Managerial Test 2 Ch 5

profit

(P × Q - V × Q) - fixed expenses.

When making a decision using incremental analysis consider the Blank______.

-change in sales dollars resulting specifically from the decision -change in cost resulting specifically from the decision

When a company produces and sells multiple products ______.

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

A company with a high ratio of fixed costs:

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

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

Company B

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

Contribution margin

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

False

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

False

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False

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

False, Sales Mix

The amount by which sales can drop before losses are incurred is the __________ of ______-

Margin of safety

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

Sales Mix

The break-even point is reached when the contribution margin is equal to:

Total sales

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

When preparing a CVP graph, the horizontal axis represents:

Unit volume

The contribution margin equals sales minus all Blank______ expenses.

Variable

Contribution Margin

becomes profit after fixed expenses are covered

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

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 profit

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

To calculate the degree of operating leverage, divide _________ _________ by net operating income

contribution margin

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decrease in the unit variable cost.

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the Blank______.

degree of operating leverage

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

degree of operating leverage

When constructing a CVP graph, the vertical axis represents

dollars

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

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

fixed, profit

At the break-even point ______.

net operating income is zero total revenue equals total cost

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

ratio

The variable expense ratio is the ratio of variable expense to ______.

sales

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

selling price product mix volume

The break-even point calculation is affected by ______.

selling price per unit costs per unit sales mix

To prepare a CVP graph, lines must be drawn representing total revenue, Blank______.

total expense, and total fixed expense

CVP analysis focuses on how profits are affected by ______.

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

Variable expenses ÷ Sales is the calculation for the _________ ratio

variable, expense

Profit = (selling price per unit × quantity sold) - ___________ expense per unit × quantity sold) - ___________ expenses.

variable, fixed

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

variable, fixed