Ch. 6
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 ______.
$180,000 Reason: Contribution margin = 20,000 × ($20 - $11) = $180,000.
A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be ______.
$198,000 Reason: Net operating income = (26,000 - 17,000) × $22 = $198,000.
When making a decision using incremental analysis consider the ______.
change in sales dollars resulting specifically from the decision change in cost resulting specifically from the decision
After reaching the break-even point, a company's net operating income will increase by the
contribution margin per unit
CVP analysis allows companies to easily identify the change in profit due to changes in ______.
costs volume selling price
Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.
decrease Reason: Sales - variable cost = contribution margin so an increase in variable cost per unit decreases contribution margin per unit.
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 ______.
increase by $6,000 Reason: ($70,000 × 30%) - $15,000 = $6,000 increase
When preparing a CVP graph, the horizontal axis represents ______.
sales volume
CVP analysis focuses on how profits are affected by ______.
sales volume unit variable cost total fixed costs mix of products sold selling price
Margin of Safety
the excess of budgeted or actual dollar sales over the break-even dollar sales
break-even point
the level of sales at which profit is zero
The break-even point is reached when the contribution margin is equal to ______.
total fixed expenses
Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.
$0.35 Reason: 35 x .01
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 ______.
$100 Reason: For each unit sold above break-even, profit increases by the contribution margin per unit ($100,000 - $80,000) ÷ 200 or $100.
Mauro Products distributes a single product, a woven basket whose selling price is $10 per unit and whose variable expense is $8 per unit. The company's monthly fixed expense is $2,400. Calculate the company's break-even point in dollar sales.
$12,000 Reason: Break-even point in dollar sales = # units at break-even x sales price per unit # units at break-even: 1,200 1,200 x $10 = $12,000
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 If the variable cost per unit increases by $1, spending on advertising increases by $1,850, and unit sales increase by 270 units, what would be the net operating income?
$13,220 Reason: Sales per unit: $95 Variable Expense per unit: $57 + $1 = $58 Sales: $95 x 1,270 = $120,650 Variable Expenses: $37 x 1,270 = $73,660 Contribution margin = $46,990 Fixed Expenses = $31,920 + $1,850 = $33,770 Net operating income = $13,220
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 If sales decline to 900 units, what would be the net operating income?
$2,280 Reason: Sales per unit: $95 Variable Expense per unit: $57 Sales: $95 x 900 = $85,500 Variable Expenses: $57 x 900 = $51,300 Contribution margin = $34,200 Fixed Expenses = $31,920 Net operating income = $2,280
A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, the net operating income or (loss) is ______.
$36,000 Reason: Net operating income = (750 - 450) × $120 = $36,000.
Whirly Corporation's contribution format income statement for the most recent month is shown below: Total Per unit Sales (8,700 units): $269,700/8,700 = $31 Variable Expenses: $165,300/8,700 = $19 Contribution Margin: $104,400/8,700 = $12 Fixed expenses: $55,000 NOI: $49,400 What would be the revised net operating income per month if the sales volume is 7,700 units?
$37,400 Reason: Sales: $31 x 7,700 = $238,700 Variable expenses: $19 x 7,700 = $146,300 Contribution Margin: $12 x 7,700 = $92,400 Fixed Expenses: $55,000 NOI: $37,400
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the contribution margin per unit?
$38 per unit Reason: Contribution margin/# of units = contribution margin per unit $38,000/1,000 = $38
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 If sales increase to 1,001 units, what would be the increase in net operating income?
$38.00 Reason: Sales per unit: $95 Variable Expense per unit: $57 Sales: $95 x 1,001 = $95,095 Variable Expenses: $57 x 1,001 = $57,057 Contribution margin = $38,038 Fixed Expenses = $31,920 Net operating income = $6,118 Increase in NOI = Ending NOI - Beginning NOI $6,118 - $6,080 = $38Whirly Corporation's contribution format income statement for the most recent month is shown below: TotalPer UnitSales (8,700 units)$ 269,700$ 31.00Variable expenses165,30019.00Contribution margin104,400$ 12.00Fixed expenses55,000 Net operating income$ 49,400
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 Reason: Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?
