Chapter 3. Cost-Volume-Profit Relationships

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. Each $1 increase in sales will have which of the following effects?

Net operating income will increase by $0.70 Total contribution margin will increase by $0.70

The calculation of contribution margin (CM) ratio is:

contribution margin/sales

CVP is the acronym for ___________ - ____________ - ____________

cost - volume - profit

When constructing a CVP graph, the vertical (y) axis represents __________

dollars

The break-even point indicates the sales volume needed to make contribution margin __________ to fixed expenses (Enter only one word per blank)

equal

A company has reached its break-even point when the contribution margin ____________ fixed expenses (Enter only one word per blank)

equals

if the total contribution margin is less than the total fixed expenses, then a ________ will occur

net loss

To prepare a CVP graph, lines must be drawn representing:

total revenue, total expense, and total fixed expense

When constructing a CVP graph, the horizontal (x) axis represents unit __________

volume

On a profit graph, the sales volume where profit is __________ is the break-even point

zero

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by:

$0.35

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

1. in multi product companies, the sales mix is constant 2. costs are linear and can be accurately divided into variable and fixed elements

(Sales - Variable Expenses)/Sales =

Contribution Margin Ratio

Selling price per unit multiplied by the quantity sold equals total __________. (Enter only one word per blank)

sales

Cartoon Cakes has $401,000 of fixed costs per year. The contribution margin ratio is 59%. What amount of sales dollars is required if the company has set a target profit of $720,000 this year?

$1,900,000 Sales = ($401,000 + $720,000)/0.59

Sniffles, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $2,404,000. To achieve a target profit of $9,300,000, Sniffles' sales must be:

$15,200,000 Sales = ($2,404,000 + $9,300,000)/0.77

A company considering the compensation of sales staff from salaries to commission. If done, fixed expenses would decrease from $50,000 to $40,000 per month and variable expenses would increase by $20 per unit. Current contribution margin is $90 per unit. The company president is confident that total monthly sales would increase from 1,000 per month to 1,400 per month. Calculate the change in net operating income if the change is made.

$18,000 increase Contribution margin with commissions: 1,400 units X $70 = $98,000. Current contribution margin: 1,000 X 90 = $90,000 - $8,000 increase in CM + decrease in fixed costs $10,000 = $18,000 increase

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%, what amount of sales dollars must be sold to reach the target profit?

$2,200,000 Sales = ($564,000 + $800,000)/0.62 = $2,200,000

A company sells 500 sleds per month for $80 and incurs $41 of variable cost per unit. Fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. The new material would increase variable costs by $9 per unit. Calculate the change in profit if the company starts using the new material.

$2,400 decrease (The current contribution margin is $39 per unit ($80-$41) or $19,500 (500 units X$39) total. The new contribution margin would be $30 per unit ($39 - $9 new cost) or $17,100 (570 units X $30), a decrease of $2,400)

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

To calculate profit, multiply the _________ per unit by sales volume and then subtract total fixed cost.

Contribution Margin

Pretty in Pearls sold 95 necklaces last month. If variable cost per unit is $40 and fixed costs total $3,085, the company's total variable cost was:

$3,800 Total variable cost = 95 X $40 = $3,800

A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. What is the company's profit?

$301,100 Profit = CM ratio X Sales - Fixed Expenses = 67% X $1,430,000 - $657,000 = $301,100

A company sold 750 units with a contribution margin of $120 per unit. If the company has a break-even point of 450 units, what is net operating income?

$36,000 Net operating income = (750 -450) X $120

Daisy's Dolls sold 30,000 dolls this year at $40 each. The company incurred $250,000 of fixed expenses. Each doll's variable cost is $19. What is Daisy's Dolls' net operating income?

