Chapter 5 Quiz

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

($1,452,000-958,320)/1,452,000 = 34%

company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If Company A has a contribution margin ratio of 62% sales, sales dollars needed to reach the target profit equals:

2,200,000= (564000+80000)/.62

a company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the BREAK-EVEN point in unit sales?

=30500/40 = 7625 units

alternate equation for contribution margin ratio

CM ratio = 1 - variable expense ratio

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the NOI or (loss) is:

NOI = (750-450) * $120 = $36,000

What is the primary purpose of cost-volume-process analysis?

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

contribution margin

amount remains from sales revenue after variable expenses have been deducted amount available to cover expenses and provide profits for the period

a company has reached its break-even point when the contribution margin __ fixed expenses.

equals

the contribution margin becomes what after fixed expenses are covered?

profit

the degree of operating income is not constant; it is greatest at

sales levels near the break-even point and decreases as sales and profits rise

to estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the

unit contribution margin

The formula for computing the unit sales to break even is

unit sales to break even = fixed expenses/unit CM

A company has contribution margin ratio of 35% for each dollar in sales, contribution margin will increase by:

$0.35

the contribution margin is primarily used for

internal decision making

operating leverage

is a measure of how sensitive NOI is to a given percentage change in dollar sales

A company with a high ratio fixed:

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

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. Which of the following statements is true?

the company should accept the idea because profit will increase by $24,000 increase in the selling price of $5 will increase the contribution margin from $27 to $32 (10,750*32)-(10,000 * 27,000) = 74,000 74,000-50,000= 24,000

Break-even point

the level of sales at which profit is zero *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 total revenue = total cost

variable expense ratio

variable expenses/sales

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

$380,000

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to break-even rounded to the nearest dollar equals:

$244,068 = 144,000/0.59

unit sales to attain the target profit

(Target Profit + Fixed Expenses) / Unit CM

to simplify CVP calculations, managers make what assumptions?

1. constant selling price. The price of a product or service will not change as volume changes 2. costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and fixed costs are constant in total over the entire relevant range 3. in multiproduct companies, the mix of products sold remains constant

MJ's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. MJ's Mugs' profit was:

300 * ($20 - $7) - $ 1,700 = $2,200

a company needs to sell 90,000 units to reach the target profit of $180,000. If each unit sells for $7.50, the total sales dollars needs to reach the target profit is $:

90,000 * 7.50= 675,000

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. what is the CM per putter and the NOI if 12,000 units are sold?

CM = $125- $60 (12,000 * $65)-400,000 = 380,000

given a sales price of $100, variable cost of $70, and a break-even point of 500 units, net operating profit for sale of 501 units will be $

CM = sales - variable expenses 100-70 = 30

solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to:

break-even

contribution margin ratio

contribution margin/sales

assuming sales price remains constant, an increase in the variable cost per unit will ___ the contribution margin per unit

decrease

Profit Equation in terms of contribution margin

profit = unit CM - fixed expenses

if sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by:

20% = 5%*4

spice sells paprika for $9 per bottle. Each bottle incurs $2.43 in variable cost. Spice incurs annual fixed costs of $852,000. The variable expense ratio for paprika is

27%= (2.43/9)*100

A company reports the following for a sales volume of 200 units: $100,000 in sales and $80,000 in variable costs. If the break-even point is 200 units and the company sells 201 units the net profit will be:

$100

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:

(4000+3200)/(15-13.5) = 4,800 bottles

to convert the margin of safety in dollars to the margin of safety in terms of the umber of units sold, divide the margin of safety in dollars by:

sales price per unit

assumption of CVP analysis: fixed costs in total

stay the same within the relevant range

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:

$5,000

company A sells its product for 10 per unit. If company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in unit and dollars

(10-5)X= 200,000 x= 40,000 units break even point in dollars = 40,000*10

A company's selling price is $90 per unit; its variable cost per unit is $28; and its total fixed expenses are $320,000. What sales volume is needed to achieve the target profit of $200,800

(320000+200800)/(90-28)= 8,400

order of items in the contribution margin format income statement

1. sales 2. variable expenses 3. contribution margin 4. fixed expenses 5. net operating income

a company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit should be $

11 + 4500/500 = 20

degree of operating leverage=

Contribution Margin / Net Operating Income is a measure, at a given level of sales, of how percentage change in sales volume will affect profits

Chrissy's cupcakes has 832,000 in sales sand 265,000 in fixed expenses. Given a contribution margin ratio of 72%, chrissy's profit loss is:

profit = CM ratio * sales - fixed expenses 72% * 832000 -265000= 334,040

cost structure refers to the relative

proportion of fixed an variable costs in an organization

A company currently has sales $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 sales to $735,000. If this is done and these results occur, net operating income will:

change in NOI = (735,000-700,000) *.45 - 8000 = $ 7,750

using the contribution margin ratio, the impact on net income for a change in sales dollars is:

change in sales dollars * contribution margin ratio

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 has the greater operating leverage?

company B

to calculate profit, multiply the BLANK by sales volume and subtract total fixed cost

contribution margin

the contribution margin as a percentage of sales is referred to as the

contribution margin ratio

if a company has a sales of $100k a contribution margin of $40,00, and fixed expenses of $50,000 the company has a:

contribution margin- fixed expenses = =40,000-50,000= (10,000)

the contribution margin income statement allows users to easily judge the impact of a change in _____ on profit

cost, volume and selling price

Golden Corporation pays its salesperson a flat salary of $5000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 50%. the current contribution margin is $80. If the change is implemented, net operating income will:

current income: ($80*200)-$5000 = $11,000 with the change salary becomes a variable cost: ($80-$20)*200*150% = 18,000

the degree of operating leverage

decreases as sales and profits rise, is greatest at sales levels near the break-even point, is not a constant

percentage change in net operating income =

degree of operating leverage * percentage change in sales

True or False: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company

false

True or false: simple CVP analysis can be relied on for changes in volume outside the relevant range

false

cost structure refers to the relative portion of product and period costs in an organization.

false

dollar sales to break even =

fixed expenses/CM ratio

the margin of safety

is the excess of budgeted or actual sales dollars over the break even volume of sales dollars. It is the amount by which sales can drop before losses are incurred. The higher the margin of safety, the lower the risk of not breaking even and incurring a loss margin of safety in dollars = total budgeted (or actual) sales - break even sales

Margin of Safety Percentage

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

incremental analysis

only requires information about the change in sales, not the previous ones

when a company only has a single product what equation should be used to determine profit?

profit = (P*Q-V*Q)-Fixed Expenses where: P*Q = selling price per unit * quantity sold V*Q = variable expenses per unit * quantity

The CM ratio shows how the contribution margin will be affected by a change in

total sales ex. 40% CM ratio means that for each dollar increase in sales, total contribution margin will increase by 40 cents. NOI will also increase by 40 cents, assuming that fixed costs are not affected by the increase in sales