Chapter 5. Cost-Volume-Profit Relationships

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 calculation of contribution margin (CM) ratio is ______.

contribution margin ÷ sales

To calculate the variable cost per unit using the high-low method, the change in is divided by the change in

cost, activity

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

costs volume selling price

If operating leverage is high, a small percentage increase in sales produces a (higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

A company's current sales are $300,000 and fixed expenses total $225,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will ______.

increase by $6,000

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

sales mix

The break-even point calculation is affected by ______.

sales mix costs per unit selling price per unit

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

sales volume

The break-even point is reached when the contribution margin is equal to ______.

total fixed expenses

After reaching the break-even point, a company's net operating income will increase by the per unit for each additional unit sold.

contribution margin

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

contribution margin

Contribution margin ratio is equal to divided by

contribution margin sales

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

false

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

margin of safety

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

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 $

5000

Which of the following statements are true?

Plotting data on a scattergraph is an important diagnostic step. Scattergraphs are a way to diagnose cost behavior.

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

decrease

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

fixed and variable

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

sales mix

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

false

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

zero

Chitter-Chatter sells phones and has set a target profit of $975,000. The contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total ______.

1,800,000

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

0.35

A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and increase the selling price to $45 per unit. If this change is implemented, profits will ______.

Reason: An increase in selling price of $5 will increase the contribution margin $5 (from $27 to $32). The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.

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

Reason: Contribution margin ratio = ($1,452,000 - $958,320) ÷ $1,452,000 = 34%.

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is ______.

Reason: Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans.

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 Ellie sells 35 elephants this month, ______.

total variable costs = $350 total sales = $1,925 profits = $875

The contribution margin equals sales minus ______.

all variable costs

Contribution margin ______.

becomes profit after fixed expenses are covered

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit

The variable cost per unit using the high-low method is calculated as ______.

change in cost ÷ change in units (activity)

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) (increase/decrease) of $

decrease, 3000

Net operating income equals ______.

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

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be ______.

1,520,000

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?

Reason: $98,000 ÷ ($50 - $15) = 2,800

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

false

In a least-squares regression line, the vertical intercept (a) of the line represents the total cost.

fixed

The slope of the regression line represents the ______ cost per unit of activity.

variable

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

variable

When using the high low method, the change in cost divided by the change in units equals ______.

variable cost per unit

Variable expenses ÷ Sales is the calculation for the

variable expense

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is for Adams, Inc. and for Baron, Inc.

3, 2

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

engineering

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

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

sales

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, net operating income will be ______.

Reason: Net income = (25,000 - 15,000) × ($25 - $12) = $130,000.

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

Profit equals ______.

(P × Q) - (V × Q) - fixed expenses

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

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.

total contribution margin will increase by $0.70 net operating income will increase by $0.70

Total contribution margin equals ______.

fixed expenses plus net operating income

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

Cost behavior is considered linear whenever ______.

a straight line approximates the relationship between cost and activity

A company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 per month on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. The company should ______.

accept the idea because profit will increase by $24,000

When making a decision using incremental analysis consider the ______.

change in sales dollars resulting specifically from the decision change in cost resulting specifically from the decision

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

company b

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 ______.

180,000

A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $

2,250

Seth's Speakers had actual sales of $1,630,000 If break-even sales equals $935,000, Seth's margin of safety in dollars is ______.

Reason: $1,630,000 - $935,000 = $695,000

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 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 ______.

Reason: ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800 bottles.

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes the advertising along with the price reduction will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to ______.

Reason: If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes × $6) - (50,000 boxes × $8)). Additional contribution margin of $44,000 - $60,000 in new fixed costs = a net operating income decrease of $16,000.

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 ______.

Reason: Net operating income = $184,000 - $85,000 = $99,000

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 ______.

Reason: Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000

Spice sells paprika for $9.00 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 ______.

Reason: Variable expense ratio = $2.43 ÷ $9.00 or 27%.

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 ______.

Reason: Variable expense ratio = $245,050 ÷ $845,000 or 29%.

Which of the following items are found above the contribution margin on a contribution margin format income statement?

Sales Variable expenses

A company with a high ratio of fixed costs ______.

is more likely to experience greater profits when sales are up than a company with mostly variable costs. is more likely to experience a loss when sales are down than a company with mostly variable costs

CVP analysis focuses on how profits are affected by ______.

mix of products sold unit variable cost selling price sales volume total fixed costs

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

Baron's net income grows twice as fast as its sales. Adams has a higher degree of operating leverage than Baron.

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______.

Reason: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.

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 ______.

Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

In a least-squares regression equation, a represents the and b represents the

intercept, slope

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

Reason: Sales - variable cost = contribution margin so an increase in variable cost per unit decreases contribution margin per unit.

The contribution margin equals sales minus

all variable costs

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

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

total expense, and total fixed expense

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 ______.

Reason: Break-even point = $305,000 ÷ $40 = 7,625

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was ______.

53% Reason: Contribution margin ratio = $100,170 ÷$189,000 = 53%.

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 ______.

Reason: Sales volume = ($520,000 + $320,000) ÷ $21 = 40,000 blankets.

A non-profit organization is trying to determine the fixed and variable costs of providing meals. During the first six months of the year, the following meals were served and the following costs were incurred.

Reason: The high-low method uses the highest and lowest level of activity, not costs. February (1,700 meals and $5,700) and April (1,100 meals and $4,200) are the high and low activity months. y = $1,450 + $2.50x.

The degree of operating leverage = ______.

contribution margin ÷ net operating income