chapter 5 accounting

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The calculation of contribution margin (CM) ratio is

contribution margin ÷ sales

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

total expense, and total fixed expense

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

sales, variable expenses, contribution margin, fixed expenses, net operating income

CVP analysis focuses on how profits are affected by

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

The break-even point is reached when the contribution margin is equal to

total fixed expenses

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 sales = $1,925 profits = $875 total variable costs = $350

Ceramic Creations sells pots for $25. The variable cost per pot is $12 and 15,000 pots must be sold to break-even. If Ceramic Creations sells 25,000 pots, net operating income will be

$130,000 Reason: Net income = (25,000 - 15,000) × ($25 - $12) = $130,000.

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 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.

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

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

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as

cm ratio × change in sales - change in fixed expenses

After reaching the break-even point, a company's net operating income will increase by the

contribution margin

The break-even point calculation is affected by

costs per unit selling price per unit sales mix

When constructing a CVP graph, the vertical axis represents

dollars

Total contribution margin equals

fixed expenses plus net operating income

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

Profit equals

(P × Q) - (V × Q) - fixed expenses

Which of the following items are found above the contribution margin on a contribution margin format income statement?

Sales Variable expenses

At the break-even point

net operating income is zero total revenue equals total cost

Net operating income equals

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

The Cutting Edge sells ice skates. Total sales are $845,000, total variable expenses are $245,050 and total fixed expenses are $302,000. The variable expense ratio is

29% Reason: Variable expense ratio = $245,050 ÷$845,000 = 29%.

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

5000

Gifts Galore had sales revenue of $189,000. Total contribution margin was $100,170 and total fixed expenses were $27,500. The contribution margin ratio was

53% Reason: Contribution margin ratio = $100,170 ÷$189,000 = 53%.

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

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

volume costs selling price


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