BUS 215 Chapter 5.
To determine the slope, intercept and R² using Excel, select the Trend/Regression type
Linear
Solving for the sales level needed to achieve a profit of zero is the same process as solving for the sales level needed to
break-even
Margin of safety in dollars is
budgeted (or actual) sales minus break-even sales
To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit
contribution margin
Operating leverage is the smallest at sales levels near the break-even point and increases as sales and profits rise
false
The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.
false
The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total
profit or loss
Company A has fixed costs of $564,000 and has set a target profit of $800,000. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals
2,200,000
A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is
7,625
If sales increase by 15% and the degree of operating leverage is 6, net operating income should increase by
90
Simple CVP analysis can be relied on for changes in volume outside the relevant range.
False
Softie, 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, Softies' sales must be
$1,520,000
True or false: CVP analysis investigates company personnel policies, business values, and performance measures for a specific company.
False
When a company produces and sells multiple products
a change in the sales mix will most likely change the break-even point each product most likely has different costs each product most likely has a unique contribution margin
Bluin Corporation pays its salesperson a flat salary of $5,750 per month and is considering paying $30 per unit instead. Current unit sales are 250 per month, but Bluin believes the compensation change will increase unit sales by 50%. Bluin's current contribution margin is $100 per unit. If Bluin switches the compensation and sales grow as expected, net operating income will _______per month.
increase by $7,000 Current net operating income = ($100 × 250) - $5,750 = $19,250. With the change salary becomes a variable cost and net operating income would be: ($100 - $30) × 250 × 150% = $26,250, an increase of $7,000 per month.
The high-low method
is easy to apply uses only two data points
The degree of operating leverage
is greatest at sales levels near the break-even point is not a constant decreases as sales and profits rise
When using the high low method, the change in cost divided by the change in units equals
variable cost per unit
The equation that should be used in setting a target selling price for a special order bulk sale that does not affect a company's normal sales is: selling price per unit =
variable cost per unit + desired profit per unit
When a company only produces a single product, the total variable cost can be calculated with the equation
variable cost per unit multiplied by quantity of units sold
CM ratio is equal to 1 -________ _______ ratio.
variable expense
The contribution margin is equal to sales minus
variable expenses
The contribution margin income statement allows users to easily judge the impact of a change in
volume selling price cost
Fill in the blank question. The break-even point is the level of sales at which the profit equals
zero
Solving for the sales level needed to attain a target profit of $ ________is the same process as solving for the sales level needed to break-even.
zero
To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to
zero
To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to $
zero
Given sales of $100,000 a contribution margin of $40,000, and fixed expenses of $50,000, the result is a
$10,000 net operating loss Contribution margin of $40,000 - fixed expenses of $50,000 = a $10,000 loss.
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
$100,170 ÷ $189,000 = 53%
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 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 Contribution margin = 20,000 × ($20 - $11) = $180,000.
A company has total sales of $1,430,000. Fixed expenses are $657,000 and the contribution margin ratio is 67%. Company profit (loss) is
$301,100
Shonda's Shoes sell for $95 per pair. If Shonda must sell a total of 284 pairs of shoes to break-even, and a total of 450 pairs to achieve her target profit, sales dollars needed to earn the target profit equals
$42,750
A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a
$450 increase The current contribution margin is $39 per unit ($80 - $41) or $19,500 (500 units × $39) total. The new contribution margin would be $35 per unit ($39 - $4 new cost) or $19,950 (570 units × $35), an increase of $450.
Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is
$49,800
Company A's product sells for $90 and has a variable cost of $35 per unit. Fixed costs total $550,000. If Company A sells 16,000 units, the contribution margin per unit is
$55
Seth's Speakers had actual sales of $1,630,000 If break-even sales equals $935,000, Seth's
$695,000
Company A has fixed costs of $564,000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equals
$909,677
Which of the following are assumptions of cost-volume-profit analysis?
- In multi product companies, the sales mix is constant.- Costs are linear and can be accurately divided into variable and fixed elements
Contribution margin is first used to cover____ Once the break-even point has been reached, contribution margin becomes_____
1. Fixed 2. Profit
A company incurred $12,000 of maintenance cost for 6,500 machine hours in June and $14,250 of maintenance costs for 8,000 hours in August. Assuming these are the high and low months of activity, the estimated fixed maintenance costs using the high-low method is $
2,250
A company has an opportunity to make a bulk sale that would not impact regular sales or total fixed expenses. The variable cost per unit is $11 and the company desires a total profit of $4,500. The quoted selling price per unit for 500 units should be $
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 required to meet the company's goal is
21,645
Shonda's Shoes sell for $95 per pair. If Shonda must sell 284 pairs of shoes to break-even, sales dollars needed to break-even equals
26980
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
40,000
Company A sells its product for $10 per unit. If Company A has variable expenses of $5 per unit and fixed expenses of $200,000, the break-even point in units and dollars is
40,000 units and $400,000
Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $
40000
Seating Galore sells high-end desk chairs. The variable expense per chair is $85.05 and the chairs sell for $189.00 each. The variable expense ratio for Seating Galore's chairs is
45
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
5,000
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
Contribution margin = 20,000 × ($20 - $11) = $180,000.
Place the following items in the correct order in which they appear on the contribution margin format income statement.
Correct order: 1. sales 2. variable expenses 3. contribution margin 4. fixed expenses 5. net operating income
Which of the following are assumptions of cost-volume-profit analysis?
Costs are linear and can be accurately divided into variable and fixed elements. In multi product companies, the sales mix is constant.
