Chapter 5 Cost-Volume Profit Relationships

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.

target profit analysis

Estimating the level of sales needed to achieve a desired target profit.

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 ______.

In crease by $7,750 Change in NOI = ((735,000 - 700,000) x 45%)- 8,000 = 7,750

contribution margin ratio (CM ratio)

a ratio computed by dividing contribution margin by dollar sales

incremental analysis

an analytical approach that focuses only on those costs and revenues that change as a result of a decision

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

Formulas for CM ratio

contribution margin = sales revenue(volume x selling price) - variable costs contribution margin = fixed costs + net operating income net operating income = contribution margin - fixed costs

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

costs volume selling price

When constructing a CVP graph, the vertical axis represents ______. When preparing a CVP graph, the horizontal axis represents ______.

dollars sales volume

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

total fixed expenses

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 equals ______.

(P × Q - V × Q) - fixed expenses

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 ______. GIVEN NOI(PROFIT), CM PER UNIT, FIXED COSTS, WHAT IS THE QUANTITY SOLD

40,000 Reason: ($520,000 + $320,000) ÷ $21 = 40,000

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 Reason: Break-even point = $305,000 ÷ $40 = 7,625.

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.

variable expense ratio

A ratio computed by dividing variable expenses by sales.

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

Margin of Safety

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?

Reason: $98,000 ÷ ($50 - $15) = 2,800 = Fixed costs / (sale price - 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 ______.

Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

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.

A company with a high ratio of fixed costs ______.

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

At the break-even point ______.

net operating income is zero total revenue equals total cost

The variable expense ratio is the ratio of variable expense to ______.

sales variable expense / selling price

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

sales variable expenses CM fixed expenses net operating income

margin of safety

the excess of budgeted or actual dollar sales over the break-even dollar sales

The contribution margin equals sales minus all ______ expenses.

variable

Variable expenses ÷ Sales is the calculation for the

variable expense or cost ratio

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.

operating leverage

a measure of how sensitive net operating income is to a given percentage change in dollar sales

The degree of operating leverage = ______.

contribution margin ÷ net operating income

Total contribution margin equals ______.

fixed expenses plus net operating income

CVP analysis focuses on how profits are affected by ______.

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

break-even point

the level of sales at which profit is zero

Cost structure refers to

the relative portion of fixed and variable costs in an organization.

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

total expense, and total fixed expense