fixed costs would decrease profits. .

Change in Fixed Cost and Sales Volume

Solution: 1. 100% -(Variable expense/Sale %) = cm ratio % expected total CM=( Sales Volume with additional budget X CM ratio %) presented total CM= CM/ current sale % Increase in total CM= expected total CM-presented total CM Changed in fixed expensed : Increased net operating income = increase in total CM -Less incremental expense 2. Incremental CM : (difference X CM ration)- incremental expense= increased net income

Change in Variable Cost, Fixed Cost, and Sales Volume

Solution: Changing the sale staff's compensation from salaries to commission would affect both variable and fixed expenses example: currently selling 400 speakers/month pay sale person a sale commission of $15 per speaker sold, total 6000 a month expected to increase sales by 460 per month variable per until increase by 15, from 150 to 165, the unit CM decrease from 100 to 85 .Fixed expense would decrease 6000 from 35,000 to 29,000 Expected total CM with sales staff on commission: 460 speakers X 85 per speaker = 39,100 Present total CM : 400 speakers X 100 per speaker=40,000 decrease in total CM (900) Change in fixed expenses: Add salaries avoided if a commission is paid= 6000 increase in net operating income: 5100 Change should be made

change in Fixed Costs, Selling price ,and Sales volume

Solution: Expected total CM with lower selling price= # of expected sale X decrease unit CM Presented total CM= current sale # X current price per unit Expected total CM - presented total CM= Incremental CM Changed in Fixed Expense= Less incremental expense = reduction in net income example: 600 speakers X $80= $48,000 400 speaker X100=$40,000 48,000-40,000= 8,000 8,000-15,000=(7000) to increase sell, manger cut the selling price by $20 per speaker adv budge 15,000 per month, sale 400 /month if these 2 steps are taken, unit sales will increase by 50 percent to 600 speaker per month a decrease in selling price of 20 / speaker would decrease the unit CM by 20 down to 80 * change should not be made. the 7000 reduction net incomes

Completed Cvp graph

The break-even point is where the total revenue and total expense line cross. When sales are below the break-even point, the company suffers from loss. the loss is presented by the vertical distance b/t the total expense and total revenue lines , and get bigger as sales decline. When sales are above the break-even pint, the company earns a profit and size of the profit ( represented by the vertical distance b/t the total revenue and total expenses lines) increase as sales increas

The Equation Method of Target Profit Analysis

To compute the unit sales required to achieve a target profit of amount $ per month, use the same profit equation equation that is used for its breakpoint analysis Profit= Unit CM X Q-Fixed expenses ex: $40,000 target profit, CM per unit $100, total fixed expense is $35,000 $40,000= $100 X-35,000 $100 X Q=$40,000 +$35,000 100X Q/100= 75,000/100 Q=750 need to sell 750 speaker per month to meet the target profit

The break-even point is reached when the contribution margin is equal to: Multiple choice question. total sales. total fixed expenses. profit. total variable expenses

Total fixed volume

The Formula method of Target Profit Analysis

Unit sales to attain the target profit= Target profit +fixed expense/ Unit CM ex: Unit sales to attain the target profit=(40,0000+35,000)/1000 =750

The Formula Method of Break Even Point

Unit sales to break even= Fixed expense / unit CM -is a shortcut version of the equation method Ex: Unit sales to break even= 35,000/100 unit sales to break even=350

The Variable expense ratio

V E Ratio = variable expenses/sales

Changing Selling Price

Variable cost per unit +(desired profit per speaker = (a profit / #of units)) = Quoted price per unit example: making bulk sale of 150 speakers to whole sale if an acceptable price can be negotiated . the sale won't alter the company regular sales and would not affect the company's fixed expenses. What price per speaker should be quoted to whole sale , if profit of 3000 on the bulk sale ? Solution: variable cost her speaker $150 desired profit per speaker 3000/ 150 speakers= 20 Quoted price per speaker= 170 fixed expenses are not included in the computation , because fixed expenses are not affect by the sulk sale , so all the additional CM increases the company's profit

Engineering approach

a detailed analysis analysis of cost behavior based on an industrial engineer evaluation of the inputs that are required to carry out a particular activity and of the prices those activity and of the prices of those inputs

engineering approach

a detailed analysis of cost behavior based on an industrial engineer's evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs

Cost-Volume-Profit (CVP) graph

a graphical representation of the relationships between an organization's revenue, costs, and profit on the one hand and its sales volume on the other hand.