$4,080 Reason: Sales per unit: $95 + $2 = $97 Variable Expense per unit: $57 Sales: $97 x 900 = $87,300 Variable Expenses: $57 x 900 = $51,300 Contribution margin = $36,000 Fixed Expenses = $31,920 Net operating income = $4,080
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 ______.
$450 Reason: 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.
Whirly Corporation's contribution format income statement for the most recent month is shown below: Total Per unit Sales (8,700 units): $269,700/8,700 = $31 Variable Expenses: $165,300/8,700 = $19 Contribution Margin: $104,400/8,700 = $12 Fixed expenses: $55,000 NOI: $49,400 What would be the revised net operating income per month if the sales volume decreases by 80 units?
$48,440 Reason: Sales: $31 x 8,620 = $267,220 Variable expenses: $19 x 8,620 = $163,780 Contribution Margin: $12 x 8,620 = $103,440 Fixed Expenses: $55,000 NOI: $48,440
Whirly Corporation's contribution format income statement for the most recent month is shown below: Total Per unit Sales (8,700 units): $269,700/8,700 = $31 Variable Expenses: $165,300/8,700 = $19 Contribution Margin: $104,400/8,700 = $12 Fixed expenses: $55,000 NOI: $49,400 What would be the revised net operating income per month if the sales volume increases by 80 units?
$50,360 Reason: Sales: $31 x 8,780 = $272,180 Variable expenses: $19 x 8,780 = $166820 Contribution Margin: $12 x 8,780 = $105,360 Fixed Expenses: $55,000 NOI: $50,360
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the break-even point in dollar sales?
$79,800 Reason: Break-even point in dollar sales = # units at break-even x sales price per unit Break-even in unit sales = 840 Sales price per unit = $95 840 x $95 = $79,800
Lin Corporation has a single product whose selling price is $140 per unit and whose variable expense is $70 per unit. The company's monthly fixed expense is $32,600. Calculate the dollar sales needed to attain a target profit of $8,000.
$81,200 Reason: Unit sales needed to attain target profit = (Fixed Cost + Target Profit)/(contribution margin per unit) ($32,600 + $8,000)/($140-$70) = 580 Dollar sales to attain the target profit = Unit sales needed to attain target profit x Selling price per unit 580 x $140 = $81,200
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 Reason: Net operating income = $184,000 - $85,000 = $99,000
Profit =
(selling price per unit × quantity sold) - (variable expense per unit × quantity sold) - fixed expenses
Mauro Products distributes a single product, a woven basket whose selling price is $10 per unit and whose variable expense is $8 per unit. The company's monthly fixed expense is $2,400. Calculate the company's break-even point in unit sales.
1,200 baskets Reason: Breakeven point in unit sales = Total Fixed expenses/(Sales per unit - Variable expenses per unit) $2,400/($10-$8) = 1,200
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 How many units must be sold to achieve a target profit of $22,800?
1,440 Reason: Unit sales needed to attain target profit = (Fixed Cost + Target Profit)/(contribution margin per unit) Fixed Cost: $31,920 Target Profit: $22,800 Contribution Margin per unit = $38 ($31,920 + $22,800)/$38 = 1,440
Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Amount Percent of Sales Sales: $131,000 100% Variable expenses: $52,400 40% Contribution Margin: $78,600 60% Fixed expenses: $17,000 NOI: $61,600 1. What is the company's degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income of a 12% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 12% increase in unit sales.
