Chapter 6: Cost-Volume-Profit Relationships

Which of the following statements is correct?

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

CVP analysis focuses on how profits are affected by ______.

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

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

variable

Variable expenses ÷ Sales is the calculation for the _________ ratio.

variable expenses

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

variable; fixed

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 ______.

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

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

1. Sales 2. Variable expenses 3. Contribution margin 4. Fixed expenses 5. Net operating income

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 Reason: $98,000 ÷ ($50 - $15) = 2,800

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 ______.

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

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 ______.

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

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 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

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

False Reason: 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 Reason: This is the engineering approach.

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

False Reason: Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False Reason: The margin of safety is the excess of the budgeted (or actual) sales dollars over break-even sales dollars.

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 Reason: 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

The contribution margin equals sales minus ______.

all variable costs

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

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

contribution margin

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

contribution margin ÷ sales

Contribution margin ratio is equal to ______ divided by ___.

contribution margin; sales

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

The measure of how a percentage change in sales affects profits at any given level of sales is the ______.

degree of operating leverage

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

engineering

Total contribution margin equals ______.

fixed expenses plus net operating income

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 Reason: Change in net operating income = $70,000 × 30% - $15,000 = $6,000 increase.

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.

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

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

linear cost

The variable expense ratio is the ratio of variable expense to ______.

sales

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

sales mix

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

sales mix

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

sales volume

The break-even point calculation is affected by ______.

selling price per unit costs per unit sales mix

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

the high-low method

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

total expense, and total fixed expense

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 Elle sells 35 elephants this month:

total sales = $1925 total sales = 35 x $55 = $1925 profits = $875 profits = 35 x ($55-$10) - $700 = $875 total variable costs = $350 total variable costs = (35 x $10) = $350