Ch.5- Cost - volume- profit relationships

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?

$98,000 ÷ ($50 - $15) = 2,800

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 ?

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

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 ______.

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

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 ?

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

A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is?

CM= 20000 x ($20-$11) cm =$180000

contribution margin equation

CM= Sales - All Variable Costs

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?

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

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 ______.

Net operating income= CM - fixed costs 184000 -85000 99000

what is the contribution margin?

The amount available to cover fixed costs/expenses and then to provide profits for the next period.

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

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

false

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

false b/c Without knowing the future, it is not obvious which cost structure is better. Both have advantages and disadvantages.

When preparing a CVP graph, the vertical (Y) axis represents ?

dollar amount

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ?

($520,000 + $320,000) ÷ $21 = 40,000

A company's current sales are $300,000 and fixed expenses total $85,000. 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?

($70,000 × 30%) - $15,000 = $6,000 increase Change in profit= Cm ratio X change in sales - change in fixed expenses

A company currently has sales of $700,000 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?

(($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase

At the break-even point ... what is happening to net income and revenue?

-net operating income = zero -total revenue = total cost

what are the 3 assumptions that managers use when simplifing CVP calcs. ?

1. selling price is constant. ( price of product/service will not change as volume increases or decreases) 2. costs are linear and can be accurately divided into variable & fixed ( variable costs per unit=constant & fixed costs in total= constant, all w/in relevant range) 3. in multi-product companies, the mix of products sold remains constant.

Spice sells paprika for $9.00 per bottle. Variable cost is $2.43 per bottle and Spice's annual fixed costs are $825,000. The variable expense ratio for paprika is ?

2.43 / 9.00 =.27 x 100%=27%

Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is?

85.05/189=.45x100 =45%

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a ?

The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units x $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units x $35) =an increase of $450.

What is cost-volume-profit analysis?

a costing accounting method- that looks at the impact that varying levels of costs and volume have on operating profit (looks at the behaviors)

What is the primary purpose of CVP?

to est. how profits are affected by: 1. selling price 2. sales volume 3.unit variable costs 4.total fixed costs 5. mix of products sold

When a company produces and sells multiple products ______.

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

The variable cost per unit using the high-low method is calculated as ______.

change in cost ÷ change in units (activity)

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be?

cm per unit = (total sales-total variable costs) / # of breakeven point of units (100000-80000)/200units= $100

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

What income statement is used to show CVP? and why?

contribution income statement. it highlights cost behavior (this allows managers to judge the impact on profits of changes in selling price, cost, or volme)

What does a CVP (break even chart) graph show?

cvp relationships over a wide ranges of activity

What does CVP help managers do determine?

decide: what products/services to offer what prices to charge what marketing strategy to use what cost structure to maintain

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______.

decrease in unit variable costs

Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n) (increase/decrease) of $ ?

decrease of $3000 cm now= 25x1200 - 15x1200= 12000 cm projected= 25x1500 - 19x1500 = 9000 12000-9000= 3000

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

degree of operating leverage

The term "cost structure" refers to the relative proportion of ? and ? costs in an organization. (Enter only one word per blank.)

fixed and variable

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

The amount by which sales can drop before losses are incurred is the?

margin of safety

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?

net income= Q x (sales per unit - var. cost per unit) - fixed costs income= 30000x ($40-$19)-250000 net income= $380000

Operating leverage is a measure of how sensitive ______ is to a given percentage change in sales dollars.

net operating income

what does the remaining CM go to?

net operating income(profit) for next period

contribution income statement equation

profit(net operating income)= (*sales-variable expenses)-fixed expenses *Sales= selling price per unit x Quantity sold = PxQ *variable expenses= variable expenses per unit x quantity sold = VxQ profit=(PxQ - VxQ) - fixed expenses

A product has a selling price of $10 per unit, variable expenses of $6 per unit and total fixed costs of $35,000. If 10,000 units are sold, net operating income will be ?

sales = $10 per unit x 10,000 units = $100000 var. exp.= $6 per unit x 10,000 units =$60,000 net income=($100,000-$60,000)-35,000 net income= $5000

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

sales mix

CVP analysis allows companies to easily identify the change in profit due to changes in ?

selling price costs volume

what is CM used for 1st?

to cover fixes costs/expenses

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ... what happens to net income and cm?

total contribution margin will increase by $0.70 net operating income will increase by $0.70 b/c ($1 sales x cm ratio of 70%)

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

total fixed expenses

When preparing a CVP graph, the horizontal (X) axis represents ?

unit(sales) volume