1. 1.28% 2. 15.31% Reason: 1. Degree of operating leverage = Contribution margin/Net operating income $78,600/$61,600 = 1.28% 2. Estimated percent increase = degree of operating level x percent increase in unit sales 1.28% x 12% = 15.31%
Northwood Company manufactures basketballs. The company has a ball that sells for $25. At present, the ball is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totaling $15.00 per ball, of which 60% is direct labor cost. Last year, the company sold 44,000 of these balls, with the following results: Sales (44,000 balls) $1,100,000 variable expenses $660,000 CM $440,000 Fixed expenses $317,000 NOI $123,000 1. Compute (a) last year's CM ratio and the break-even point in balls, and (b) the degree of operating leverage at last year's sales level. 2. Due to an increase in labor rates, the company estimates that next year's variable expenses will increase by $3.00 per ball. If this change takes place and the selling price per ball remains constant at $25.00, what will be next year's CM ratio and the break-even point in balls? 3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $123,000, as last year? Refer again to the data in (2) above. The president feels that the company must raise the selling price of its basketballs. If Northwood 4. Company wants to maintain the same CM ratio as last year (as computed in requirement 1a), what selling price per ball must it charge next year to cover the increased labor costs? (Round your answer to 2 decimal places.) 5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls? 6. Refer to the data in (5) above. a. If the new plant is built, how many balls will have to be sold next year to earn the same net operating income, $123,000, as last year? b. Assume the new plant is built and that next year the company manufactures and sells 44,000 balls (the same number as sold last year). Prepare a contribution format income statement and compute the degree of operating leverage.
1. a. 40%; 31,700 b. 3.58% Reason: 1. a. CM: $440,000/$1,100,000 = .4 or 40 Breakeven point in units: $317,000/$10 = 31,700 b. 3.58% 2. New variable expense per unit: $18 CM: $1,100,000-792,000 = $308,000/$1,100,000 = 28% Break even point in units: $317,000/$7 = 45,285.71 3. Unit sales needed to attain target profit = (Fixed Cost + Target Profit)/(contribution margin per unit) ($317,000 + $123,000)/(7) = 62,857.14 4. Variable cost per unit = $18 per unit Required contribution margin ratio = 40% required variable cost ratio = 60% New selling price per unit = $18 / 60% = $30 per unit 5. Refer to the original data. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40.00%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls? Selling price = $25 Contribution Margin: 15 x .4 = 6 Contribution Margin per unit = Selling Price per unit - Variable Cost per unit Contribution Margin per unit = $25.00 - $9.00 Contribution Margin per unit = $16.00 Break-even point in balls: 15 - 6 = $9 Variable expenses: $660,000 - 264,000 = $396,000 CM: $704,000/$1,100,000 = .64 or 64 % Fixed expenses: $317,000 x 2 = $634,000/$16 = breakeven in units: 39,625 6 a. Contribution Margin per unit = $16.00 Fixed Expenses = $634,000 Target Profit = $123,000 Required Sales in units = (Fixed Expenses + Target Profit) / Contribution Margin per unit Required Sales in units = ($634,000 + $123,000) / $16.00 Required Sales in units = 47,313 6 b. Degree of operating leverage = Contribution margin/Net operating income $704,000/$70,000 = 10.06
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $31,920 and the total fixed expenses are $57,000. Under this scenario and assuming that total sales remain the same, what is the degree of operating leverage?
10.38% Reason: Revised Amounts: Sales: $95 x 1,000 = $95,000 Variable Expenses = $31,920 Contribution margin = $63,080 Fixed Expenses = $57,000 Net operating income = $6,080 Degree of operating leverage = Contribution margin/Net operating income $63,080/$6,080 = 10.375 or 10.38
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 Reason: $98,000 ÷ ($50 - $15) = 2,800
Last month when Holiday Creations, Incorporated, sold 44,000 units, total sales were $176,000, total variable expenses were $140,800, and fixed expenses were $36,100. What is the company's contribution margin (CM) ratio?
20% Reason: Contribution Margin = Sales - Variable expenses $176,000-$140,800 = $35,200 Contribution Margin Ratio = Contribution Margin/Sales $35,200/$176,000 = 0.2 x 100 = 20%
Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans required to meet the company's goal is ______.
21,645 Reason: Sales volume = ($470,000 + $222,640) ÷ $32 = 21,645 fans.
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) decrease of
3,000
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 Using the degree of operating leverage, what is the estimated percent increase in net operating income that would result from a 5% increase in unit sales?
31.25%? Reason: Estimated percent increase = degree of operating level x percent increase in unit sales 6.25 x 5% = 31.25%
Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is ______.
