chapter 5 accounting
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
