Chapter 5

The calculation of contribution margin (CM) ratio is ______.

contribution margin ÷ sales

The degree of operating leverage = ______.

contribution margin ÷ net operating income

At the break-even point _________.

total revenue equals total cost net operating income is zero

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

selling price costs volume

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease

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

A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is _________.

20000*(20-11) = $180,000

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

The contribution margin equals sales minus ______.

All variable costs

Contribution margin ___________.

Becomes profit after fixed expenses are covered

Total contribution margin equals ________.

Fixed expenses plus net operating income

Contribution margin ______.

becomes profit after fixed expenses are covered

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

The term "cost structure" refers to the relative proportion of ________________ and ____________ costs in an organization

fixed, variable

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating __________.

leverage

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals ___________ __________ behavior.

linear cost

The break-even point is the level of sales at which the profit equals ________.

zero, 0

CVP analysis focuses on how profits are affected by _________.

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

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 ___________

Sales = 10,000*10= $100,000 Variable Expenses = 10,000*6= $60,000 Sales - Variable Expenses = Contribution margin =$100,000 - $60,000 =$40,000 Contribution margin - fixed expenses = net operating income $40,000 - $35,000 = $5,000 Net operating income = $5,000

Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is _____.

Sales = 30000*40 =1,200,000 Variable cost = 30000*19 =570,000 Contribution Margin = 1,200,000 - 570,000 =630,000 Fixed Expenses = 250,000 Net Operating Income = 630,000 - 250,000 =$380,000

True or false: The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

True Because selling prices, costs, and contribution margins of the products differ, the sales mix is assumed to be constant when doing break-even calculations.

Cost behavior is considered linear whenever ______.

a straight line approximates the relationship between cost and activity

Spice sells paprika for $9 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is ____________.

variable expense ratio = variable expenses / sales =2.43/9 =.27 or 27%

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

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 __________.

(300*20) - (300*7) - 1700 =$2,200

When a company produces and sells multiple products ______.

each product most likely has a unique contribution margin a change in the sales mix will most likely change the break-even point each product most likely has different costs

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.

When using the high-low method, the slope of the line equals the __________________ cost per unit of activity.

variable

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is ______.

variable expense ratio = variable expenses / sales 245050/845000=.29

The break-even point calculation is affected by ______.

selling price per unit sales mix costs per unit

The equation used to calculate the variable expense ratio using total values is total variable expenses divided by total ______.

sales

The variable expense ratio is the ratio of variable expense to

sales

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Each elephant has variable costs of $10 and total fixed costs are $700. If Ellies sells 35 elephants this month, ___________.

sales = 55*35 = $1925 variable costs = 10*35 = $350 Contribution margin = 1925-350 = $1575 Net operating income = 1575-700 = $875 profits = $875 total sales = $1925 total variable costs = $350

The relative proportions in which a company's products are sold is referred to as _______________ _______________.

sales mix

When preparing a CVP graph, the horizontal axis represents ______.

sales volume

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

The rise-over-run formula for the slope of a straight line is the basis of ______.

the high-low method

Contribution margin ratio is equal to _______ ________ divided by _________.

Contribution margin / sales

The term used for the relative proportion in which a company's products are sold is ______.

sales mix

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 ______.

305000/40 =7625

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 _________.

Contribution margin - fixed costs $99,000

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False

True or false: Cost structure refers to the relative portion of product and period costs in an organization.

False Cost structure refers to the relative portion of fixed and variable costs in an organization.

True or false: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False This is the engineering approach

The amount by which sales can drop before losses are incurred is the __________________.

Margin of safety

Blissful Blankets' target profit is $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 ______.

Profit = Unit CM * Q - Fixed expense 520000 = 21*Q - 320000 =840000=21Q =40000

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

Sales -Variable Expenses =Contribution Margin -Fixed expenses =Net operating income

When constructing a CVP graph, the vertical axis represents _________.

dollars

Estimating the fixed and variable components of a mixed cost using the ___________________ approach involves a detailed analysis of what cost behavior should be.

engineering

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

fixed, profit/income

Which of the following statements is correct?

The higher the margin of safety, the lower the risk of incurring a loss.