$380,000 Net operating income = 30,000 X ($40-$19) - $250,000 = $380,000

A company's current budget shows the following: budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's margin of safety in dollars is:

$49,800

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

$55; Unit contribution margin = $90 - $35 = $55

Given $250,000 of fixed costs per year and a contribution margin ratio of 40%, what amount of sales dollars is required to break-even

$625,000

In order to reach a target profit of $180,000, 90,000 units need to be sold. Assuming each unit sells for $7.50, the total sales dollars needed to reach the target profit is $

$675,000 90,000 X $7.50

Net operating income can be calculated as follows:

(unit sales - unit sales to break even) X unit contribution margin

Net operating income can be calculated as follows:

(unit sales - unit sales to break-even) X unit contribution margin

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Which of the following are true?

1. Company A has reached the break-even point. 2. Company A's contribution margin equals the fixed costs

At the break-even point:

1. Net Operating income is zero 2. Total Revenue equals total cost

Which of the following items are needed to solve for net operating income at any projected sales volume above the break-even point?

1. Projected unit sales 2. Contribution margin per unit 3. Break-even unit sales

Which of the following items are needed to solve for net operating income at any projected sales volume above the break-even point?

1. Projected unit sales 2. contribution margin per unit 3. break-even unit sales (you must know how many units are needed to break-even to determine the number of units above the break-even point.)

Place the following items in the correct order in which they appear on the contribution margin format income statement

1. Sales 2. Variable Expenses 3. Contribution Margin 4. Fixed Expenses 5. Net Operating Income

Candle Central has $1,440 of total variable expense 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, which of the following statements would be true?

1. The variable cost per unit is $2.40. ($1,440/600) 2. Total variable cost is $1,200 (1,440/600 = 2.40 per unit X 500 units = 1,200 total variable cost)

Place the following items in the order in which sales dollars are applied on a contribution margin income statement.

1. Variable Costs 2. Fixed Expenses 3. Net Income

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. Each $1 increase in sales will have which of the following effects?

1. net operating income will increase by $0.70 2. Total contribution margin will increase by $0.70

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. Each $1 increase in sales will have which of the following effects?

1. net operating income will increase by $0.70 2. total contribution margin will increase by $0.70

The single point where the total revenue line crosses the total expense line on the CVP graph indicates:

1. profit equals zero 2. the break-even point

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

1. selling price 2. volume 3. costs

The single point where the total revenue line crosses the total expense line on the CVP graph indicates:

1. the break-even point 2. profit equal zero

Blissful Blankets hopes to achieve a profit this year of $520,000. Each blanket has a contribution margin of $21. Fixed costs for the company are $320,000. How many blankets does Blissful Blankets need to sell in order to achieve its target profit?

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

Gifts Galore sold $189,000 worth of wrapping paper last year. Total contribution margin was $100,170. Calculate the contribution margin ratio

53%

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?

7,625 units Break-even point = #305,000/ $40 = 7,625

A company's selling price is $90 per unit; its variable cost per unit is $28; and its total fixed expenses are $320,000. What sales volume is needed to achieve the target profit of $200,800

8,400 units Sales Volume = ($320,000 + $200,800)/($90 - $28)

Adams, Inc. currently sells one of its products for $140 per unit. Variable costs are $75 per unit and total fixed costs are $5,000. The company has been asked to provide 500 units to a charity at a reduced price. The sale would not disrupt regular sales. If Adam's desired profit for this sale is $20 per unit, the quoted price per unit will be $

95; $75 variable cost + $20 profit. Fixed costs are not included because they will not be impacted so the additional contribution margin increases profits

Plush & Cushy 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 Plush & Cushy's chairs is:

=45%

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit __________ _________

Contribution Margin

Which of the following equations can be used to solve for the change in profit due to a change in sales and fixed expenses?

Change in profit = CM ratio X Change in sales - Change in fixed expenses

After reaching the break-even point, a company's net operating income will increase by the __________ __________ per unit for each additional unit sold. (Enter only one word per blank.)

Contribution Margin

If contribution margin is not sufficient to cover the ___________ ___________, a company will experience a net operating loss (Enter only one word per blank.)

