Ch 6: Cost-Volume-Profit Relationships

The Variable expense ratio is the ratio of variable expense to _______.

sales

Contribution Margin is equal to

sales - variable expenses

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) x ($25-$12) = 130,000

Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26 and total fixed costs are $110,000. If Tommy sells an additional 5,000 trains, profits will ____________.

increase $120,000

A company has an opportunity to make a bulk sales 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 $11 + ($4,500 / 500) =$20

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. For each $1 increase in sales, the net operating and total contribution margin will:

- Net operating income will increase by $0.70 - Total Contribution Margin will increase by $0.70

What are the assumptions of the CVP calculations?

- Selling price is constant. The price of a product or service will not change as volume changes - Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed are constant in total over the entire relevant range - In Multiproduct companies, the mix of products sold remains constant.

Chitter Chatter sells phones and has set a target profit of $975,000. The Contribution margin ratio is 65%, and fixed costs are $195,000. Sales dollars needed to earn the target profit total:

1,800,000 Sales = (975,000 + $195,000) / 0.65 = $1,800,000

Blissful Blankets' target profit is 520,000, Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets Blissful Blankets need to sell in order to achieve its target profit is _________.

40,000 sales volume = ($520,000 + $320,000) / $21 = 40,000 blankets

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%

To calculate the degree of operating leverage, divide _________ _________ by net operating income

Contribution margin

True of False: When a company sells multiple products, an increase in total sales always results in an increase in total profits.

False

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

False

The term used for the relative proportion in which a company's products are sold is ___________.

Sales mix

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:

Sales volume = ($470,000 + $222,640) / $32 = 21,645 fans

True of False: The sales must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

True

Contribution Margin

becomes profit after fixed expenses are covered

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

total fixed expenses

The contribution margin income statement allows users to easily judge the impact of a change in ___________ on profit.

- selling price - volume - cost

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.

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

CVP analysis focuses on how profits are affected by:

- Mix of products sold - Sales volume - Selling Price - Total Fixed Costs - Unit Variable Cost

The break-even point can be affected by _________.

- sales mix - contribution margin - Total fixed costs

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 Break-even point = $305,000 / $40 = 7,625

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 ____________.

8,400 units Sales Volume= ($320,000 + $200,800) / ($90 - %28) =8,400 units

Company A has fixed costs of $564,000 and a contribution margin 62% Sales dollars to break-even rounded to the nearest whole dollar equals __________.

909,677 $564,000 / 0.62 = $909,677

Once the break-even point has been reached, the sale of an additional unit will lead to an increase in contribution margin that is _____ the increase in net operating income.

equal to

A company has reached its break-even point when the contribution margin _____ fixed expenses

equals

A measure of how sensitive net operating income is to a given percentage change in sales dollars is known as operating _____________.

leverage