4,800
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the contribution margin ratio?
40% Reason Contribution Margin/Sales = Contribution Margin Ratio $38,000/$95,000 = 0.4 x 100 = 40%
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 ______.
40,000 Reason: ($520,000 + $320,000) ÷ $21 = 40,000
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 $
5,000
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 Assume that the amounts of the company's total variable expenses and total fixed expenses were reversed. In other words, assume that the total variable expenses are $31,920 and the total fixed expenses are $57,000. Using the degree of operating leverage, what is the estimated percent increase in net operating income of a 5% increase in unit sales?
51.90% Reason: Revised Amounts: Sales: $95 x 1,000 = $95,000 Variable Expenses = $31,920 Contribution margin = $63,080 Fixed Expenses = $57,000 Net operating income = $6,080 Degree of operating leverage = Contribution margin/Net operating income $63,080/$6,080 = 10.375 or 10.38% Estimated percent increase = degree of operating level x percent increase in unit sales 10.38% x 5% = 51.90%
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the degree of operating leverage?
6.25% Reason: Degree of operating leverage = Contribution margin/Net operating income $38,000/$6,080 = 6.25
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the variable expense ratio?
60% Reason: Variable expenses/sales = Variable expense ratio $57,000/$95,000 = 0.6 x 100 = 60%
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 Reason: Break-even point = $305,000 ÷ $40 = 7,625.
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 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the break-even point in unit sales?
840 per unit Reason: Breakeven point in unit sales = Total Fixed expenses/(Sales per unit - Variable expenses per unit) Sales per unit: $95 Variable Expense per unit: $57 $31,920/($95-$57) $31,920/$38 = 840
Cost-volume-profit (CVP) graph
A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.
Degree of Operating Leverage
A measure, at a given level of sales, of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net operating income.
Data for Hermann Corporation are shown below: per unit percent of sales Selling price: $70 100% Variable expenses: $49 70% Contribution Margin: $21 30% Fixed expenses are $74,000 per month and the company is selling 4,400 units per month. 1. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $9,800, the monthly sales volume increases by 100 units, and the total monthly sales increase by $7,000? 2. Should the advertising budget be increased?
Decreases by $(7,700); Therefore the advertising budget should not be increased. Reason: Beginning Sales: $70 x 4,400 = $308,000 Beginning Variable Expenses = $49 x 4,400 = $215,600 Beginning CM = $21 x 4,400 = $92,400 Fixed Expenses: $74,000 Beginning NOI: $18,400 Ending Sales: $70 x 4,500 = $315,000 Ending Variable Expenses = $49 x 4,500 = $220,500 Ending CM = $21 x 4,500 = $94,500 Fixed expenses = $9800 + $74,000 = $83,800 Ending NOI = $10,700 Change in NOI = $10,700 - $18,400 = -7,700
True or false: Without knowing the future, it is best to have a cost structure with high variable costs.
False
Data for Hermann Corporation are shown below: per unit percent of sales Selling price: $70 100% Variable expenses: $49 70% Contribution Margin: $21 30% Fixed expenses are $74,000 per month and the company is selling 4,400 units per month. 1. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $4 per unit and increase unit sales by 25%. 2. Should the higher-quality components be used?
Increases by $1,100; Yes, higher-quality components should be used. Reason: Ending Variable Expense per unit: $49 + $4 = $53 Increase in unit sales = 4,400 + (4,400 * 25%) = 5,500 Ending Sales: $70 x 5,500 = $385,000 Ending Variable Sales: $53 x 5,500 = $291,500 Ending CM = $93,500 Fixed expenses: $74,000 Ending NOI: $19,500 Change in NOI = Ending NOI - Beginning NOI $19,500-$18,400 = 1,100
Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next month's budget appear below: Selling Price per unit: $23 Variable expense per unit: $13 Fixed expense per month: $8,500 Unit sales per month: 1,000 1. What is the company's margin of safety? 2. What is the company's margin of safety as a percentage of its sales?
