Chapter 6 - Cost-Volume-Profit (CVP) Relationship (Part 1)

Which of the following represents the equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales?

Selling price per unit = Variable cost per unit + Desired profit per unit

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:

$130,000 ($25,000 - $15,000) * ($25 - $12) = $130,000

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

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

contribution margin (first and second blanks) sales (third blank)

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

fixed (first blank) profit (second blank)

Total contribution margin equals:

fixed expenses plus net operating income

When preparing a CVP graph, the horizontal axis represents:

sales volume

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit _______ _______.

contribution margin

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

$30

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 30,000 * ($40 - $19) - $250,000 = $380,000

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 ($10 - $8) * 10,000 - $35,000 = $5,000

Spice sells paprika for $9.00 per bottle. Each bottle incurs $2.43 in variable cost. Spice incurs annual fixed costs of $825,000. The variable expense ratio for paprika is:

27% $2.43 / $9 = 27%

Gifts Galore had $189,000 of Sales Revenue from wrapping paper sales last year. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was:

53% $100,170 / $189,000 = 53%

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

False

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 statement is true?

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

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be %70. For each $1 increase in sales: (Select all that apply) a) total contribution margin will increase by $0.70 b) net operating income will increase by $0.70 c) net operating income will increase by $0.30 d) total contribution margin will increase by $0.30

a) total contribution margin will increase by $0.70 b) net operating income will increase by $0.70

The contribution margin income statement allows users to easily judge the impact of a change in _______ on profit. (Select all that apply) a) volume b) cost c) selling price d) organizational structure

a) volume b) cost c) selling price

When making a decision using incremental analysis consider the: (Select all that apply) a) volume that would occur regardless of the decision b) change in sales dollars resulting specifically from the decision c) old income statement in comparison to the new income statement d) change in cost resulting specifically from the decision

b) change in sales dollars resulting specifically from the decision d) change in cost resulting specifically from the decision

At the break-even point: (Select all that apply) a) the company is earning a profit b) net operating income is zero c) total revenue equals total cost d) the company is experiencing a loss

b) net operating income is zero c) total revenue equals total cost

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 currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) _______ of $_______.

decrease (first blank) $3,000 (second blank) [1,500 * ($25-$19)] - [1,200 * ($25-$15)] = $3,000

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decrease in the unit variable cost

If the total contribution margin is less than the total fixed expenses, then a _______ _______ will occur.

net loss

Variable expenses/Sales is the calculation for the _______ _______ ratio.

variable expense

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