ACCT CH 5

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals

(564,000/0.62) = $909,677

unit sales to attain the target profit

(target profit + fixed expenses)/CM

dollar sales to attain the target profit

(target profit + fixed expenses)/CM ratio

which of the following are assumptions of cost-volume profit analysis?

- In multi product companies, the sales mix is constant - costs are linear and can be accurately divided into variable and fixed elements

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

NI = $184,000-$85,000 = $99,000

Ceramic creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If ceramic creations sells 25,000 pots, net operating income will be:

NI = (25,000-15,000) x ($25-$12) = $130,000

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

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

selling price, volume, costs

margin of safety

the excess of budgeted or actual sales dollars over the break even volume of sales dollars

margin of safety (in dollars)

total budgeted (or actual) sales - break even sales

at the break even point

total revenue equals total cost, net operating income is zero

which of the following is needed to calculate profit?

unit contribution margin, unit sales, and total find costs

variable expenses/sales is the calculation for the ________ _______ ratio

variable expense

the contribution margin is equal to sales minus

variable expenses

variable expense ratio

variable expenses/sales

given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000 contribution margin ratio is

(1,452,000 - $958,320)/1,452,000 = 34%

Water world sells wake boards and water skis and pays sales commissions based on product sales price. The wake boards sell for a higher price than the skis and the skis have a higher contribution margin per unit than the wake boards. Which of the following are true?

- Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them. - the company would rather see more skis sold as it created the higher profit per unit for the company

when making a decision using incremental analysis consider the:

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

the degree of operating leverage

- decrease as sales and profits rise - is not a constant - is greatest at sales levels near the break-even point

a company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the break even point in unit sales?

BE = $305,000/$40 = 7625

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 $200,8000 is

Sales volume = ($320,000+$200,800)/($90-$28) = 8400 units

pretty in pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was:

Total variable cost = 95 x $40 = $3800

contribution margin ratio

contribution margin/sales

cost volume profit 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

operating leverage

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

degree of operating leverage

a measure, at a given level of sales, of how a percentage change in sales will affect profits

incremental analysis

an analytical approach that focuses only on those costs and revenues that changes as a result of a decision

the single point where the total revenues line crosses the total expense line on the CVP graph indicates

break even point, profit equals zero

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

using the contribution margin ratio, the impact on net income for a change in sales dollars is:

change in sales dollars x contribution margin ratio

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

to estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit _____ _____

contribution margin

to solve for net operating income at any sales volume above the break even point requires the knowledge of the

contribution margin per unit, break even unit sales, projected unit sales

contribution margin divided by sales is the formula for

contribution margin ratio

degree of operating leverage

contribution margin/net operating income

percentage change in net operating income

degree of operating leverage x percentage change in sales

a company has reached its break even point when the contribution margin ________ fixed expenses

equals

target profit analysis

estimating what sales volume is needed to achieve a specific target profit

dollar sales to break even

fixed expenses/CM ratio

unit sales to break even

fixed expenses/unit CM

CM is first to cover ________ expenses. Once the break even point has been reached, CM becomes __________ .

fixed, profit

cost volume profit analysis

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain

bluin corporation pays its salesperson a flat salary of $5750 per month and is considering paying her $30 per unit instead. Current unit sales are 250 per month, but bluin believes the compensation change will increase unit sales by 50% .Bluin's cM is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will:

increase by $7000 per month

when the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using __________ analysis

incremental

break even point

level of sales at which profit is zero

margin of safety percentage

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

the amount by which sales can drop before losses are incurred is the ______ of ________

margin, safety

CVP analysis focuses on how profits are affected by

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

sales mix

refers to the relative proportions in which a company's products are sold

the variable expense ratio is the ratio of variable expense to:

sales

when preparing a CVP graph, the horizontal axis represents

sales volume