ACCT 2101 Chapter 6

The formula for target sales is:

(Total fixed costs + Target profit)/ contribution margin ratio

The formula for target units is:

(Total fixed costs + Target profit)/ unit contribution margin

The profit equation is:

(Unit Price x Q)-(Unit Variable Costs x Q)- Total Fixed costs= Profit

The formula for break-even point in terms of units is:

Total fixed costs/ Unit contribution margin

The margin of safety is the difference between:

actual sales and break even sales

Degree of operating leverage is used to:

calculate profit change given sales change

Degree of operating leverage is calculated as:

contribution margin divided by profit

Which of the following is not a key assumption of cost volume profit? - costs may be fixed, variable, mixed or step - production and sales are equal - changes in total cost are strictly due to changes in activity - total costs and revenues can be depicted with a straight line

costs may be fixed, variable, mixed or step

A firm with a higher degree of operating leverage would be considered less risky than a comparable firm with a lower degree of operating leverage.

false

Cost volume profit analysis can only be performed for companies that sell only one product.

false

Cost-volume-profit analysis assumes that total costs behave in a curvilinear fashion

false

Degree of operating leverage is calculated by dividing sales by profit.

false

In multiproduct cost volume profit analysis, a break even point must be calculated separately for each product.

false

On a CVP graph, the break even point is the point at which the contribution margin line crosses the total cost line.

false

The margin of safety is a positive number at the break even point.

false

The margin of safety is the difference between actual sales and budgeted sales.

false

The margin of safety is the point where zero profit is earned.

false

The target sales level equals fixed costs plus variable costs divided by the contribution margin ration.

false

To determine the number of units needed to earn a target profit, divide the target contribution margin by the contribution margin per unit.

false

Cost structure refers to:

how a company uses variable versus fixed costs

The margin of safety tells managers:

how much sales could drop before the firm no longer earns profits

What component of the profit equation should be set equal to zero to find the breakeven point?

profit

If production does not equal sales..

the conclusions it draws from a CVP analysis will not be as sound as they would be if production equaled sales

The break-even point is:

the point where zero profit is earned

In multiproduct cost volume profit analysis, an assumption made in addition to those used in single product CVP analysis is that:

the sales mix remains constant

If a firm sells more than one product, the breakeven point in units represents:

the sum of the units of all products required to break even

Profit is indicated on a cost volume profit graph by:

the vertical difference between the revenue line and the cost line

The formula for break even point in terms of revenue is:

total fixed costs/contribution margin ratio

An important assumption in multiproduct cost volume profit analysis is the sales mix remains constant.

true

Break even units can be found by dividing fixed costs by unit contribution margin.

true

Contribution margin is equal to fixed costs at the break even point.

true

Cost-volume-profit analysis assumes that all costs can be accurately described as either fixed or variable.

true

Managers can use cost volume profit analysis to evaluate changes in cost structure.

true

Managers can use cost volume profit analysis to evaluate changes in price.

true

Target units equals fixed costs plus target profit divided by the unit contribution margin.

true

The break even point is the point at which profit equals zero.

true

The degree of operating leverage can be multiplied by a change in sales to determine change in profit.

true