Chapter 6: Cost-Volume-Profit Relationship

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ___.

$0.35

account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False

cost structure refers to the relative portion of product and period costs in an organization.

False

true or false: the margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

false

total contribution margin equals __.

fixed expenses plus net operating income

A company currently has sales of $700,000 and a contribution margin ratio of 45%. As a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. If this is done and these results occur, net operating income will ___.

increase by $7,750 profit = (CM ratio * sales) - fixed costs

the rise-over-run formula for the slope of a straight line is the basis of ___.

the high-low method

which of the following statements is correct?

the higher the margin of safety, the lower the risk of incurring a loss

true or false: the sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

true

true or false: without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

true

when preparing a CVP graph, the horizontal axis represents:

unit volume

when using the high-low method, the slope of the line equals the ___ cost per unit of activity.

variable

Majorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Majorie's Mugs' profit was ___.

$2,200 = 300(20-7)-1700 Q(P-VC)-FC

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is ___.

$380,000 sales variable expenses contribution margin fixed expenses net operating income Q(P-VC)-FC=net operating income 30,000(40-19)-250,000

Vivian's Violins has sales of $326,000 contribution margin of $184,000 and fixed costs total $85,000. Vivian's Violins net operating income is ___.

$99,000 (contribution margin - fixed costs)

the break-even point calculation is affected by ___.

- costs per unit - selling price per unit - sales mix

when a company produces and sells multiple products ___.

- each product most likely has different costs - each product most likely has a unique contribution margin - a change in the sales mix will most likely change the break-even point

Contribution margin is first used to cover ___ expenses. Once the break-even point has been reached, contribution margin becomes ___.

- fixed - profits

a company with a high ratio of fixed costs:

- is more likely to experience greater profits when sales are up than a company with mostly variable costs - is more likely to experience a loss when sales are down than a company with mostly variables costs

Terry's Trees has reached its break-even point and has a contribution margin of 70%. For each $1 increase in sales ___.

- net operating income will increase by $0.70 - total contribution margin will increase by $0.70

which of the following items are found above the contribution margin on a contribution margin format income statement?

- sales - variable expenses

which of the following statement are true?

- scatter graph area way to diagnose cost behavior - plotting date on a scatter graph is an important diagnostic step

CVP analysis focuses on how profits are affected by ___

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

The term "cost structure" refers to the relative proportion of ___ and ___ costs in an organization.

- variable - fixed

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

- volume - selling price - product mix

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?

2,800 unit CM = unit price - variable cost Unit sales to break even = fixed expenses / unit CM

Blissful Blanket's target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ___.

40,000 target profit formula = (target profit + fixed expenses) / CM ratio

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. the BREAK-EVEN point in unit sales is ___.

7,625 units break-even formula = TFC/CM ratio

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 ___.

8,400 target profit = (target profit + fixed expenses) / unit CM (200,800+320,000) / (90-28)

The relative proportions in which a company's products are sold is referred to as ___ ___.

Sales mix

cost behavior is considered linear whenever ___.

a straight line approximates the relationship between cost and activity

Contribution margin:

become profit after fixed expenses are covered

to calculate the degree of operating leverage, divide ___ ___ by net operating income.

contribution margin

the degree of operating leverage =

contribution margin / net operating income

the calculation of contribution margin (CM) ratio is ___.

contribution margin / sales

Company A produced and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ___.

decrease by $2,000 initial profit was 30,000, if move was made profit would change to 28,000

The measure of how a percentage change in sales affects profits at any given level of sales is the ___.

degree of operating leverage

When constructing a CVP graph, the vertical axis represents:

dollars

estimating the fixed and variable components of a mixed cost using the ___ approach involves a detailed analysis of what cost behavior should be.

engineering

it makes sense to perform a high-low or regression analysis if a scattergraph plot reveals ___ ___ behavior.

linear cost

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

margin of safety

The contribution margin as a percentage of sales is referred to as the contribution margin or CM ___.

ratio

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellie sells 35 elephants this month, ___.

sales = $1,950 variable costs = $350 total costs = $1,050 profits = $875

the term used for the relative proportion in which a company's products are sold is ___.

sales mix