Chapter 5

with an operating leverage of 5, if RBC co. increases its sales by 10%, net operating income would increase by __%

50

when a company sells more than one product, break-even analysis becomes more __

complex

profit = (sales - variable expenses) - fixed expenses this equation expresses the __ format income statement

contribution

this refers to the relative proportion of fixed and variable costs in an organization. managers often have some latitude in determining this for their organization.

cost structure

the purpose of this is to determine how many units and/or what total sales dollars needs to be to earn a desired profit

cost-benefit-profit analysis

__ __ operating leverage = (contribution margin)/(net operating income)

degree of

different products have __ selling prices, cost structures, and contribution margins

different

a disadvantage of high __ __ structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs

fixed cost

an advantage of a high __ __ structure is that income will be higher in good years compared to companies with lower proportion of fixed costs

fixed cost

companies with low __ __ structures enjoy greater stability in income across good and bad years

fixed cost

contribution margin is first used to cover __ expenses, and any remaining contribution margin contributes to __ __ income

fixed, net operating

margin of safety percentage = (total sales - break-even sales)/(sales) the numerator is also called the

margin of safety in dollars

this is a measure of how sensitive net operating income is to percentage changes in sales. it is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits

operating leverage

the variable expense ratio is the ratio of variable expenses to __

sales

this is the relative proportion in which a company's products are sold

sales mix

the excess of budgeted (or actual) sales over the break-even volume of sales

the margin of safety in dollars

sales, variable expenses, and contribution margin can also be expressed on a per __ basis.

unit

steps to completing a __ __ problem: 1. make sure the problem is set up properly. contribution margin income statement for each product AND a total column for all products combined. 2. calculate the Weighted Average Contribution Margin Ratio. Use information from the Company Total Column 3. use the total company Fixed Costs and the Desired Profit and the weighted averaged contribution margin ratio to determine what total Sales needs to be to earn the desired profit 4. Allocate sales dollars to each product based on relative sales dollars (assumes that sales mix remains constant)

sales mix

margin of safety in dollars = total __ - break-even __

sales, sales

if you want to determine the appropriate __ __ or costing structure, you should use the equation method

selling price

we can copute the number of units that must be sold to attain a __ profit using either equation method or formula method

target

3 methods of cost-volume-profit analysis (CVP): 1. equation method (algebraic method): most flexible method. allows for __ analysis. 2. contribution margin per unit approach (formula approach) - best for figuring __ sales needed to achieve desired profit. 3. contribution margin ratio approach (formula approach) - best for figuring __ __ needed to achieve desired profit.

target, unit, sales dollars

when solving for the break-even point, the profit =

0

4 key assumptions of CVP analysis: 1. selling price is __ 2. costs are __ and can be accurately divided into variable (constant per unit) and fixed (constant in total) elements 3. in multiproduct companies, the sales mix is __ 4. in __ companies, inventories do not change (units produced = units sold)

constant, linear, constant, manufacturing

__ __ is the amount remaining from sales revenue after variable expenses have been deducted

contribution margin

the contribution margin ratio is calculated by dividing the total __ __ by total __. (each dollar increase in sales results in a total contribution margin __ of whatever the CM ratio (the percentage) was)

contribution margin, sales

the CM ratio can also be calculated by dividing the __ __ per unit by the __ __ per unit

contribution margin, selling price

the contribution of income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. the emphasis is on __ __

cost behavior