The greatest dangerous lies in replying on simple CVP analysis when ______

a manager is contemplating a large change in sales volumes likes outside the relevant range

R2

a measure of goodness of fit in least-squares regression analysis. It is the percentage of the variation in the dependent variable that is explained by variation in the independent variable

Operating Leverage

a measure of how sensitive net operating income is to a given percentage change in unit sales - acts as a multiplier if OL is high, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income

break-even analysis

a method of determining what sales volume must be reached before total revenue equals total costs To calculate the break even point in in unit sales and dollar sales manager can use either two approaches, the equation method or the formula method

High-low method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

least- square regression method

a method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimize the sum of the squared errors

variable expenses ratio

a ratio computed by diving variable expenses by sales -the variable expense as a percentage of sales

independent variable

a variable that acts as a causal factor, activity is independent variable, as represented , by the letter X, in the equation Y=a +bX

Account Analysis

an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves

Multiplying unit selling price times the number of units required to break-even is one way to calculate Blank______. Multiple choice question. net operating income Reason: Net operating income is contribution margin - total fixed costs. contribution margin Reason: Contribution margin is sales - variable costs. operating leverage Reason: Operating leverage is a measure of how sensitive net operating income is to a percentage change in dollar sales. break-even sales dol

break-even sales dollars

sing the contribution margin ratio, the impact on net income for a change in sales dollars is Blank______. Multiple choice question. change in total contribution margin × contribution margin ratio change in sales dollars × contribution margin ratio variable expense per unit - contribution margin ratio change in sales dollars per unit - contribution margin ratio

change in sales dollars × contribution margin ratio

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the Blank______ approach. Multiple choice question. balance sheet contribution margin gross margin traditional

contribution margin

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 ______. Multiple choice question. contribution margin ratio Reason: You would also need the selling price. contribution margin per unit selling price Reason: You would also need information on variable costs. total contribution margin Reason: You would also need the total number of units sold.

contribution margin per unit

The calculation of contribution margin (CM) ratio is Blank______. Multiple choice question. contribution margin ÷ total expenses net operating income ÷ total contribution margin variable expenses ÷ contribution margin contribution margin ÷ sales

contribution margin ÷ sales

Percentage change in net operating income=

degree of operating leverage x percentage change in sales

In a single-product company , the MS also can be expressed in term of the number of units sold by

dividing the margin of safety in dollars by the selling price per unit. ex: margin of safety is 50 speakers 12,500/$250 per speaker= 50 speakers

The contribution income statement

emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profit of changes in selling price, cost or volume -Sales, variable expenses, and contribution margin are expressed on a per unit basis and in total -The manager use the per unit figures in the calculations -use inside the company and would not ordinarily be made available to those outside the company

target profit analysis

estimating the level of sales needed to achieve a desired target profit -one of the key uses of CVP analysis To determine the unit sales and dollar sales needed to achieve a target profit, reply on the same2 approaches : equation method or formula method

Profit=( P X Q - V XQ) - Fixed expenses Profit=( $250 X$351 - $150 X351) - 35,000 Profit= (250-150)X351-35,000 Profit= (100)X351-35,000 Profit=35,100-35,000 Profit=100

example of CVP the net operating income (profit) at sales of 351 speakers would be$100 fixed expense= 35,000

Cost-volume-profit (CVP) analysis

helps managers make many important decisions such as : -what products and services to offer -what prices to charge -what marketing strategy to use - what cost structure to maintain

Change in Variable Costs and Sales Volume

increase variable cost and that would reduce CM using higher quality component would increase sales Solution: expected total CM with higher quality components= expected sale X decrease unit cm presented total contribution margin= current sales X current unit CM Increase in total CM = Expected total CM - presented total CM example: current selling 400 speakers/month, cost 100 each increase variable costs by 10 per speaker 10 increase in variable costs would crease the unit CM by 10 from 100 down to 90 480 speakers x 90 per speaker - 400 speakers x 100 per speaker = 3200 fixed costs would not change, the 3200 increase in CM shown should result in a 32000 increase in net operating income

If sales are zero the company's loss would equal

its fixed expenses. -each unit, that is sold, the reduces the loss by the amount of of the unit contribution margin. Once the break-even point has been reached, each additional unit sold increases the company's profit by the amount of the unit contribution margin.

Estimate profit at any sales volume above break even point

multiple the number of units sold in excess of the break-even point by the unit contribution margin. The result=the anticipated profits for the period or estimate the effect of a planned increase in sales volume on profit, simply multiple the increase in units sold by the unit contribution margin, the result will be expected increase in profits

Linear equation

plots as a single straight line To plot the line- compute the profit at 2 different sales volumes -plot the point connect them with straight line

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

product mix selling price volume

Cost Structure and Profit Stability

refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure(trading off b/t 2 types of costs) ex: fixed investment in automated equipment can reduce variable labor costs.

