Chapter 5 Cost-Volume-Profit Relationships

Contribution margin ______.

becomes profit after fixed expenses are covered

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

fixed; profit

To prepare a CVP graph, lines must be drawn representing total revenue, ______.

total expense, and total fixed expense

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?

2,800 Reason: $98,000 ÷ ($50 - $15) = 2,800

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

False

Contribution margin ratio is equal _____ _____ to divided by _____.

Contribution Margin divided by Sales

A change in profits that occurs due to a change in sales and fixed expenses may be calculated as ______.

cm ratio × change in sales - change in fixed expenses

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

contribution margin/sales

A company's current sales are $300,000 and fixed expenses total $225,000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70,000 and fixed expenses by $15,000. If these results occur, net operating income will ______.

increase by $6,000 Reason: Change in net operating income = $70,000 × 30% - $15,000 = $6,000 increase.

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

margin, safety

Which of the following statements is correct?

The higher the margin of safety, the lower the risk of incurring a loss.

Marjorie's Mugs sold 300 mugs last year for $20 each. Variable costs were $7 per mug and total fixed costs were $1,700. Marjorie's Mugs' profit was ______.

$2,200 Reason: Profit = 300 × ($20 - $7) - $1,700 = $2,200.

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

dollars

Select all that apply: 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, ______.

profits = $875 total variable costs = $350 total sales = $1,925 Reason: Profits = 35 × ($55 - $10) - $700 = $875. Reason: Total variable costs = (35 × $10) = $350. Reason: Total sales = 35 × $55 = $1,925.

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

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 Reason: Net operating income = $184,000 - $85,000 = $99,000

Select all that apply: CVP analysis allows companies to easily identify the change in profit due to changes in ______.

-volume -costs -selling price

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 Reason: Sales volume = ($520,000 + $320,000) ÷ $21 = 40,000 blankets.

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 Reason: 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 Reason: ($320,000 + $200,800) ÷ ($90 - $28) = 8,400 units.

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n) ______.

decrease in the unit variable cost