LS CH3 - Cost-Volume-Profit Relationships

Operating leverage is a measure of how sensitive ____ is to a given percentage change in sales dollars.

net operating income

Solving for the sales needed to attain a target profit of $____ is the same process as solving for the sales level needed to break-even.

$0

If a company has sales of $100,000, variable expenses of $60,000, and fixed expenses of $50,000 the company has a:

$10,000 net operating loss Contribution margin ($100,000-$60,000) of $40,000 - fixed exp of $50,000 = a $10,000 loss

Tommy's Trains is currently selling 55,000 toy trains for $50 per unit. The variable cost per train is $26. Calculate the change in profits if Tommy sells an additional 5,000 trains.

An increase of $120,000 Change in profits= 5,000 x ($50 - $26) = $120,000

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

false

If operating leverage is high, a small percentage increase in sales can produce a much ____ percentage increase in net operating income.

larger

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

margin safety

A company that has a high margin of safety is:

not likely to incur a loss

The variable expense ratio is the ratio of variable expense to:

sales

The variable expense ratio may be calculated using per unit amounts by dividing variable expense per unit by unit ____ price.

sales

The contribution margin is equal to:

sales minus variable expenses

The term "cost structure" refers to the relative proportion of ____ and ____ costs in an organization.

variable fixed

The break-even point is the level of sales at which the profit equals ____,

zero

To prepare a CVP graph, lines must be drawn representing:

total revenue, total expense, and total fixed expense

Marjorie's Mugs sold 300 mugs last year for $20 each. The company incurred variable costs of $7 per unit and total fixed costs of $1,700. Marjorie's Mugs' profit was:

$2,200 Profit = 300 x ($20 - $7) - $1,700 = $2,200

Which of the following items are needed to solve for net operating income at any projected sales volume above the break-even point? (Check all that apply) - Total variable expenses - Projected unit sales - Total contribution margin - Break-even unit sales - Number of units produced - Contribution margin per unit

- Projected unit sales - Break-even unit sales - Contribution margin per unit

The contribution margin income statement allows users to easily judge the impact of a change in ____ on profit. (Check all that apply) - Organizational structure - Volume of sales - Total fixed costs - Variable cost per unit - Selling price per unit

- Volume of sales - Total fixed costs - Variable cost per unit - Selling price per unit

Target profit analysis: (check all that apply) - can be calculated using the formula method or the equation method - is one of the key uses of CVP analysis - target profit analysis estimates what sales are needed to obtain the target profit

- can be calculated using the formula method or the equation method - is one of the key uses of CVP analysis

CVP analysis allows companies to easily identify the change in profit due to changes in: (check all that apply) - selling price - management - volume - costs - location

- selling price - volume - costs

The formula used to calculate the sales volume needed to achieve a target profile is:

Unit sales to attain a target profit = (Target profit + Fixed expenses) /Unit contribution margin

Assuming the sales price constant, an increase in the variable cost per unit will ____ the contribution margin per unit.

decrease

Adam's Sports Store has a contribution margin ratio of 55%. The break-even point has already been reached this year. If the shop is able to generate additional sales of $250,000 by the end of the year, how much will its net operating income change as a result of the additional sales?

Net operating income will increase by $137,500. Net operating income change= $250,000 x 55% = $137,500 increase

Which of the following is the equation to solve for profit in terms of sales volume?

Profit = (Unit contribution margin x Unit sales) - Fixed expense

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

contribution margin

Factors which determine whether a cost structure with higher variable costs is better than one with higher fixed costs include: (check all that apply) - Average sales price per unit - Long-run trends in sales - the attitude of owners toward risk - year-to-year fluctuations in the level of sales

- Long-run trends in sales - the attitude of owners toward risk - year-to-year fluctuations in the level of sales

Tasty Tangerine is currently selling 50,000 boxes of tangerines for $25 per box. Variable cost per box Is $17 and fixed costs total $260,000. A plan Is being considered to Increase the visual appeal of its packaging and reduce the selling price. The design change would result In a $60,000 increase to fixed costs. Management believes the design change along with a $2 reduction in the selling price per box would Increase sales volume by 24,000 boxes. Which of the following Is true? - Net operating income would increase by $44,000. - Net operating income would increase by $132,000. -Net operating income would decrease by $16,000. - Net operating income would decrease by $104,000.

- Net operating income would decrease by $16,000. (If the change is implemented, total contribution margin would increase by $44,000 ((74,000 boxes x $6) - (50,000 boxes x $8)). Additional contribution margin of $44,000 -$60,000 in new fixed costs = a net operating income decrease of $16,000.

