Chapter 7

Dairy Days Ice Cream sells ice cream cones for $ 5.00 per customer. Variable costs are $ 3.00 per cone. Fixed costs are $ 2,400 per month. What is Dairy​ Days' contribution margin per ice cream​ cone?

$5.00 - $3.00 = $2.00 Sales - Variable expenses = CM

Fave Motion Pictures sells movie tickets for $ 12 per movie patron. Variable costs are $ 8.50 per movie patron and fixed costs are $ 44,000 per month. The​ company's relevant range extends to 30 ,000 movie patrons per month. What is Fave Motion​ Pictures' projected operating income if 27,000 movie patrons see movies during a​ month?

$50,500 $12- $8.50 = $3.50 (CM) ($3.50 x 30,000) - $40,000(Fixed Expenses) = $50,500 (Projected Operating Income)

Dairy Days Ice Cream sells ice cream cones for $ 6.00 per customer. Variable costs are $ 5.00 per cone. Fixed costs are $ 3,000 per month. What is Dairy​ Days' contribution margin​ ratio?

$6.00 - $5.00 = $1.00 (Contribution Margin) $1.00 / $6.00 = 17% sales - variable expense = contribution margin contribution margin / sales = CMR

Operational Income Equation

(CM x # of units) - Fixed Expenses

Sweet Treats sells ice cream cones for $ 5.50 per customer. Variable costs are $ 1.75 per cone. Fixed costs are $ 2,900per month. What is the​ company's contribution margin​ ratio?

68.18% sales - variable expense = contribution margin contribution margin / sales = CMR

​________ should be subtracted from the sales price per unit to compute the unit contribution margin.

All variable costs

Contribution Margin Ratio

CM/Sales

The area to the right of the breakeven point and between the total revenue line and the total expense line represents

Expected Profits

CVP analysis assumes that the only factor that affects costs is a change in sale price.

False

CVP assumes that inventory levels will not change.

False

Gross margin is another term for net income.

False

The contribution margin derived from different products is not used to motivate the sales force to increase sales of the most profitable products.

False

The contribution margin per unit is how much profit each unit contributes after fixed costs are considered.

False

When using the contribution margin​ ratio, managers project operating income based upon sales units.

False

The breakeven point is the sales level where operating income is positive.

False : Breakeven point , sales lvl = 0

The breakeven point may be defined as the number of units a company must sell to do which of the​ following?

Generate a zero profit

CVP analysis assumes all of the following except

Inventory Sales will increase

To the left of the breakeven point on a CVP​ graph, the area between the total expense line and the sales revenue line represents which of the​ following?

Operating Loss

Sales above the breakeven point indicate a​ ________, whereas sales below the breakeven point indicate a​ ________.

Profit, Loss

Contribution Margin

Sales - Variable Expenses = CM

What is contribution margin equal to on a contribution margin income​ statement?

Sales revenues minus variable expenses

The horizontal line intersecting the vertical y-axis at the level of total cost on a CVP graph represents

Total Fixed Costs

Operating Income

Total contribution margin - total fixed expenses

The line that begins at the origin on a CVP graph represents

Total sales revenues.

A company that sells one product would be more likely to calculate breakeven in terms of sales​ units, rather than sales revenue.

True

A​ product's contribution margin per unit is the excess of the selling price per unit over the variable cost of obtaining and selling each unit.

True

If a unit sells for​ $12.50 and has a variable cost of​ $3.25, its contribution margin per unit is​ $9.25.

True

The breakeven point can either be calculated in terms of number of units or in terms of sales revenue.

True

If total fixed expenses are​ $65,000, the target operating income is​ $15,000 and the contribution margin is​ $25 per​ unit, the sales needed to achieve the target operating income will be​ 3,200 units.

True: $65,000 + $15,000 / $25 = 3,200 units

Which of the following represents the excess of the selling price per unit of a product over the variable cost of obtaining and selling each​ unit?

Unit Contribution Margin

Which of the following is an underlying assumption of the cost-volume-profit graph?

Volume is the only cost driver.

The contribution margin ratio explains the percentage of each sales dollar that

contributes towards fixed costs and generating a profit.

Contribution margin ratio is computed by

contribution margin/sales revenue.

To find the number of units that need to be sold to​ breakeven, the formula used could be

fixed expenses​ / contribution margin per unit.

To find the sales revenue needed to​ breakeven, the formula used could be

fixed expenses​ / contribution margin ratio.

By multiplying​ ________ and then subtracting fixed​ costs, managers can quickly forecast the operating income.

projected sales revenue by the contribution margin ratio

Managers can quickly forecast the total contribution margin by multiplying the

projected sales revenue by the contribution margin ratio.

When using the income statement approach to finding​ breakeven, which of the following is​ true?

sales revenue - variable expenses - fixed expenses​ = operating income

The unit contribution margin is computed by

subtracting the variable cost per unit from the sales price per unit.

To find the number of units that need to be sold in order to breakeven or generate a target​ profit, the formula used is

​(fixed expenses​ + operating​ income) / contribution margin per unit.

To find the sales revenue​ (sales in​ dollars) needed in order to breakeven or generate a target​ profit, the formula used is

​(fixed expenses​ + operating​ income) / contribution margin ratio.