Chapter 2. Cost-Volume-Profit Relationships
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 Reason: Break-even point = $305,000 ÷ $40 = 7,625.
The break-even point calculation is affected by
-selling price per unit -sales mix -costs per unit
Contribution margin:
becomes profit after fixed expenses are covered. Reason: Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses.
The degree of operating leverage =
contribution margin ÷ net operating income
The calculation of contribution margin (CM) ratio is
contribution margin ÷ sales
An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the
degree of operating leverage
When constructing a CVP graph, the vertical axis represents:
dollars.
Estimating the fixed and variable components of a mixed cost using the ________ involves a detailed analysis of what cost behavior should be
engineering approach
The best fitting line minimizes the sum of the squared errors when using
least-square regression
A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called
least-squares regression
The amount by which sales can drop before losses are incurred is the
margin of safety
The contribution margin as a percentage of sales is referred to as the contribution margin or CM
ratio
The relative proportions in which a company's products are sold is referred to as
sales mix
The term used for the relative proportion in which a company's products are sold is
sales mix
Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was
$2,200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.
CVP analysis focuses on how profits are affected by
-selling price -mix of products sold -unit variable cost -total fixed costs -sales volume
Profit equals:
(P × Q - V × Q) - fixed expenses.
Which of the following statements are true?
-Scattergraphs are a way to diagnose cost behavior. -Plotting data on a scattergraph is an important diagnostic step
When a company produces and sells multiple products
-each product most likely has different costs -each product most likely has a unique contribution margin -a change in the sales mix will most likely change the break-even point
CVP analysis allows companies to easily identify the change in profit due to changes in
-product mix -selling price -volume
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 Reason: $98,000 ÷ ($50 - $15) = 2,800 to break-even. 6,400 units is needed to earn the target profit.
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 Reason: ($520,000 + $320,000) ÷ $21 = 40,000
Cost structure refers to the relative portion of product and period costs in an organization.
False Reason: Cost structure refers to the relative portion of FIXED and VARIABLE costs in an organization.
Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.
False Reason: This is the engineering approach.
The term "cost structure" refers to the relative proportion of _______ and _______costs in an organization.
Fixed; Variable
Which of the following statements is correct?
The higher the margin of safety, the lower the risk of incurring a loss.
The contribution margin equals sales minus all
Variable Expenses
Cost behavior is considered linear whenever
a straight line approximates the relationship between cost and activity
The rise-over-run formula for the slope of a straight line is the basis of
the high-low method
To prepare a CVP graph, lines must be drawn representing total revenue,
total expense, and total fixed expense
When using the high-low method, the slope of the line equals the _________ cost per unit of activity
variable
When compared to a company with higher fixed costs and lower variable costs, a company with lower fixed costs and higher variable costs, has
-greater profit stability -better protection from loss in bad years -lower net income in good years
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.
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
8,400 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.