Which of the following statements are true?
Plotting data on a scattergraph is an important diagnostic step. Scattergraphs are a way to diagnose cost behavior.
Which of the following items are found above the contribution margin on a contribution margin format income statement?
Sales Variable expenses
Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information
The contribution margin per putter is $65d. The sale of 12,000 putters results in net operating income of $380,000
The profit graph allows users to easily identify
The profit at any given sales volume. The sales volume required to reach the break-even point.
Candle Central has $1,440 of total variable expense for a sales level of 600 units and $2,160 of total variable expense for a sales level of 900 units. If Candle Central sells 500 units
The variable cost per unit is $2.40.Total variable cost is $1,200.
A company is currently selling 10,000 units of product monthly for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 per month on advertising will allow them to increase the selling price to $45 and that sales will increase by 750 units per month. The company should ______ the idea because profit will ______.
accept; increase by $24,000 An increase in selling price of $5 will increase the contribution from $27 to $32. The increased contribution margin of $74,000 ((10,750 × $32) - (10,000 × $27)) - the additional fixed costs of $50,000 = a profit increase of $24,000.
Using the high-low method, the fixed cost is calculated
after the variable cost per unit is calculated using either the high or low level of activity
CVP analysis is based on some _________that may be violated in practice,
assumptions, theories, or predictions
Contribution margin:
becomes profit after fixed expenses are covered. Contribution margin is first used to cover fixed expenses. It is equal to sales - variable expenses.
The break-even point calculation is affected by
costs per unit selling price per unit sales mix
Assuming sales price remains constant, an increase in the variable cost per unit will______the contribution margin per unit.
decrease
Sweet Dreams sells pillows for $25 each. Variable costs are $15 per pillow. The company is considering improving the quality of materials which will increase variable costs to $19. The company expects the improved materials will increase sales from 1,200 to 1,500 pillows per month. The impact of this change on total contribution margin would be a(n)
decrease 3000
Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes this plan will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to
decrease by $16,000
According to the CVP analysis model and assuming all else remains the same, profits would be increased by a
decrease in the unit variable cost
The measure of how a percentage change in sales affects profits at any given level of sales is the
degree of operating leverage
When constructing a CVP graph, the vertical axis represents:
dollars
Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying $20 per unit instead. Sales are currently 200 units per month. Goldin believes the compensation change will increase unit sales by 25%. The current contribution margin is $80 per unit. If the change is implemented, net operating income will
increase 4,000
A company is currently selling 10,000 units of product for $40 per unit. The unit contribution margin is $27. The company believes that spending $50,000 on advertising will increase sales by 750 units per month and enable them to increase the selling price to $45 per unit. If this change is implemented, profits will
increase by $24,000
The contribution margin statement is ordinarily used by those
inside the company only
The contribution margin statement is primarily used for
internal decision making
The statistic R²
is a measure of goodness of fit
The contribution margin as a percentage of sales is referred to as the contribution margin or CM
ratio
Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has
reached the break-even point a contribution margin equal to fixed costs
To convert the margin of safety in dollars to the margin of safety in terms of the number of units sold, divide the margin of safety in dollars by the
sale price per unit
The variable expense ratio is the ratio of variable expense to
sales
To simplify CVP calculations, it is assumed that
selling price
CVP analysis allows companies to easily identify the change in profit due to changes in
selling price, volume, product mix
The single point where the total revenue line crosses the total expense line on the CVP graph indicates
the break-even point profit equals zero
The rise-over-run formula for the slope of a straight line is the basis of
the high-low method
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 total variable costs = $350 profits = $875
When using Excel, the intercept (a), slope (b) and R² is determined by selecting any data point in the scattergraph plot and selecting Add
trendline
CVP analysis focuses on how profits are affected by
unit variable cost sales volume selling price mix of products sold total fixed costs
When preparing a CVP graph, the horizontal axis represents:
unit volume.
The contribution margin equals sales minus all Blank______ expenses.
variable
When using the high-low method, the slope of the line equals the ______ cost per unit of activity
variable
Profit = (selling price per unit × quantity sold) - _____________expense per unit × quantity sold) - ___________expenses
variable fixed
Daisy's Dolls sold 30,000 dolls this year. Each doll sold for $40 and had a variable cost of $19. Fixed expenses were $250,000. Net operating income for the year is
$380,000 Reason: Net operating income =30,000 × ($40 - $19) - $250,000 = $380,000
Company A sold 200,000 units. Selling price is $7 per unit, contribution margin is $4 per unit, and the fixed expenses total $632,000. Company A's profit (loss) is
168,000
Fill in the blank question. Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance's profit is
168,000
A company's break-even point is 17,000 units. If the contribution margin is $22 per unit and 26,000 units are sold, net operating profit will be
198,000
Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by
65
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 Net operating income = $184,000 - $85,000 = $99,000
When a company sells one unit above the number required to break-even, the company's net operating income will
change from zero to a net operating profit
Fill in the blank question. After reaching the break-even point, a company's net operating income will increase by the ______ ______ per unit for each additional unit sold.
contribution margin
To calculate profit, multiply the ______ per unit by sales volume and subtract total fixed cost.
contribution margin
Users can easily judge the impact on profits of changes in selling price, cost or volume when using an income statement constructed under the Blank______ approach.
contribution margin
To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the
contribution margin per unit
A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating
leverage
It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals
linear and cost
If the total contribution margin is less than the total fixed expenses, a Blank______ occurs.
net loss