Margin of safety in dollars = Total Budgeted (or actual) sales - Break-even point in dollar sales Actual sales = $23 x 1,000 = $23,000 Breakeven point in unit sales = Total Fixed expenses/(Sales per unit - Variable expenses per unit) $8,500/($23-$13) = 850 Break-even point in dollar sales = # units at break-even x sales price per unit 850 x $23 = $19,550 Margin of safety in dollars = $23,000-$19,550 = $3,450 Margin of safety percentage: Margin of safety in dollars/Total Budgeted (or actual) sales $3,450/$23,000 = 0.15 x 100 = 15%
Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units): Sales $95,000 Variable expenses $57,000 Contribution margin $38,000 Fixed expenses $31,920 Net operating income $ 6,080 What is the margin of safety in dollars? What is the margin of safety percentage?
Margin of safety in dollars: $15,200 Margin of safety percentage: 16% Reason: Margin of safety in dollars = Total Budgeted (or actual) sales - Break-even point in dollar sales Actual sales = $95,000 Break-even point in dollar sales = $79,800 $95,000 - $79,000 = $15,200 Margin of safety percentage: Margin of safety in dollars/Total Budgeted (or actual) sales $15,200/$95,000 = 0.16 x 100 = 16%
Mauro Products distributes a single product, a woven basket whose selling price is $10 per unit and whose variable expense is $8 per unit. The company's monthly fixed expense is $2,400. If the company's fixed expenses increase by $600, what would become the new break-even point in unit sales? In dollar sales?
Reason: Ending fixed expense: $2,400 + $600 = $3,000 Breakeven point in unit sales = Total Fixed expenses/(Sales per unit - Variable expenses per unit) $3,000/($10-$8) = 1,500 Break-even point in dollar sales = # units at break-even x sales price per unit 1,500 x $10 = $15,000
Last month when Holiday Creations, Incorporated, sold 44,000 units, total sales were $176,000, total variable expenses were $140,800, and fixed expenses were $36,100. What is the estimated change in the company's net operating income if it can increase sales volume by 325 units and total sales by $1,300?
Reason: Sales per unit: $176,000/44,000 Variable expenses per unit: $140,800/44,000 = $3.20 Sales: $4 x 44,325 = $177,300 Variable expenses: $3.20 x 44,325 = $141,840 Contribution Margin: $35,460 Fixed expenses: $36,100 NOI: $(640) estimated change in NOI = Ending NOI - Beginning NOI -640 - (-900) = $240
Lin Corporation has a single product whose selling price is $140 per unit and whose variable expense is $70 per unit. The company's monthly fixed expense is $32,600. Calculate the unit sales needed to attain a target profit of $6,250.
Reason: Unit sales needed to attain target profit = (Fixed Cost + Target Profit)/(contribution margin per unit) ($32,600 + $6,250)/($140-$70) = 555
Which of the following items are found above the contribution margin on a contribution margin format income statement?
Sales Variable expenses
sales mix
The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
Operating Leverage
a measure of how sensitive net operating income is to a given percentage change in dollar sales
Contribution Margin Ratio (CM ratio)
a ratio computed by dividing contribution margin by sales
Variable Expense Ratio
a ratio computed by dividing variable expenses by sales
incremental analysis
an analytical approach that focuses only on those costs and revenues that change as a result of a decision
Contribution margin ______.
becomes profit after fixed expenses are covered
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 Reason: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits.
According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______.
decrease in the unit variable cost
When constructing a CVP graph, the vertical axis represents ______.
dollars
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
target profit analysis
estimating the level of sales needed to achieve a desired target profit
The contribution margin equals sales minus all ______ expenses.
fixed
The term "cost structure" refers to the relative proportion of _____________ and _____________ cost in an organization.
fixed and variable
Total contribution margin equals ______.
fixed expenses plus net operating income
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 ______.
increase by $7,750 Reason: (($735,000 - $700,000) × 45%) - $8,000 = $7,750 increase
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
Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.
net operating income will increase by $0.70 total contribution margin will increase by $0.70
The contribution margin as a percentage of sales is referred to as the contribution margin or CM
ratio