A306 Smart Book Ch 2

If a company has a variable expense ratio of 35%, its CM ratio must be

65%

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

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 ____.

8,4000

The calculation of contribution margin (CM) ratio is _____.

contribution margin ÷ sales

The contribution margin income statement allows users to easily judge the impact of a change in _____ on profit.

cost volume selling price

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

false

Degree of operating leverage

A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income. (p. 82)

Contribution margin ratio (CM ratio)

A ratio computed by dividing contribution margin by sales. (p. 70)

To calculate profit, multiply the ____ per unit by sales volume and subtract total fixed cost.

contribution margin

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the ____ approach.

contribution margin

Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a ____.

$10,000 net operating loss

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 ____.

$100

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

ratio

The variable expense ratio equals variable expenses divided by ____.

sales

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

sales

Adam's Sports Store has a contribution margin ratio of 55% and has already passed the break-even point for the year. If Adam's generates additional sales of $250,000 by year-end, net operating income will increase by ____.

$137,500

Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is ____.

$168,000

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 ____.

$174,000

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is ____.

$301,100

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 ____.

$334,040

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 (Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000)

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 (Net operating income = $184,000 - $85,000 = $99,000)

Operating leverage

A measure of how sensitive net operating income is to a given percentage change in unit sales. (p. 82)

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

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

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

30

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If the current net loss is $3,000, selling one additional unit will decrease the loss by $

4

Blissful Blankets' 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

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. (p. 67)

Incremental analysis

An analytical approach that focuses only on those costs and revenues that change as a result of a decision. (p. 73)

Contribution income statement

Emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price, cost or volume.

Target profit analysis

Estimating the level of sales needed to achieve a desired target profit. (p. 77)

If a company with $40,000 of fixed expenses is operating at a loss, each additional unit sold will decrease that loss by the selling price per unit.

False

Contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted. (p.

Margin of safety

The excess of budgeted or actual dollar sales over the break-even dollar sales. (p. 79)

Which of the following statements is correct?

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

Break-even point

The level of sales at which profit is zero. (p. 65)

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. (p. 84)

Contribution margin:

becomes profit after fixed expenses are covered.

When compared to a company with higher fixed costs and lower variable costs, a company with lower fixed costs and higher variable costs, has ____.

better protection from loss in bad years greater profit stability lower net income in good years

Using the contribution margin ratio, the impact on net income for a change in sales dollars is ____.

change in sales dollars × contribution margin ratio

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.

A company's current sales are $300,000 and fixed expenses total $85,000. 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 ____.

increase by $6,000

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

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.

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

margin, safety

If the total contribution margin is less than the total fixed expenses, a ____ occurs.

net loss

At the break-even point _____.

net operating income is zero total revenue equals total cost

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

sales mix

CVP analysis focuses on how profits are affected by ____.

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

Cost structure

the relative proportion of fixed, variable, and mixed costs in an organization

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

total fixed expenses.

The contribution margin equals sales minus all ____ expenses.

variable

CM ratio is equal to 1 - ___ ___ ratio

variable expense

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

volume. selling price. costs.