Which of the following statements apply to companies that sell multiple products? (check all that apply) - The contribution margin ratio approach to target profit analysis would likely be the approach which is more easily applied to such companies. - The contribution margin per unit approach to target profit analysis would likely be the approach which is more easily applied to such companies. - Multiple products will more than likely have different contribution margin ratios for each individual product. - Profits earned will more likely depend on the sales mix of products.

- Profits earned will more likely depend on the sales mix of products. - Multiple products will more than likely have different contribution margin ratios for each individual product. - The contribution margin ratio approach to target profit analysis would likely be the approach which is more easily applied to such companies.

Water World sells wake boards and water skis and pays commissions to their salespeople based on each product's sales price. Although the wake boards sell for a higher price than the skis, the skis have a higher contribution margin per unit than t he wake boards. Which of the following are true in reference to sales commissions? (Check all that apply.) - The company should not pay sales commissions on these products. - Sales commissions based on sales price would be ideal to use under these circumstances. - Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them. - The company would rather see more skis sold as it creates the higher profit per unit for the company.

- Salespersons will be motivated to sell more wake boards as they will create a higher commission per unit for them. -The company would rather see more skis sold as it creates the higher profit per unit for the company.

When using incremental analysis, which of the following items are considered when making a decision? (Check all that apply.) - The change in sales dollars resulting specifically from the decision - The volume that would occur regardless of the decision - The complete old income statement in comparison to the complete new income statement - The change in cost resulting specifically from the decision - The change in volume resulting specifically from the decision

- The change in sales dollars resulting specifically from the decision - The change in cost resulting specifically from the decision - The change in volume resulting specifically from the decision

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, which of the following statements would be true? (Check all that apply) - The variable cost per unit is $2.40 - Total fixed cost is $1,440. - Total variable cost is $1,200 - Sales are $3,600

- The variable cost per unit is $2.40 $1,440/600= $2.40 per unit - Total variable cost is $1,200 $1,440/600= $2.40 per unit x 500 units = $1,200 total variable cost

Terry's Trees has reached its break-even point and has calculated its contribution margin ratio to be 70%. Each $1 increase in sales will have which of the following effects? (Check all that apply) - Net operating income will increase by $0.30 - Total contribution margin will increase by $0.30 - Total contribution margin will increase by $0.70 - Net operating income will increase by $0.70

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

Profit = (selling price per unit x quantity sold) - (variable expense per ____ x quantity sold) - ____ expenses.

- Unit - Fixed

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. - lesser than - equal to - greater than

- equal to

The single point where the total revenue line crosses the total expense line on the CVP graph indicates: (Check all that apply.) - the break-even point - profit equals zero - profit is less than zero - profit is greater than zero

- the break-even point - profit equals zero

Which of the following statements are correct with regards to a change in a company's sales mix? (check all that apply) - A change in sales mix from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales. - A change in the sales mix resulting in an increase in total sales will always result in an increase in profits. - A change in sales mix from low-margin to high-margin items may cause total profits to increase despite a decrease in total sales. - A change in the sales mix resulting in a decrease in total sales will always result in a decrease in profits.

-a change in sales mix from high-margin to low-margin items may cause total profits to decrease despite an increase in total sales. -a change in sales mix from low-margin to high margin items may cause total profits to increase despite a decrease in total sales.

The contribution margin statement is primarily used for:

-internal decision making

Place the following items in the order in which sales dollars are applied on a contribution margin income statement. - Fixed expenses - Variable costs - Net income

1. variable costs 2. fixed expenses 3. net income

Steel, Inc. has a margin of safety in dollars of $559,740. If actual sales were $2,946,000, Steel's margin of safety percentage is ____%.

19% = $559,740/$2,946,000 = 19%

Pool Time reported sales of $1,452,000 last summer. The company incurred variable expenses of $958,320 and fixed expenses of $354,000. Calculate the contribution margin ratio.

34% Contribution margin ratio =($1,452,000 - $958,320)/$1,452,000 = 34%

Plush & Cushy 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 Plush & Cushy's chairs is:

45%

Polly's Day Planners sells its planners for $35 each. Sales this year equals $927,500. The margin of safety is $27,300. What is the firm's margin of safety in units?

780 units =$27,300/$35 = 780 units

CVP is the acronym for ____ - ____ - ____.

Cost-Volume-Profit

CVP analysis is useful for companies with the need to answer which of the following questions?

How can we increase net income?

Goldin Corporation currently pays its salesperson a flat salary of $5,000 per month and is considering paying him $20 per unit instead. Sales are currently 200 units per month. Goldin believes that compensation change will increase unit sales by 50%. The current contribution margin is $80 per unit. Should Goldin implement the change?

Yes, income will increase by $7,000. Current income: ($80 x 200) - $5,000 = $11,000 With the change: ($80 - $20) x 200 x 150% = $18,000, an increase of $7,000 per month.

