Test 2: Chapter 5 Smartbook

CVP analysis focuses on how profits are affected by:

Selling Prices Sales Volume Unit Variable Costs Total Fixed Costs Mix of Products Sold

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

The Margin of Safety

Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, contribution margin per unit is:

$90 - $35 = $55

A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be

$11 + $4,500 / 500 = $20.

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. What is the break-even point in unit sales?

$305,000 / $40 = 7,625 Units

Company A has fixed costs of $564,000 and wishes to earn a profit of $800,000 this year. If company A has a contribution margin ratio of 62%, sales dollars to reach the target profit equals:

$564,000 + $800,000 / 62% = $2,200,000

Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals:

$564,000 / 0.62 = $909,677

Terry's trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales:

-Net operating income will increase by $0.70 -Total Contribution Margin will increase by $0.70.

Daisy's dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

30,000 * ($40 -$19) - $250,000 = $380,000.

Contribution Margin:

Becomes profit after fixed expenses are covered.

When making a decision using incremental analysis consider the:

Change in cost resulting specifically from the decision. Change in sales dollars resulting specifically from the decision.

After reaching the break-even point, a company's net operating income will increase by the _____ ____ per unit for each additional unit sold.

Contribution Margin

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

Contribution Margin

When constructing a CVP graph, the vertical axis represents

Dollars

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has:

Reached the break-even point A contribution margin equal to fixed costs

Place the following items in the correct order in which they appear on the contribution margin format income statement: Net Operating Income Contribution Margin Sales Fixed Expenses Variable Expenses

Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income

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

Selling Price Cost Volume

The calculation of contribution margin (CM) ratio is

contribution margin / sales

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

zero

Blissful Blankets' 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:

($520,000 + $320,000) / $21 = 40,000 blankets

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is

(9,000 *$32) - $120,000 = 168,000

Net Operating Income can be calculated as:

(unit sales - unit sales to break even) * unit contribution margin.

Pete's putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information:

The contribution margin per putter is $65 because 125 - 60 = $65. The sale of 20,000 putters results in net operating income of $380,000 because 12,000 units * $65 Contribution Margin = $780,000 - $400,000 = $380,000.

At the break-even point:

Total Revenue equals total cost Net Operating Income is zero

Variable expenses/sales is the calculation for the _____ ____ ratio.

Variable Expense

Profit = (selling price per unit * quantity sold) - ( ____ expenses per unit * quantity sold) - ___ expenses.

Variable; Fixed

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:

($10 - $6) * 10,000 - $35,000 = $5,000.

Candle Central has $1,440 of total variable expenses for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units:

-Total Variable Cost is $1,200 because 1,440 / 600 = $2.40 per unit * 500 units = $1,200. -The Variable Cost Per Unit is $2.40 because 1,440 / 600 = $2.40 per unit and 2,160 / 900 = $2.40 per unit.

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:

-Total Variable Costs: 35*$10 = $350 -Profits: 35 * ($55-$10) - $700 = $875 -Total Sales: 35 * $55 = $1,925