SmartBook Chapter 3: Analysis of Cost, Volume and Profitability

Identify the underlying assumptions of CVP analysis.

All CVP variables are within the relevant range Inventory levels in manufacturing companies are constant The sales mix in multiproduct companies is constant

Determining the sales price by marking up the cost is _____.

cost-plus pricing

Sam's Dog Company sells two toys: Red and Blue. Contribution margins are $9 for Red and $5 for Blue. The current sales mix is 80% Red and 20% Blue. If the sales mix changes to 60% Red and 40% Blue, Sam's profit will _____.

decrease

Reducing fixed costs will _____ the number of units necessary to earn a desired profit.

reduce

Reducing fixed cost _____ the break-even point.

reduces

The contribution margin ratio is calculated by dividing contribution margin by ____​_.

sales

Investigating a multitude of what-if possibilities involving simultaneous changes in fixed cost, variable cost, and volume is called _____ analysis.

sensitivity

Determining the market price at which a product will sell is the first step in _____.

target costing

On the CVP graph, the break-even point is the point where total sales intersects ____​_ cost.

total

When a company has multiple products the break-even point is calculated using the _____ contribution margin.

weighted average

Target costing is a strategy where the sales price is determined by _____.

what the market is willing to pay

At the break-even point, profit equals ____​_.

zero

Sam's Dog Company sells two toys: Red and Blue. Red sells for $7 and has a variable cost of $5. Blue sells for $9 and has a variable cost of $6. The expected sales mix is 80% Red and 20% Blue. What is the weighted average contribution margin?

$2.20

A company's contribution margin is $14 per unit. If fixed costs are $6 per unit and variable costs are $9 per unit, the selling price of the product must be _____.

$23 Reason: Contribution margin of $14 + variable costs of $9 = $23 selling price.

Sam's Dog Company sells two toys: Red and Blue. Red sells for $8 and has a variable cost of $3. Blue sells for $10 and has a variable cost of $4. The expected sales mix is 60% Red and 40% Blue. What is the weighted average contribution margin?

$5.40 Reason: Red ($5 CM × 60%) + Blue ($6 CM × 40%) = $5.40

If sales are $100,000, variable costs are $60,000 and fixed costs are $10,000, what is the contribution margin ratio?

0.40 Reason: ($100,000 - $60,000) ÷ $100,000 = .40

If sales are $120,000, variable costs are $40,000 and fixed costs are $20,000, what is the contribution margin ratio?

0.67

Assume the sales price is $10 per unit, variable cost is $5 per unit, and fixed cost is $1,000. If the variable cost increases to $8 per unit, how many additional units will need to be sold to earn a target profit of $3,000?

1,200 Reason: $4,000 ÷ $5 = 800 units; $4,000 ÷ $2 = 2,000 units for an increase of 1,200 units.

Calculate contribution margin per unit assuming sales price is $21, variable cost is $11, and fixed cost is $6 per unit.

10

The sales price of a product is $20 per unit; the variable cost is $5 per unit; and fixed costs total $1,500. How many units must be sold to break even?

100

If the sales price of a product is $10 per unit; the variable cost is $6 per unit; and fixed costs total $10,000, how many units must be sold to earn a profit of $10,000?

5000

Assume the sales price is $15 per unit, variable cost is $6 per unit, and fixed cost is $5,000. If the variable cost decreases to $3 per unit, how many fewer units will have to be sold to earn a target profit of $4,000?

250 Reason: $9,000 ÷ $9 = 1,000 units; $9,000 ÷ $12 = 750 units for a decrease of 250 units.

If the sales price of a product is $12 per unit; the variable cost is $7 per unit; and fixed costs total $1,000, how many units must be sold to earn a profit of $1,000?

400 Reason: ($1,000 + $1,000) ÷ ($12 - $7) = 400 units

Given a contribution margin ratio of 0.25 and fixed costs of $1,000, the break-even point in dollars is ____​_.

4000

Sam's Dog Company sells two toys: Red and Blue. Contribution margins are $5 for Red and $10 for Blue. The expected sales mix is 60% Red and 40% Blue. Total fixed costs are $3,000 and the company's desired profit is $500. How many total units must be sold to reach this goal?

500

Mark's Chemical Co. produces two products, Product A and Product B. Fixed costs are $20,000. The weighted average contribution margin is $16 per unit. Product A accounts for 60% of sales and the other 40% are Product B. What is the break-even point in units for Product B?

