SB 6

Degree of operating leverage equals ______.

Contribution margin/Net operating income

The equation for the profit equation method is ______.

Total Sales Revenue - Total Variable Costs - Total Fixed Costs = Profit

The amount each unit sold contributes towards fixed costs and profit is the unit ___ ___.

contribution margin

To calculate the degree of operating leverage, divide ___ ___ by net operating income.

contribution margin

How much contribution margin is generated per dollar of sales revenue is the ___ ___ ___.

contribution margin ratio

The contribution margin stated as a percentage of sales dollars is the ______.

contribution margin ratio

Contribution margin ______.

covers fixed cost and profit

Decisions about the use of debt versus equity affects a company's ___ ___.

financial leverage

According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases.

price

When preparing a multi-product break-even analysis, the assumption is ordinarily made that the ______ will not change.

sales mix

The break-even point can be affected by ______.

sales mix total fixed costs product mix

When constructing a CVP graph, the ___ of the line represents variable cost per unit.

slope

CVP analysis can be useful in deciding ______.

which products to offer which services to offer what marketing strategy to use what price to charge for goods or services what cost structure to implement

Decisions about whether to use fixed or variable costs to run a business affects a company's ___ leverage.

operating

The weighted-average ___ ___ ___ is based on the relative percentage of total sales revenue in dollars, not units

contribution margin ratio

The Greenery sells three products. Product A has a contribution margin of $10 per unit, Product B has a contribution margin of $15 per unit and Product C has a contribution margin of $12 per unit. Sales are: 25% A, 35% B and 40% C. The weighted average unit contribution for The Greenery is ______.

$12.55 Rationale: ($10 × 25% + $15 × 35% + $12 × 40%) = $12.55

Sweet Dreams sells 15,000 pillows per year for $25 per unit. Variable cost per unit is $14. Sweet Dreams wants to improve customer satisfaction by using higher quality direct materials which will increase the variable cost per unit to $19. Fixed costs per year total $90,000. If sales increase by 5,000 units per year, what price will Sweet Dreams have to charge to earn the same profit it is earning now ($75,000 per year)?

$27.25 Rationale: Costs + Target Profit: ($19 × 20,000 + $90,000 + $75,000) = $545,000 / 20,000 = $27.25

A company sells two products. Product A sells for $10.00 per unit and Product B sells for $8.00 per unit. Variable costs are $3.00 for Product A and $2.50 for Product B. If the sales mix is 70% Product A and 30% Product B, the weighted average contribution margin is ______.

$6.55 Rationale: $7.00 × 70% + $5.50 × 30% = $6.55

The weighted average unit contribution margin ______.

-assumes that the percentage of each product sold is constant -is used instead of the single product contribution margin in multi-product break-even analysis -is based on the relative percentage of each unit sold

CVP ______.

-can be used for "what-if" analysis -can be used to make many different decisions -allows managers to see how changing one variable can impact another

Multi-product target profit analysis ______.

-depends upon the sales mix -is calculated the same way as single product analysis

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 Rationale: $98,000/($50 - $15) = 2,800

Given sales of $110,000, a contribution margin of $75,000 and net operating income of $30,000, operating leverage is ______.

2.5 Rationale: $75,000/$30,000 = 2.5

Desks by Daisy sells a student desk for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell ___ desks per month in order to break-even.

250

A company sells 15,000 units of product per month. The sales price per unit is $5.00, variable costs are $2.80 per unit and and total fixed costs equal $3,000. The contribution margin ratio is ______.

44% Rationale: ($5.00 - $2.80) / $5.00 = 44%

Given sales of 10,000 units per month, sales price per unit of $4.00, variable costs of $1.80 per unit and and total fixed costs of $5,000, the contribution margin ratio is ___%.

55

Which of the following is NOT a method used for basic CVP analysis?

Break-even analysis

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs?

CVP analysis

Which of the following are assumptions of cost volume profit analysis?

Production volume is equal to sales volume. All costs can be classified as either fixed or variable. In multi-product companies, the sales mix is constant.

Contribution margin equals sales minus ______.

all variable costs

If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ratio will ______.

both increase

Solving for the sales level needed to achieve a profit of zero is ______ analysis.

break-even

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

CVP analysis can help answer the question of _____.

how net income can be increased

The excess of the budgeted (or actual) sales dollars over break-even sales is called the ___ of ___.

margin safety

The weighted-average contribution margin ratio is calculated using the ______.

total sales mix

The amount that each unit sold contributes to fixed costs and profit is ______.

unit contribution margin

Methods that can be used to model the relationship between revenues, costs, profit and volume include the ___ contribution margin method and the contribution ___ ___ method

unit; Margin Ratio

Given net operating income of $50,000, contribution margin of $150,000 and sales of $300,000, the degree of operating leverage of ___.

3

When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will ______.

decrease

True or false: CVP analysis is only used for break-even and target profit analysis.

false

The weighted average unit contribution margin is the average unit contribution margin of multiple products weighted according to ______.

units sold

The term cost structure refers to how a company uses ___ costs versus ___ costs in its operations.

varaible; fixed

When preparing a CVP graph, the slope of the total cost line represents ______.

variable cost per unit

When constructing a CVP graph, the vertical axis represents ______.

variable costs Rationale: This is only partially correct. The vertical axis represents dollars. Sales, variable costs, and fixed costs are all measured in dollars.

In the profit equation, total ______ is a function of the number of units sold (Q).

variable costs sales revenue

Contribution margin equals sales minus ______.

variable manufacturing costs variable selling and administrative costs

Jacki's Jewels sells 10,000 necklace & earring sets per year. Fixed costs are $80,000 and variable costs are $20 per set. Jacki is planning to increase the quality of the stones, which will increase variable costs by $8 per set and increase sales by 25%. If Jacki increases the quality of the stones, what price will she need to charge to attain her target profit of $60,000 per year?

$39.20 Rationale: Costs + Target Profit = ($28 x 12,500 + $80,000 + $60,000) = $490,000/12,500 = $39.20

True or false: Cost structure refers to how a company uses product and period costs in an organization.

false

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: The terms operating leverage and financial leverage refer to the same concept.

false

Decisions about whether to use fixed or variable costs to run a business impact a company's ___ ___.

operating leverage