Managerial Accounting Ch. 5

With regards to interpretation, what are the important areas that appear on a CVP graph?

Break-even point, loss area, and profit area

Change in contribution margin=

CM ratio * change in sales

Atlas Corporation sells 100 bicycles during a month. The contribution margin per bicycle is $200. The monthly fixed expenses are $8,000. What is the profit from the sale of 100 bicycles?

Profit = Contribution margin of $20,000 (or 100 units × Unit contribution margin of $200 per unit) − Fixed expenses of $8,000 = $12,000.

The profit graph is based on the following linear equation:

Profit = Unit CM * Q - Fixed Expenses

What is usually plotted as a horizontal line on the CVP graph?

Fixed expenses

Atlas Corporation sells 100 bicycles during a month at a price of $500 per unit. The variable expenses amount to $300 per bicycle. How much does profit increase if it sells one more bicycle?

$200. Unit Contribution Margin = Sales price per unit - Variable costs per unit.

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

Contribution margin per unit = ($190,000 − $76,000)/1,000 units = $114 per unit$114 x 300 units = $34,200Less increase in fixed costs -$20,000Change in net operating income = increase of $14,200.

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's contribution margin ratio?

Contribution margin ratio = Contribution margin/Sales = ($50 − $20)/$50 = 60%.

Future Corporation has a single product; the product selling price is $100 and variable costs are $60. The company's fixed expenses are $10,000. What is the company's break-even point in sales dollars?

Dollar sales to break-even = Fixed expenses of $10,000 ÷ CM Ratio of 0.40 = $25,000.

Frank Corporation has a single product. Its selling price is $80 and the variable costs are $30. The company's fixed expenses are $5,000. What is the company's break-even point in unit sales?

Unit CM = Selling price of $80 − Variable expense of $30 = $50. Unit sales to break-even = Fixed expenses of $5,000 ÷ $50 = 100 units.

Once the break-even point has been reached, net operating income will increase by the amount of the _____ for each additional unit sold.

Unit contribution margin

What is represented on the X axis of a cost-volume-profit (CVP) graph?

Unit volume

Cartier Corporation currently sells its products for $50 per unit. The company's variable costs are $20 per unit. Fixed expenses amount to a total of $5,000 per month. What is the company's variable cost ratio?

Variable expense ratio = Variable expenses/Sales = $20/$50 = 40%.

Profit=

(P*Q-V*Q) - fixed expenses

Taylor Company has current sales of 1,000 units, at a selling price of $190 per unit, variable costs per unit of $76, and fixed expenses of $96,000. The company believes sales will increase by 300 units, if the company introduces sales commissions as an incentive for the sales staff. The change will decrease the selling price to $175 per unit, increase variable cost per unit to $100, and decrease fixed expenses by $20,000. What is the net operating income after the changes?

New contribution margin per unit = $175 − $100 = $75. New contribution margin = $75 × 1,300 units = $97,500. New fixed cost = $96,000 − 20,000 = $76,000. New net operating income = $97,500 − 76,000 = $21,500. Increase of $21,500.

Contribution margin=

Sales - variable costs

The break-even point is the level of sales at which ______.

Total revenue equals total costs