Fixed Expenses

Adam's Sports Store has a contribution margin ratio of 55%. The break-even point has already been reached this year. If the shop is able to generate additional sales of $250,000 by the end of the year, how much will its net operating income change as a result of the additional sales?

Net operating income will increase by $137,500 (Net operating income change = $250,000 X 55% - $137,500 increase

Anne's Antique Store has a contribution margin ratio of 29%. The break-even point has been reached. If the store generates an additional $600,000 of sales for the year, how will these additional sales affect net operating income?

Net operating income will increase by $174,000 (Net operating income change = $600,000 X 29% = $174,000)

Elle's Elephant Shop sells giant stuffed elephants for $55 each. Elle incurs $10 of variable costs for each elephant and a total of $700 fixed costs. Assuming Elle will sell 35 elephants this month, which of the following statements are true?

Profits = $875 [35 X ($55 - $10) - $700] Total Sales = $1,925 [35 X $55] Total Variable Costs = $350 [35 X $10]

A company is currently selling 10,000 units of product. The selling price is $40 per unit and the contribution margin is $27 per unit. The company thinks spending $50,000 on advertising will increase sales by 750 units per month and allow them to increase the selling price to $45 per unit. If this is correct, which of the following statements is true?

The company should accept the idea because profit will increase by $24,000 (An increase in selling price is $5 will increase the contribution margin $5 (from $27 to $32). The increased contribution margin of $74,000 ((10,750 X $32)-(10,000 X $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000

Candle Central has $1,440 of total variable expense 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, which of the following statements would be true?

Total Variable cost is $1,200 The Variable cost per unit is $2.40

The formula used to calculate the sales volume needed to achieve a target profit is:

Unit sales to attain a target profit = (Target profit + Fixed expenses)/Unit Contribution Margin

The CVP graph evaluates CVP relationships over a wide range of ________ levels

activity

CVP analysis is based on some ________ that may be violated in practice, but the tool is still generally useful.

assumptions

Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to:

break-even

Multiplying unit selling price times the number of units required to break-even is one way to calculate:

break-even sales dollars

Assuming the sales price remains constant, an increase in the variable cost per unit will _________ the contribution margin per unit

decrease

In order to convert the margin of safety from dollar form to percentage form, the margin of safety in dollars must be __________ by the budgeted (or actual) sales in dollars

divided

In order to convert the margin of safety from dollar form to percentage form, the margin of safety in dollars must be ____________ by the budgeted (or actual) sales in dollars.

divided

When considering changes in costs and revenues, focusing only on the items that will change is called _______ ________

incremental analysis

The contribution margin statement is primarily used for:

internal decision making

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

margin of safety

To calculate the impact on net income using the contribution margin ratio, _________ the change in ___________ by the contribution margin ratio

multiply the change in sales by

Which of the following is the equation to solve for profit in terms of sales volume?

profit = (unit contribution margin X unit sales) - fixed expense

To simplify CVP calculations, which of the following is assumed to remain constant?

selling price

When a company has a specific net operating income it wishes to achieve, determining required sales to achieve the specific income is done by using _________ _________ analysis

target profit analysis

The vertical distance between the total revenue line and the total expense line on a CVP graph represents:

the total amount of either profit or loss

For a single-product company, the margin of safety in _________ form is calculated by dividing the margin of safety in dollars by the selling price per unit.

unit

For a single-product company, the margin of safety in __________ form is calculated by dividing the margin of safety in dollars by the selling price per unit

unit

Profit = (selling price per unit X quantity sold) - (______________ expense per unit X quantity sold) - ____________ expenses

variable fixed

When a company only produces a single product, the total variable cost can be calculated with the equation:

variable cost per unit multiplied by quantity of units sold

Variable expenses/Sales is the calculation of the ___________ __________ ratio.

variable expense

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

zero

The break-even point is the level of sales at which the profit equals ____________ (enter only one word per blank)

zero