Chapter 6 Cost-Volume Profits

At the break-even point:

Total revenue equals total cost net operating income is zero

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

fixed expenses, profit

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

$100,170 / $189,000 = 53%

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is...

$380,000[net operating income= 30,000 x (40-19) - 25,000]

net operating income equals

(Unit sales - unit sales to break even) x unit contribution margin

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

0.35

Spice sells paprika for $9.00 per bottle. Each bottle incurs $2.43 in variable cost. Spice incurs annual fixed costs of $825,000. The variable expense ratio for paprika is:

VER= 2.43/9=27%

Y= a + bX

b= slope of the line, variable cost per unit of activity

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:

change in net operating income = 70,000 x 30% - 15,000= 6,000 increase

To calculate the degree of operating leverage, divide _______ _________ by NOI.

contribution margin

after reaching the break even point, a company's net operating income will increase by the ______ per unit for each additional unit sold

contribution margin

Contribution margin ratio is equal to ______ ______ divided by ______.

contribution margin by sales

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total

sales

high-low or least squares regression analysis should only be done if a ___ depicts linear cost behavior

scattergraph

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

selling price

The contribution margin is equal to sales minus

variable expenses

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to increase advertising and reduce the selling price. The advertising would increase fixed costs by $60,000. Management believes the advertising along with a $2 reduction in the selling price per box will increase sales volume by 24,000 boxes. If managements predictions are correct, making these changes will cause net income for the year to

decrease by $16,000 -If the changes implemented, total contribution margin would increase by $44,000 -50,000 + 24,000=74,000 boxes -25-17=8-2=6 -(74,000 boxes x $6) - (50,000 boxes X $8) = $44,000 -Additional contribution margin of $44,000 - $60,000 in new fixed cost = a net operating decrease of $16,000

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. What is the company's profit?

$301,100 Profit = CM ratio X Sales - Fixed Expenses = 67% X $1,430,000 - $657,000 = $301,100

Place the following items in the correct order in which they appear on the contribution margin format income statement

1.Sales 2.Variable Expenses 3.Contribution margin 4.Fixed Expenses 5.Net Operating Income

given a sales price of $100, variable costs of $70, and a break even point of 500 units, net operating profit for a sale of 501 units will be $

100-70=30

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

9000 x 32 - 120,000 = 168,000

When a company produces and sells multiple products:

A change in the sales mis will most likely change the break-even pint Each product cost likely creates a unique total of fixed costs. Each product most likely has a unique CM.

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on net income would be a

The current contribution margin is $39 per unit (80-41) or 19,500 (500 units x 39) total. The new contribution margin would be $35 per unit (39 - 4 new cost) or $19,950 (570 units x $35), an increase of $450

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:

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

which of the following represents the equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales?

selling price per unit= variable cost per unit+ desired profit per unit

CVP analysis focuses on how profits are affected by which 5 factors?

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