ACCT 201B Chapter 6

CVP analysis allows the evaulatation of the chnage in profit depending on changes in what?

1. Selling Price 2. Sales Volume 3. Unit Volume costs 4. Total Fixed costs 5. Mix product sold

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, net operating income will increase by Blank______.

174,000

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales?

25,000

Once break-even point has been reach, net operating income will increase by the amount of the unit ___ ___ for each additional unit sold

Unit contribution margin

What do you need to calculate profit?

Unit contribution margin, unit sales, and total fixed costs

Variable Expense Ratio

Variable Expenses / Sales

Variable Expenses equals

Variable Expenses per unit X Quantity Sold (VXQ)

What can effect Net operating income?

Variable costs, Fixed Costs, Sales Volume, Selling Prices

Where is activity volume on CVP graph?

X- Axis

Where is Sales, Cost, and/Profit on CVP graph?

Y-Axis

CVP analysis model (assuming everything remains constant) says profits will increase if...

a decrease in the unit variable cost occurs

The single point where the total revenue line crosses the total expense line on the CVP graph indicates

profit equals zero and the break-even point

The break-even point is reached when the contribution margin is equal to

total fixed expenses

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 is: selling price per unit = Blank______.

variable cost per unit + desired profit per unit

The break even point is the level of sales at which the profit equals

zero

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100, and decrease fixed expenses by $20,000. What is the net operating income after the changes?

$21,500

Walton Corporation is currently selling 104 units of its product. The company is deciding the price that it should charge for a bulk order of 40 units. The variable cost per unit is $200. This order will not involve any additional fixed costs and the company's current sales will not be affected. The company targets a profit of $4,000 on the bulk order. What selling price per unit should the company quote for the bulk order? (Round your answer to the nearest whole dollar.)

$300

% change in Net operating income equals...

% change in sales X degree of operating leverage

Advanced version of Profit equals....

( P X Q - V X Q) - Fixed Expenses

Profit equals...

( Sales - Variable expenses ) - Fixed Expenses

Steps of making a CVP graph

1. Plot fixed expenses on graph from income statement 2. Choose level of activity 3. Plot total expense Total expense = variable expenses + Fixed expenses 4. Total expenses line by connecting fixed Expenses and total Expense 5. Plot total sales revenue First plot sales revenue at 0 units then sales revenue at total sales revenue

Winter Corporation's current sales are $500,000. The contribution margin is $300,000 and the net operating income is $100,000. What is the company's degree of operating leverage?

3...Net operating income grows 3 times as fast as its sales

The following information is extracted from the records of Johnson Corporation: Target profit $ 120,000 Unit contribution margin $ 40 Fixed expenses $ 40,000 Contribution margin ratio (CM ratio) 0.40 Selling price $ 100 Knowledge Check 01 What are the unit sales required to attain a target profit of $120,000?

4,000 units

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio?

40 %

The current sales of Trent, Incorporated, are $400,000, with a contribution margin of $200,000. The company's degree of operating leverage is 2. If the company anticipates a 30% increase in sales, what is the percentage change in net operating income for Trent, Incorporated?

60 %

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio?

60%

What does contribution margin means?

Amount available to cover fixed expenses and then provide profit for period

What are 3 important points of the CVP graph?

Break-even point, profit area, loss area

Degeee of operating leverage equals...

CM / Net operating Income

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

Change in CM equals...

CM ration X Change in Sales

Why is the CM ratio important?

Changes in contribution margin for change in Sales Volume

What is profit area mean?

Company earns profit for any sales above break-even point

Degree of operating leverage equals...

Contribution Margin / Net operating Income

CM ratio equals...

Contribution Margin / Sales

CVP is the acronym for

Cost, Volume, Profit

Percentage change in net operating income equals...

Degree of operating leverage X percentage change in sales

Dollar Sales to break-even equals...

Fixed Expense / CM ratio

Unit Sales to break-even equals...

Fixed expense / Unit CM

Total cintribution margin equals

Fixed expenses plus net operating income

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

Increase of $14,200

What does the Margin of Safety mean?

It expresses how much cushion there is in the current level of sales above the break-even point

Margin of Safety percentage equals...

Margin of safety in dollars / Sales

Operating Leverage

Measure of how sensitive net operating income is to % change in units sales

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

Net loss

What does it mean if Fixed Expenses > Contribution Margin?

Net operating loss

What relationships are revealed on a Cost-Volume Profit Graph?

Profit, Revenue, Cost

Fantastic Frames sells units for $15 each. Variable costs total $6 per unit, and fixed costs total $90,000. If the number of units being sold increases by 2,000, net operating income will ______.

Reason: Change in net operating income = 2,000 × ($15 - $6) = $18,000.

Contribution Margin equals...

Sales - variable expenses

What is loss area mean?

Sales < Break-even point

Unit CM equals...

Selling Price per unit - Variable Expenses per unit

To simplify CVP calculations, it is assumed that ___ will remain constant

Selling price

Sales equals...

Selling price per unit X Quantity Sold (PXQ)

The contribution margin income statement allows users to easily judge the impact of a change in ___ on profit.

Selling price, cost, volume

Unit Sales to attain target profit equals...

Target profit + Fixed expense / Unit CM

What do you use to understand the affect of changes of sales on the net operating income?

The CM ratio...Used in the profit formula (CM ratio X Sales ) - Fixed Expenses Or Change in Contribution Margin = (CM ratio X change in Sales)

Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the Blank______ approach.

The expenses on the traditional income statement are organized into product and period expenses. The contribution margin income statement is organized by cost behavior.

What is the break-even point?

The level of sales at which the profit is zero

CM Ratio (total) equals...

Total Contribution Margin / Total Sales

Margin of Safety equals...

Total budgeted (or actual) sales dollars - the break-even point....

Break-even point for a Muti product company depends on sales mix

True

True of False. The degree of operating leverage will decrease as the company is further from break-even point

True.

Profit equals...In terms of Unit CM

Unit CM X Q - Fixed expenses

CM Ratio (Unit) equals...

Unit Contribution Margin / Unit Selling Price

Profit Graph formula equals...

Unit Contribution Margin X Q - Fixed Expenses

When making a decision using incremental analysis consider the Blank______.

change in sales dollars resulting specifically from the decision change in cost resulting specifically from the decision

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using

incremental analysis

The contribution margin statement is primarily used for

internal decision making

A shift in the sales mix from high-margin items to low-margin items can cause total profit to

decrease