Chapter 6

When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will ______. remain the same increase decrease

decrease

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the ______. leverage leap margin of safety degree of operating leverage sales commissions percentage

degree of operating leverage

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

dollars

The break-even point is reached when total revenue is ______ total costs. equal to greater than less than

equal to

True or false: CVP analysis is only used for break-even and target profit analysis. True False

false

True or false: Cost structure refers to how a company uses product and period costs in an organization.

false

Decisions about the use of debt versus equity affects a company's__ __

financial leverage

When constructing a CVP graph, the place where the total cost line intercepts the y-axis represents total __ costs

fixed

If operating leverage is high, a small percentage increase in sales produces a __(higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

Managers should be willing to choose either alternative at the __ __ because the profit is the same.

indifference point

Managers should be willing to choose either alternative at the __ __because the profit is the same.

indifference point

Setting two profit equations so that they yield the same profit allows managers to calculate the __ __

indifference point

The excess of the budgeted (or actual) sales dollars over break-even sales is called the __ of __.

margin safety

The excess of the budgeted (or actual) sales dollars over break-even sales is called the ___ of __.

margin of safety

The margin of safety percentage is ______. margin of safety in dollars divided by total budgeted (or actual) sales in dollars margin of safety in dollars divided by break-even sales in dollars total budgeted (or actual) sales in dollars divided by break-even sales in dollars total budgeted (or actual) sales in dollars divided by margin of safety in dollars

margin of safety in dollars divided by total budgeted (or actual) sales in dollars

Sniffles, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Sniffles' sales rounded to the nearest dollar must be ______. $1,242,408 $1,520,000 $5,088,695 $1,170,400

$1,520,000

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%, sales dollars needed to reach the target profit equals ______. $3,000,000 $913,880 $1,364,000 $2,200,000

$2,200,000

A company sells a product for $80 per unit and has a contribution margin ratio of 45%. Fixed costs total $180,000. Sales dollar to break even equals ______. $500,000 $400,000 $180,000 $327,273

$400,000

Given budgeted sales of $982,000, break-even sales of $932,200, and fixed expenses of $429,000, the budgeted margin of safety in dollars is ______. $503,200 $(379,200) $553,000 $49,800

$49,800

When a company increases the selling price of a product with no change in variable cost per unit or total fixed costs, the break-even point for that product will ______. increase decrease remain the same

(Reason: An increase in selling price increases contribution margin and decreases the break-even point.) decrease

The formula used to calculate the sales volume needed to achieve a target profit is ______. (Target profit + Fixed expenses)/Unit contribution margin (Target profit)/(Fixed expenses - Unit contribution margin) (Target profit + Fixed expenses)/Selling price per unit (Variable expenses + Fixed expenses)/Selling price per unit

(Target profit + Fixed expenses)/Unit contribution margin

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ______. 16% 14.3% 6.25% 2.72%

16% (Reason: Margin of safety = $272,000/(100,000 × $17) = 16%.)

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ______. 6.25% 14.3% 2.72% 16%

16% (Reason: Margin of safety = $272,000/(100,000 × $17) = 16%.)

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is =__%.

19

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is

19%

Given sales of $110,000, a contribution margin of $75,000 and net operating income of $30,000, operating leverage is ______. 2.5 .4 27.2 3.67

2.5 (Reason: $75,000/$30,000 = 2.5)

If sales increase by 5% and the degree of operating leverage is 4, net operating income should increase by ______. 0.25% 20% 1% 9%

20% (Reason: Increase in net operating income = 5% × 4 = 20%.)

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans that must be sold to meet the company's goal is ______. 7,730 21,645 14,688 6,958

21,645

Desks by Daisy sells a student desk for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell __ desks per month in order to break-even.

250

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? 1,960 3,600 2,800 6,400

2800

Given net operating income of $50,000, contribution margin of $150,000 and sales of $300,000, the degree of operating leverage of

3

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is ______. 4,800 267 534 7,200

4,800

A company sells 15,000 units of product per month. The sales price per unit is $5.00, variable costs are $2.80 per unit and and total fixed costs equal $3,000. The contribution margin ratio is ______.

44%

A company sells its product for $40 per unit. Variable costs are $12 per unit. Total fixed costs are $50,000. In order to reach the profit goal of $90,000 the company must sell __units of the product.

5000

Given sales of 10,000 units per month, sales price per unit of $4.00, variable costs of $1.80 per unit and and total fixed costs of $5,000, the contribution margin ratio is__

55%

Given fixed costs of $30,000, variable costs of $2.00 per unit, and a contribution margin of $5.00 unit, __ units have to be sold in order to break even.

6000

Given total fixed costs of $35,000 and a contribution margin ratio of 40%, __ of revenue must be earned to break even

87,500

Larson's Ltd. sells its product for $12.00 per unit. The contribution margin per unit is $8.00 and fixed costs are $75,000. Larson has to sell to ______ units to break even. 18,750 9,375 3,750 6,250

9375

Which of the following is NOT a method used for basic CVP analysis? Profit equation Contribution margin ratio Break-even analysis Unit contribution margin

Break-even analysis

Which tool can be used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs? Target profit analysis Cost structure Degree of operating leverage CVP analysis

CVP analysis

Degree of operating leverage equals ______. Contribution margin/Net operating income Contribution margin/Total sales Gross margin/Net operating income Total sales/Net operating income

Contribution margin/Net operating income

True or false: The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False

Select all that apply Which of the following are assumptions of cost volume profit analysis? Total cost and total revenue are affected by both volume and price changes. Production volume is equal to sales volume. All costs can be classified as either fixed or variable. In multi-product companies, the sales mix is constant.