500 Reason: ($20,000 ÷ $16) × .4 = 500

Given a break-even point of 500 units, selling price of $10 and variable cost of $3, the sales dollars required to break-even is $_____

5000

If a company has budgeted sales of $10,000 and break-even sales of $4,000, what is the margin of safety?

60%

Mark's Chemical Co. produces two products, Product A and Product B. Fixed costs are $20,000. The weighted average contribution margin is $16 per unit. Product A accounts for 60% of sales and the other 40% are Product B. What is the break-even point in units for Product A?

750

Sam's Dog Company sells two toys: Red and Blue. Contribution margins are $2 for Red and $3 for Blue. The expected sales mix is 60% Red and 40% Blue. Total fixed costs are $2,112 and the company's desired profit is $264. How many total units must be sold to reach this goal?

990 Reason: ($2,112 + $264) ÷ ($2 × .6 + $3 × .4) = 990 total units

When a company sells a product for the variable cost to produce plus 25% of the variable cost, they are using a(n) _____-_____ _____ strategy.

Blank 1: cost Blank 2: plus Blank 3: pricing

The amount by which a company's sales can fall short and still break even is called the _____ of _____.

Blank 1: margin Blank 2: safety

The relative proportions in which a company's products are sold is called the _____ _____.

Blank 1: sales Blank 2: mix

When a company has multiple products the break-even point is calculated using the _____ _____ contribution margin.

Blank 1: weighted Blank 2: average

Identify the underlying assumptions of CVP analysis

Cost are linear The selling price is constant Efficiency and productivity are constant

Jen's Shampoo Company currently earns $50,000 net income. The marketing manager believes reducing the sales price per bottle from $26 to $22 will increase sales volume from 4,375 to 5,000 units. Variable costs are $10 per unit and total fixed costs are $20,000. If the sales price is reduced and the volume increases as expected, net income will ____​_.

decrease by $10,000

Jen's Shampoo Company currently earns $40,000 net income. The marketing manager believes reducing the sales price from $28 to $25 will increase sales volume from 4,375 to 5,000 units. Variable costs are $12 per unit and total fixed costs are $30,000. If the sales price is reduced and the volume increases as expected, net income will ____​_.

decrease by $5,000

A company that has a margin of safety of 40% can incur a 40% _____.

decrease in budgeted sales and still break-even

The contribution margin ratio can only be computed using total sales and total variable cost.

false

The equation and contribution margin per unit method can only be used to determine breakeven in units, not dollars.

false

When compared to companies with high variable cost structures, companies with high fixed costs structures have _____ risk.

higher

On a CVP graph the ____​_ axis represents activity in units.

horizontal

Increasing fixed costs will ____​_ the number of units necessary to earn a desired profit.

increase

Sam's Dog Company sells two toys: Red and Blue. Contribution margins are $2 for Red and $3 for Blue. The current sales mix is 60% Red and 40% Blue. If the sales mix changes to 40% Red and 60% Blue, Sam's profit will _____.

increase Reason: Since Blue has a higher contribution margin, shifting customers from Red to Blue will increase the company's profitability.

Jen's Shampoo currently has fixed cost of $30,000. Management believes sales will increase from 4,375 to 6,000 units if an additional $12,000 is spent on advertising. The sales price is $28 and variable cost is $12 per unit. If fixed costs are increased and management is correct, net income will _____.

increase by $14,000

Jen's Shampoo currently has fixed cost of $30,000. Management believes sales will increase from 4,375 to 7,000 units if an additional $25,000 is spent on advertising. The sales price is $28 and variable cost is $12 per unit. If fixed costs are increased and management is correct, net income will:

increase by $17,000.

Jen's Shampoo's net income was $40,000. A decision was made to decrease the sales price from $28 to $25 per bottle, decrease variable costs from $12 to $8, and decrease total fixed costs from $30,000 to $22,000. The changes resulted in the number of bottles sold decreasing from 4,375 to 4,200. As a result of these changes, net income _____.

increased by $9,400

The amount at which a company's sales can fall short before incurring loses is the _____.

margin of safety

Charging a premium price for a new product or renowned brand name is ____​_ pricing.

prestige

When people will be willing to pay a premium price to be the first to use a new product, the product may be a good candidate for a strategy known as _____ pricing.

prestige