SB 02

unit sales to attain the target profit =

(Target Profit + Fixed Expenses) / Unit CM

Profit =

(sales - variable expenses) - fixed expenses or (P x Q)-(V x Q) - Fixed expenses or Unit CM x Q - Fixed expenses or CM ratio x sales - fixed expenses

dollar sales to attain the target profit =

(target profit + fixed expenses) / CM ratio

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by: Multiple choice question. A. $0.65 B. $0.35

B

Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is: Multiple choice question. A. 20,000 units and $200,000 B. 40,000 units and $400,000 C. 13,333 units and $133,330 D. 50,000 units and $500,000

B

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

B

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales: Multiple select question. A. net operating income will increase by $0.30 B. total contribution margin will increase by $0.70 C. net operating income will increase by $0.70 D. total contribution margin will increase by $0.30

C

Change in contribution margin =

CM ratio x change in sales

change in profit =

CM ratio x change in sales - change in fixed expenses

CM ratio =

CM/Sales

degree of operating leverage =

Contribution Margin / Net Operating Income

dollar sales to break even =

Fixed Expenses / CM Ratio

Sales =

Selling price per unit X Quantity Sold = P x Q or variable expenses per unit X Quantity sold = V x Q

sales mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

Operating Leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales

Contribution Margin Ratio (CM ratio)

a ratio computed by dividing contribution margin by dollar sales

percentage change in net operating income =

degree of operating leverage x percentage change in sales

Margin of Safety

difference between your actual or expected profitability and the break even point

Contribution income statements are made for _________ the company

inside/management

Unit CM =

selling price per unit - variable expenses per unit = P-V

When a company only produces a single product, the total variable cost can be calculated with the equation:

variable cost per unit X quantity of units sold

Variable expense ratio =

variable expenses/sales

the break-even point is the level of sales at which the profit equals...

zero

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: Multiple choice question. A. 8,400 B. 5,787 C. 18,600 D. 5,162

A

cost-volume-profit (CVP) graph

A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.

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.

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is: Multiple choice question. A. 15,200 B. 9,524 C. 40,000 D. 24,762

C

Multiplying unit selling price times the number of units required to break even is one way to calculate: Multiple choice question. A. contribution margin B. operating leverage C. break-even sales dollars D. net operating income

C

unit sales to break even =

Fixed Expenses / Unit CM

Contribution Income Statement Example

Sales -variable expenses =contribution margin -fixed expenses =net operating income

The contribution income statement emphasizes the behavior of _______ and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.

costs

If the contribution margin is not sufficient to cover the fixed expenses, then a ____ occurs for the period.

loss

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

margin of safety

margin of safety percentage =

margin of safety in dollars / total budgeted (or actual) sales in dollars

Contribution margin is the amount remaining from _______ ________ after variable expenses have been deducted. Thus, it is the amount available to cover fixed expenses and then to provide profits for the period. Notice the sequence here—contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits.

sales revenue

break-even point

the point at which the costs of producing a product equal the revenue made from selling the product

margin of safety in dollars =

total budgeted (or actual) sales - break even sales

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

total fixed expenses

The CM ratio shows how the contribution margin will be affected by a change in __ ___. Acoustic Concepts' CM ratio of 40% means that for each dollar increase in sales, the total contribution margin will increase by 40 cents ($1 sales × CM ratio of 40%). Net operating income will also increase by 40 cents, assuming that fixed costs are not affected by the increase in sales.

total sales