smartbook chapter 5

contribution margin ____________.

becomes profit after fixed expenses are covered

true or false: cost structure refers to the relative portion of product and period costs in an organization

false cost structure refers to the relative portion of fixed and variable costs in an organization

contribution margin is first used to cover ________ expenses. once the break-even point has been reached, contribution margin becomes __________.

fixed; profit

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

fixed; variable

when preparing a cvp graph, the horizontal axis represents __________.

sales volume

an increase in sales will increase net operating income by a multiple of that increase in sales. the multiple is known as __________.

the degree of operating leverage

profit equals ___________.

(P x Q) - (V x Q) - fixes expenses

select all that apply: the break-even point calculation is affected by ___________.

-costs per unit -sales mix -selling price per unit

select all that apply: when a company produces and sells multiple products __________.

-each product most likely has different costs -a change in the sales mix will most likely change the break-even point -each product most likely has a unique contribution margin

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

false without knowing the future, it is not obvious which cost structure is better. both have advantages and disadvantages.

profit and change in profit equations

relation between profit and CM ratio equation: profit = (CM ratio) x (sales) - (fixed expenses)^2 profit equations: profit = (sales - variable expenses) - fixed expenses profit = (contribution margin) - (fixed expenses) profit = (contribution margin / sales) x (sales) - (fixed expenses) profit = (CM ratio) x (sales) - (fixed expenses) change in profit = (CM ratio) x (change in sales) - (change in fixed expenses)

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

sales mix

which of the following statements is correct? -the higher the margin of safety, the higher the risk of incurring a loss -the risk of loss is not impacted by the margin of safety -the higher the margin of safety, the lower the risk of incurring a loss

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

when constructing a cvp graph, the vertical axis represents _________.

dollars

select all that apply: a company with a high ratio of fixed costs ___________.

-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

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 $98,000 / ($50 - $15) = 2,800 to break-even

blissful blanket's 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 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 break-even point = $305,000 / $40 = 7,625

operating leverage

a measure of how sensitive net operating income is to a given percentage change in unit sales

the calculation of contribution margin (CM) ratio is __________.

contribution margin / sales

contribution margin ratio is equal to ___________ ____________ divided by _____________.

contribution margin; sales

company a produces and sells 10,000 units of its product for $10 per unit. variable costs are $4 per unit and fixed costs total $30,000. a move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. if the move is made, profits will ___________.

decrease by $2,000 new contribution margin = $6,000 (1,000 x ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits

cost-volume profit (CVP) analysis

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain. its primary purpose is to estimate how profits are affected by the following five factors: 1.) selling prices, 2.) sales volume, 3.) unit variable costs, 4.) total fixed costs, 5.) mix of products sold

to prepare a cvp graph, lines must be drawn representing total revenue, _________.

total expense, and total fixed expense (there is no line for total variable costs, profit, or break-even point)

daisy's dolls sold 30,000 dolls this year. each doll sold for $40 and had a variable cost of $19. fixed expenses were $250,000. net operating income for the year is _________.

$380,000 net operating income = 30000 x ($40 - $19) - $250,000 = $380,000

vivian's violins has sales of $326,000, contribution margin of $184,000 and fixed costs total $85,000. vivian's violins net operating income is __________>

$99,000 net operating income = $184,000 - $85,000 = $99,000

CVP graph

(sometimes called a break-even chart), unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis. preparing the graph involves three steps: 1.) draw a line parallel to the volume axis to represent total fixed expense 2.) choose some volume of unit sales and plot the point representing total expense (fixed and variable) at the sales volume you have selected. after the point has been plotted, draw a line through it back to the point where the fixed expense line intersects the dollars axis 3.) again choose some sales volume and plot the point representing total sales dollars at the activity level you have selected

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 ($320,000 + $200,800) / ($90 - $28) = 8,400 units

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 change in net operating income = $70,000 x 30% - $15,000 = $6,000 increase

a company currently has sales of $700,00 and a contribution margin ratio of 45%. as a result of increasing advertising expense by $8,000, the company expects to increase sales to $735,000. if this is done and these results occur, net operating income will __________.

increase by $7,750 change in net operating income = ($735,000 - $700,000) x 45% - $8,000 = $7,750

the amount by which sales can drop before losses are incurred is the ________ of ___________.

margin of safety

variable expense ratio

variable expenses as a percentage of sales. equation: variable expense ratio = (variable expenses)/(sales)

select all that apply: 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 ellie sells 35 elephants this month, ___________.

-profits = $875 (profits = 35 x ($55 - $10) - $700) = $875 -total sales = $1,925 (total sales = 35 x $55 = $1925) -total variable costs = $350 (total variable costs = (35 x $10) = $350)

select all that apply: cvp analysis focuses on how profits are affected by ____________.

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

select all that apply: cvp analysis allows companies to easily identify the change in profit due to changes in ___________.

-selling price -volume -costs

change in contribution margin

equation: change in contribution margin = (CM ratio) x (change in sales)

a change in profits that occurs due to a change in sales and fixed expenses may be calculated as __________.

cm ratio x change in sales - change in fixed expenses

the degree of operating leverage = _____________.

contribution margin / net operating income degree of operating leverage = (contribution margin)/(net operating income the degree of operating leverage is a measure, at a given level of sales, of how a percentage change in sales volume will affect profits.

contribution margin ratio (CM ratio)

contribution margin as a percentage of sales. equation: CM ratio = (contribution margin)/(sales) CM ratio = (sales - variable expenses)/(sales) CM ratio = (1 - variable expense ratio)

contribution margin

the amount remaining from sales revenue after variable expenses have been deducted. thus, it is the amount available to cover fixed expenses and then to provide profits for the period. notice the sequence here - contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits.

the relative proportions in which a company's products are sold is referred to as __________ ___________.

sales mix