To simplify CVP calculations, it is assumed that Blank______ will remain constant. Multiple choice question. total contribution margin selling price total variable cost unit fixed cost

selling price

To simplify CVP calculations, it is assumed that Blank______ will remain constant. Multiple choice question. total contribution margin total variable cost selling price unit fixed cost

selling price a) total contribution margin Reason: The per unit contribution margin will not change, but total contribution margin will change. total variable cost Reason: The per unit variable cost will not change, but total variable cost will change. selling price unit fixed cost Reason: Total fixed cost will not change, but per unit fixed cost will change.

Application of the CM Ratio

shows how the CM will be affected by a change in sales volume ex: if the CM ratio of 40% means that for each dollar increases in sales, total CM will increase will increase by 40%, assuming that fixed costs are not affected by the increase in unit sales. - The effect of a change in sales volume on the CM is expressed in equation form as: =CM ratio x change in sales

Profit= (P X Q-V X Q ) - Fixed expenses

term profit stand for net operating income only single product when a business has only a single product, the refine the equation. Sales= Selling price per unit quantity sold = P X Q Variable expenses= Variable expenses per unit X quantity sold= V X Q

Multiple Select Question Select all that apply Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information ______. Multiple select question. Pete's Putters is unable to make a profit lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit the contribution margin per putter is $65. the sale of 12,000 putters results in net operating income of $380,000

the contribution margin per putter is $65. Reason : Pete's Putters is unable to make a profit Reason: Pete's breakeven point is $400,000 ÷ $65 or 6,154 putters. If total sales are in excess of 6,154 putters, Pete's will make a profit. lowering variable cost per unit to $45 would result in a contribution margin of $70 per unit Reason: If variable costs decreased by $15, contribution margin would increase by $15 to $80 per unit. the sale of 12,000 putters results in net operating income of $380,000 Reason: 12,000 units × $65 contribution margin = $780,000 - $400,000 = $380,000.

CM ratio is particularly valuable in situations, where

the dollar sales of one product must be traded off against the dollar of another product.

Profit= (sales - variable expenses) - fixed expenses Profit= Contribution margin- Fixed expenes Profit= (Contribution margin/Sales ) X sales - Fixed expenses Profit= CM ratio X Sales- Fixed expenese

the equation can be delivered using the basic profit equation and the definition of the CM ratio

The high-low method and least- squares regression method estimate

the fixed and variable elements of mixed cost and activity data

Example of Unit CM

the profit at sales of 351 speakers cost $100 fixed expense Profit= Unit CM X Q - Fixed expense = $100 X351- 35,000 =35,100 - 35,000 = 100

If a company sells more than one product, break-even analysis is more complex than discussed to this point.

the reason is that different product will have different selling prices, different costs, and different contribution margins, the break-even point depends on the mix in which the various products are sold

Diagnosing Cost Behavior with a Scattergraph Plot

the senior management team believes that maintenance cost is a mixed cost and that the variable portion of this cost is driven by the number of patient- days. -the first step in applying the high low method or the least squares regression method is to diagnose cost behavior with a cattegraph plot : 1. the total maintenance, y is plotted on the vertical axis. dependent variable- a variable that respond to some casual factor, total cost is the dependent variable , as represented by the letter y, in the equation Y=a + bX. 2. The activity, X ( patient-day )is plotted on the horizontal axis. Activisity is known as the Independent variable because it causes variations in the cost.

The anticipated profit or loss at any given level of sales is measured by

the vertical distance between the total revenue line (sales) and the total expense line (variable expense plus fixed expense)

The break-even point on the profit graph is

the volume of sales at which profit is zero and is indicated by the dashed line on the graph

Contribution margins

to reach the break-even point, the company will have to sell enough to cover fixed expenses. if enough items can be sold to generate the number in contribution margin, the all the fixed expenses will be covered and the business will break even for the month, it will neither profit nor loss , but just over all its costs

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

unit contribution margin

The contribution margin equals sales minus all Blank______ expenses. Multiple choice question. product period fixed variable

variable

When a company only produces a single product, the total variable cost can be calculated with the equation ______. Multiple choice question. variable cost per unit multiplied by quantity of units sold total sales minus net income total sales minus total period costs contribution margin minus total fixed costs

variable cost per unit multiplied by quantity of units sold