Production volume is equal to sales volume. All costs can be classified as either fixed or variable. In multi-product companies, the sales mix is constant.

Select all that apply Which of the following are assumptions of cost volume profit analysis? Production volume is equal to sales volume. Total cost and total revenue are affected by both volume and price changes. In multi-product companies, the sales mix is constant. All costs can be classified as either fixed or variable.

Production volume is equal to sales volume. In multi-product companies, the sales mix is constant. All costs can be classified as either fixed or variable.

The equation for the profit equation method is ______. (Total Fixed Costs + Target Profit)/Contribution Margin Ratio (%) = Profit Actual or Budget Sales - Break Even Sales = Profit Total Fixed Costs/Unit Contribution Margin = Profit Total Sales Revenue - Total Variable Costs - Total Fixed Costs = Profit

Total Sales Revenue - Total Variable Costs - Total Fixed Costs = Profit

Select all that apply CVP ______. allows managers to see how changing one variable can impact another can be used for "what-if" analysis can be used to make many different decisions only works in single product companies

allows managers to see how changing one variable can impact another can be used for "what-if" analysis can be used to make many different decisions

The difference between break-even analysis and target profit analysis is the ______. selling per unit price total amount of fixed costs amount that profit is set to formula that is used

amount that profit is set to

If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ratio will ______. both decrease remain unchanged both increase

both increase

If a company raises the price of a product with no change in costs, the unit contribution margin and contribution margin ratio will ______. remain unchanged both increase both decrease

both increase

Margin of safety in dollars is ______. break-even sales minus budgeted (or actual) sales budgeted (or actual) sales minus break-even sales net income minus break-even sales net income minus fixed costs

budgeted (or actual) sales minus break-even sales

The amount each unit sold contributes towards fixed costs and profit is the unit

contribution margin

How much contribution margin is generated per dollar of sales revenue is the __ __ __

contribution margin ratio

The contribution margin stated as a percentage of sales dollars is the ______. contribution margin ratio weighted-average contribution margin contribution margin per unit

contribution margin ratio

Contribution margin ______. is first used to cover variable expenses covers fixed cost and profit equals sales minus fixed expenses

covers fixed cost and profit

The margin of safety percentage is ______. margin of safety in dollars divided by total budgeted (or actual) sales in dollars total budgeted (or actual) sales in dollars divided by break-even sales in dollars margin of safety in dollars divided by break-even sales in dollars total budgeted (or actual) sales in dollars divided by margin of safety in dollars

margin of safety in dollars divided by total budgeted (or actual) sales in dollars

Decisions about whether to use fixed or variable costs to run a business affects a company's __ leverage

operating

Decisions about whether to use fixed or variable costs to run a business impact a company's ______. target profit operating leverage financial leverage

operating leverage

According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases. total contribution margin price unit fixed cost total variable cost

price

According to the assumptions of CVP, ______ will not change as the volume of a product increases or decreases. total variable cost unit fixed cost total contribution margin price

price

select all that apply In the profit equation, total ______ is a function of the number of units sold (Q). sales revenue fixed costs variable costs

sales revenue variable costs

An extension of break-even analysis that allows managers to determine units or sales needed to achieve an earning's goal is called ___ ___ analysis.

target profit

The single point where the total revenue line crosses the total expense line on the CVP graph indicates ______. profit is less than zero profit is greater than zero the break-even point profit equals zero

the break-even point profit equals zero

The distance between the total revenue line and the total cost line a on a cost-volume-profit graph represents the ______. total amount of revenue total contribution margin total amount of either profit or loss break-even point

total amount of either profit or loss

Methods that can be used to model the relationship between revenues, costs, profit and volume include the __contribution margin method and the contribution __ __ method.

unit margin ratio

The amount that each unit sold contributes to fixed costs and profit is ______. variable cost per unit unit sales price unit contribution margin

unit contribution margin

The term cost structure refers to how a company uses __costs versus __ costs in its operations

variable fixed

When preparing a CVP graph, the slope of the total cost line represents ______. total fixed costs variable cost per unit sales volume sales dollars per unit

variable cost per unit

Select all that apply Contribution margin equals sales minus ______. fixed selling and administrative costs fixed manufacturing overhead variable selling and administrative costs variable manufacturing costs

variable selling and administrative costs variable manufacturing costs

Select all that apply CVP analysis can be useful in deciding ______. what price to charge for goods or services what cost structure to implement which services to offer how to change the sick leave policy for employees which products to offer what marketing strategy to use

what price to charge for goods or services what cost structure to implement which services to offer which products to offer what marketing strategy to use

The goal of break-even analysis is to find the level of sales where profit is equal to ______. the contribution margin zero total variable costs total fixed costs

zero