The CVP graph evaluates CVP relationships over a wide range of ____ levels.

activity

Multiplying unit selling price times the number of units required to break-even is one way to calculate:

break-even sales dollars

The equation used to calculate 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

Contribution margin divided by sales is the formula for ____ ____ ____.

contribution margin ratio

The calculation of contribution margin (CM) ratio is:

contribution margin/sales

On a profit graph, the point where the line crosses the y-xis represents ____ costs.

fixed

The equation used to solve for the variable expense ratio using per unit values is variable cost per unit divided by:

sales price per unit

On a profit graph, the sales volume where profit is ____ is the break-even point.

zero

Which of the following are assumptions of cost volume profit analysis? - Variable costs per unit increase over the relevant range of activity. - In multi product companies, the sales mix is constant. - Fixed costs per unit stay the same within the relevant range. - In a manufacturing company, the number of units of inventory produced equals the number of units sold.

- In multi product companies, the sales mix is constant. - In a manufacturing company, the number of units of inventory produced equals the number of units sold.

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?

= $98,000/(50-15) = 2,800

Lance, Inc. has sales of 9,000 units. The contribution margin per unit is $32 and fixed costs total $120,000. Lance profit is $_____.

= (9,000 x $32) - $120,000 = $168,000

Sales total $500,000, and fixed costs total $300,000. The contribution margin ratio is 68%. Profit = $____.

=($500,000 x .68) - $300,000 =$40,000

A company currently has a contribution margin ratio of 30% and sales of $300,000. Fixed expenses total $225,000. The company has decided to expand production and, as a result, is expecting to increase sales by $70,000. The change will also result in an increase in fixed expenses of $15,000. What will be the impact on net operating income?

Net operating income will increase by $6,000.

The relative proportions in which a company's products are sold is referred to as ____ ____.

sales mix

When preparing the break-even analysis for a company that produces and sells multiple products, the assumption is ordinarily made that which of the following will not change?

sales mix

The equation to calculate sales dollars on a per unit basis is:

total sales divided by units

Variable costs per unit is calculated by dividing total variable costs by total ____.

units

When constructing a CVP graph, the horizontal (x) axis represents unit ____.

volume

Which of the following are decisions in which using CVP analysis could be useful? (check all that apply) - Deciding which services to offer - Deciding what price to charge for goods/services - Deciding which products to offer - Deciding what cost structure to implement - Deciding to change the sick leave policy for employees - Deciding what marketing strategy to use

- Deciding which services to offer - Deciding what price to charge for goods/services - Deciding which products to offer - Deciding what cost structure to implement - Deciding what marketing strategy to use

The break-even point calculation is affected by which of the following items? (check all that apply) - Sales mix - Number of batches produced - Variable cost per unit - Selling price per unit - Total fixed cost

- Sales mix - Variable cost per unit - Selling price per unit - Total fixed cost

Pete's Putters manufactures and sells a specialized golf putter. The company sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400,000. Based on this information which of the following statements are true? (Check all that apply)

- if Pete's putters sells 12,000 putters, net operating income would be $380,000. 12,000 units x $65 contribution margin = $780,000 - $400,000 = $380,000 - The contribution margin per unit is $65

The profit graph allows users to easily identify: (check all that apply) - the sales volume required to reach the break-even point. - total expenses incurred at any given sales volume. - the profit at any given sales volume.

- the sales volume required to reach the break-even point. - the profit at any given sales volume.

CVP analysis is based on some ____ that may be violated in practice, but the tool is still generally useful.

assumptions

When constructing a CVP graph, the vertical (y) axis represents ____.

dollars

Net income can be estimated for any sales volume above the break-even point by ____ the number of units sold above the break-even point by the unit contribution margin.

multiplying

If a company with excess capacity has an opportunity to take an order in addition to its regular sales, the sales price per unit must cover which of the following costs? - total fixed costs - Fixed costs per unit for units included in the order - Variable manufacturing cost per unit - Any cost incurred by accepting the order

- Variable manufacturing cost per unit - Any cost incurred by accepting the order

Which of the following must be subtracted from sales to reach the contribution margin? (check all that apply) - Variable overhead - Fixed overhead - Variable direct labor - Variable selling and administrative costs - Fixed selling and administrative costs - Variable direct materials

- Variable overhead - Variable direct labor - Variable selling and administrative costs - Variable direct materials *Note: any variable expense

Cartoon cakes has $401,000 of fixed costs per year. The contribution margin ratio is 59%. What amount of sales dollars is required if the company has set a target profit of $720,000 this year?

1,900,000 Sales = (401,000 + 720,000)/ .59