Chapter 2. Cost-Volume-Profit Relationships

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.

The break-even point calculation is affected by

-selling price per unit -sales mix -costs per unit

Contribution margin:

becomes profit after fixed expenses are covered. Reason: Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses.

The degree of operating leverage =

contribution margin ÷ net operating income

The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

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

When constructing a CVP graph, the vertical axis represents:

dollars.

Estimating the fixed and variable components of a mixed cost using the ________ involves a detailed analysis of what cost behavior should be

engineering approach

The best fitting line minimizes the sum of the squared errors when using

least-square regression

A method that uses all the available data points to divide a mixed cost into its fixed and variable components is called

least-squares regression

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

margin of safety

The contribution margin as a percentage of sales is referred to as the contribution margin or CM

ratio

The relative proportions in which a company's products are sold is referred to as

sales mix

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

sales mix

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was

$2,200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

CVP analysis focuses on how profits are affected by

-selling price -mix of products sold -unit variable cost -total fixed costs -sales volume

Profit equals:

(P × Q - V × Q) - fixed expenses.

Which of the following statements are true?

-Scattergraphs are a way to diagnose cost behavior. -Plotting data on a scattergraph is an important diagnostic step

When a company produces and sells multiple products

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

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

-product mix -selling price -volume

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 to break-even. 6,400 units is needed to earn the target profit.

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

Cost structure refers to the relative portion of product and period costs in an organization.

False Reason: Cost structure refers to the relative portion of FIXED and VARIABLE costs in an organization.

Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False Reason: This is the engineering approach.

The term "cost structure" refers to the relative proportion of _______ and _______costs in an organization.

Fixed; Variable

Which of the following statements is correct?

The higher the margin of safety, the lower the risk of incurring a loss.

The contribution margin equals sales minus all

Variable Expenses

Cost behavior is considered linear whenever

a straight line approximates the relationship between cost and activity

The rise-over-run formula for the slope of a straight line is the basis of

the high-low method

To prepare a CVP graph, lines must be drawn representing total revenue,

total expense, and total fixed expense

When using the high-low method, the slope of the line equals the _________ cost per unit of activity

variable

When compared to a company with higher fixed costs and lower variable costs, a company with lower fixed costs and higher variable costs, has

-greater profit stability -better protection from loss in bad years -lower net income in good years

A company with a high ratio of fixed costs:

-is more likely to experience a loss when sales are down than a company with mostly variable costs. -is more likely to experience greater profits when sales are up than a company with mostly variable costs.

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.