CH. 5 Cost-Volume-Profit Relationships

Profit = (selling price per unit * quantity sold) - (_________ expense per unit * quantity sold) - _______ expenses

variable; fixed

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?

7,625; Break-even point = $305,000/$40 = 7,625

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

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

When preparing a CVP graph, the horizontal axis represents:

sales volume

Company A has a contribution margin ratio of 35%. For each $ in sales, contribution margin will increase by:

$0.35

A company reports the following for a sales volume of 200 units: $100,000 is sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units, net profit will be

$100; for each unit sold above break-even, profit increases by the contribution margin per unit which is ($100,000-$80,000/200 = $100)

A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be:

$198,000; Net operating income = (26,000 - 17,000) * $22 = $198,000

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be $________.

$5,000; Net operating income = 10,000 * ($10 - $6) - $35,000 = $5,000

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is:

$55; unit contribution margin = $90 - $35 = $55

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

Net operating income can be calculated as:

(unit sales - unit sales to break-even) * contribution margin

Company A has sales of $500,000, variable costs of $350,000 and fixed costs of $150,000. Company A has:

1. A contribution margin = to fixed costs 2. Reached the break-even point

When a company produces and sells multiple products:

1. Each product most likely has a unique contribution margin 2. A change in the sales mix will most likely change the break-even point 3. Each product most likely creates a unique total of fixed costs

Place the following items in the correct order in which they appear on the contribution margin format income statement.

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

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

1. Selling price 2. Cost 3. Volume

At the break-even point:

1. Total revenue = Total cost 2. Net operating income = 0

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

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

Plush & Cushy sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Plush & Cushy's chairs is:

45%; Variable expense ratio = $85.05/$189 = 0.45 or 45%

CVP is the acronym for _________-_________-_________.

Cost-Volume-Profit

The contribution margin = sales minus:

all variable costs

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

contribution margin

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

contribution margin

To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the:

contribution margin per unit

Contribution margin ratio is equal to ______ ______ divided by ________.

contribution margin; sales

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

fixed; profit

The contribution margin statement is primarily used for:

internal decision making

Variable expenses/sales is the calculation for the ______ ______ ratio.

variable expense

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals:

$2,200,000; Sales = ($800,000 + $564,000)/0.62 = $2,200,000

The single point where the total revenue line crosses the total expense line on the CVP graph indicates:

1. The break-even point 2. Profit equals 0

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is:

4,800; Sales volume = ($4,000 + $3,200)/($15.00 - $13.50) = 4,800 bottles

Blissful Blankets' target profit os $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:

40,000; Sales volume = ($520,000 + $320,000)/$21 = 40,000 blankets

Contribution Margin:

Becomes profit after fixed expenses are covered.

True of False: Simple CVP analysis can be relied on for changes in volume outside the relevant range.

False

To simplify CVP calculations, which of the following is assumed to remain constant?

Selling price

Which of the following represents the equation that should be used in setting a target selling price for a special order bulk sale that does affect a company's normal sales?

Selling price per unit = Variable cost per unit + Desired profit per unit A special order bulk sale will not increase fixed costs and therefore they should not be considered in setting a price. Variable costs are what will be incurred to complete the order.

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

$30; ($100 - $70 = $30) For every unit above break-even, profit increases by the contribution margin per unit.

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; Profit = CM ration * Sales - Fixed Expense = 72% * $832,000 - $265,000 = $334,040

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is:

$36,000; Net operating income = (750 - 450) x $120 = $36,000

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

1. Selling prices 2. Sales volume 3. Unit variable costs 4.Total fixed costs 5. Mix of products sold

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, then a _______ will occur.

net loss

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

sales

Bluin Corp. pays its salesperson a flat salary of $5,750 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 current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will:

increase by $7,000 per month Current net operating income = (100 * 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) * 250 * 150% = $26,250, an increase of $7,000 per month.

the profit graph allows users to easily identify:

1. The sales volume required to reach the break-even point 2. The profit at any given sales volume