Ch 6 Cost-Volume-Profit Relationships

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

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, what will the net operating income be?

$130,000 profit

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; CM ratio x sales - fixed expenses

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on net income would be a

$450 increase; current CM is $39 per unit (80-41) or $19500 (500 units x $39) total. new CM would be $35 per unit (39-4) or $19,950 (570 units x $35)

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is

$49,800

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is

16%

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

34%; CM/sales

Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. The margin of safety in units is

780

contribution margin ratio

Contribution Margin / Sales

Cost-volume-profit (CVP) analysis

The study of the effects of changes in costs and volume on a company's profits

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

incremental analysis

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

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

Increasing variable costs reduces

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

contribution margin approach

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

When constructing a CVP graph, the vertical axis represents

dollars

target profit analysis

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

Total contribution margin equals

fixed expenses plus net operating income

formula for dollar sales to break even

fixed expenses/ CM ratio

formula for unit sales to break even

fixed expenses/unit CM

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; change in net operating income = ($735,000 -$700,000) x 45% - $8,000

Changing the sales staff's compensation from salaries to commissions would result in

increasing variable expenses per unit, decreasing unit contribution margin, and decreasing fixed expenses

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

incremental analysis

What does CVP analysis help managers do?

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

formula for margin of safety percentage

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

contribution format income statement can be expressed in equation form:

profit = (sales - variable expenses) - fixed expenses

formula for profit using CM ratio

profit = CM ratio x sales - fixed expenses

formula for profit using unit CM

profit = unit CM x Q - fixed expenses

when a company has only a single product, the contribution equation can be further refined as follows:

sales = selling price per unit x quantity sold = P x Q; variable expenses = variable expenses per unit x quantity sold = V x Q

When preparing a CVP graph, the horizontal axis represents

sales volume

To simplify CVP calculations, it is assumed that ______ will remain constant.

selling price

formula for unit CM

selling price per unit - variable expense per unit; P - V

equation for unit contribution margin

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

The equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is

selling price per unit = variable cost per unit + desired profit per unit

formula for unit sales to attain the target profit

target profit + fixed expenses/ unit CM

Once the break-even point has been reached, net operating income will increase by...

the amount of the unit contribution margin for each additional unit sold

contribution margin

the amount remaining from sales revenue after variable expenses have been deducted; amount available to cover fixed expenses and then to provide profits for the period

margin of safety

the excess of budgeted or actual dollar sales over the break-even dollar sales

break-even point

the level of sales at which profit is zero

What is the CVP analysis' primary purpose?

to estimate how profits are affected by selling prices, sales volume, unit variable costs, total fixed costs, and mix of products sold

formula for margin of safety in dollars

total budgeted (or actual) sales - Break-even sales

To prepare a CVP graph, lines must be drawn representing...

total revenue, total expense, and total fixed expense

variable expense ratio

total variable expenses/total sales; variable expense per unit/unit selling price

Decreasing selling price decreases

unit contribution margin