Ch6. Cost-Volume-Profit Relationships

The degree of operating leverage =

contribution margin / net operating income

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

Company A has sales of $500,000, variable costs of $350,000, and fixed costs of $150,000. Company A has ______.

Contribution margin equals the fixed costs. Has reached the break-even point.

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

The break-even point calculation is affected by _____.

Sales mix Selling price per unit Costs per unit

The break-even point can be affected by _____.

Total Fixed Costs Contribution Margin Per Unit Sales Mix

Profit = (selling price per unit X quantity sold) - ( ______ expense per unit X quantity sold) - ( _____ expenses)

Variable Fixed

Daisy's Dolls sold 30,000 dolls this year for $40 each. Each doll's variable cost was $19. If Daisy incurred $250,000 of fixed expenses, net operating income for the year is:

$380,000 [net operating income= 30,000 x (40-19) - 25,000]

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

Sales Variable expenses Contribution Margin Fixed Expenses Net operating income

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 of $19. The company currently sells 1,200 pillows per month and expects that the improved materials would increase sales to 1,500 per month. The impact of this change on total contribution margin would be a(n) ______ (increase/decrease) of $______.

decrease 3,000 ((1,500 x (25-19)) - (1,200 x (25-15)) = 3,000

Cakes by Jacki has $144,000 of fixed costs per year. The contribution margin ratio is 59%. The sales dollars to breakeven rounded to the nearest dollar equals:

$ 244,068 unit sales to break even = fixed expenses / unit cm 144,000/.59 =$ 244,068

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 _____.

2,200,000 564,000+800,000/0.62= 2,200,000

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 $65 The sale of 12,000 putters results in net operating income of $380,000 **(12,000 units x $65 contribution margin = $780,000 - $400,000 = $380,000

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 (25,000-15,000)*($25-$12)

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 Profit = 200,000 x 4 - 632,000 = 168,000

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

Costs Selling price Volume

High-low or least squares regression analysis should only be done if a(n) ________ depicts linear cost behavior.

scattergraph

In the equation, y = a + bx, a represents the:

total fixed cost vertical intercept of the line

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

total fixed expenses

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

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

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 (10-6) x 10,000 - 35,000 = 5,000

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 (10-6)x10,000 - 35,000 = 5,000

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 _____.

8400 units ($200,800 + $320,000)/(($90 - $28)/90) = $756,000 $756,000/$90 = 8400 units

The calculation of contribution margin (CM) ratio is _____.

Contribution margin divided by sale

Contribution margin is first used to cover _____ expenses. Once the break-even point has been reached, contribution margin becomes _____.

Fixed Profit

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

Margin Safety

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:

Net operating income will increase by $0.70 Total contribution margin will increase by $0.70

Variable expenses divided sales is the calculation for the ______ ______ ratio.

Variable expense