MGT 11B Ch.5 LS

to simplify CVP calculations, what is assumed to remain constant?

selling price

Selling price per unit equation

variable cost per unit +desired profit per unit

variable expense ratio

variable expenses/ sales

according to the CVP analysis model and assuming all else remains the same, profits would be increase by a:

decrease in the unit variable cost

when making a decision using incremental analysis consider the:

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

the single point where the total revenue line crosses the total expense line on the CVP graph indicates:

-the profit equals 0 - the break-even point

margin of safety

excess of budgeted/ actual sales dollars over the break even volume of sales dollars; amount of by which sales can drop before losses are incurred

an income statement under what approach allows users to easily judge the impact on profits of changes in selling price, cost or volume?

contribution margin

contribution margin ratio

CM ratio= Contribution margin/ sales and =1- variable expense ratio

degree of operating leverages

CM/net operating income -measure at a given level of sales, of how a percentage change in sales volume will affect profits

a company sold 20000 units of its product at a selling price of $20. The variable cost per unit is $11. Fixed expenses total $150000. The company's CM is:

CM=20000*($20-$11)=$180000

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:

Profit=300*($20-$7)-$1700=$2200

given a sales price of $100, variable costs of $70 and a break-even point of 500 units, net operating profit for sale of 501 units will be what?

$100-$70= $30. For every unit above break even, profit increases by the contribution margin of $30 per unit.

Seth's Speakers had actual sales of $1630000. If break even sales equals $935000, Seth's margin of safety in dollars is:

$1630000- $935000=$695000

Company A sells its products for $10 per unit. If company A has variable expenses of $5 per unit and fixed expenses of $200000, the break-even point in units and dollars is:

$200000/5=40000 units * $10=$400000 Break even point in units=40000 break even point in dollars =$400000

Company A has fixed costs of $564000 and a contribution margin of 62%. Sales dollars to break-even rounded to the nearest whole dollar equal:

$564000/0.62=$909677

JVL Enterprise has set a target profit of $126000. The company sells a single product for $50 per unit. Variable costs are $15 per unit and fixed costs total $98000. How many units does JVL have to sell to Break-Even?

$98000/($50-$15)=2800 to break even

high low method

- it only uses two data points - the high-low method should only be used if a scattergraph plot indicates a linear relationship between cost and activity

a company with a high ratio of fixed costs:

-is more likely to experience a loss when sales are down than a company with mostly variable costs -is more likely to experience greater profits when sales are up than a company with mostly variable costs

CVP analysis focuses on how profits are affected by:

-unit variable cost -sales volume -total fixed costs -selling price -mix of products sold

when using the high-low method, if the high or low levels of cost do not match the high or low levels of activity:

choose the periods with the highest and lowest level of activity and their associated costs

least squares regression

a method that uses all the available data points to divide a mixed cost into its fixed and variable components; is a measure of goodness of fit

account analysis

an account is classified as either variable/fixed base on the analyst's prior knowledge of how the cost in account behaves

cost volume profit analysis

helps managers make many important decisions such as what products and services to offer, what prices to charge, what marketing strategy, and what cost structure to maintain. -primary purpose is to estimate how profits are affected by: 1. selling prices 2. sales volume 3. unit variable costs 4. total fixed costs 5. mix of products sold

A company's current sales are $300000 and fixed expenses total $225000. The contribution margin ratio is 30%. The company has decided to expand production which is expected to increase sales by $70000 and fixed expenses by $15000. If these results occur, net operating income will: (increase/ decrease? and by how much?)

increase by $6000 -change in net operating income= $70000*30%-$15000=$6000 increase

operating leverage

measure of how sensitive net operating income is to given percentage change in dollar sales

Terry's Trees has reached its break-even point and has calculated its contribution margin ration to be 70%. For each $1 increase in sales:

-net operating income will increase by $0.70 and total contribution margin will increase by $0.70

Pete's Putters sells each putter for $125. The variable cost is $60 per putter and fixed costs total $400000. What can you tell from this information?

-the sale of 12,000 putters results in net operating income of $380000 (12000 units * $65 contribution margin =$ 780000-$400000= $380000) -the contribution margin per putter is $65

using the high-low method, the fixed cost is calculated:

-using either the high/low level of activity -after the variable cost per unit is calculated

which of the following items are found above the CM on a CM format income statement?

-variable expenses -sales

what order does variable expense, net operating income, fixed expenses, sales, and contribution margin appear on the CM format income statement:

1.sales 2. variable expenses 3. contribution margin 4. fixed expenses 5. net operating income

engineering approach

approach to estimate the fixed and variable components of a mixed cost involving detailed analysis of what cost behavior should be

contribution margin

is amount remaining from sales revenue after variable expenses have been deducted; amount available to cover fixed expenses and then to provide profits for the period

break even point (know the graph)

level of sales at which profit is zero. Once reached, net operating income will increase by the amount of unit contribution margin for each additional unit sold -example: if 351 speakers are sold, there was 1 more sold to break even so cost would equal to $100, if 2 more was sold above break even point, it would add $200

R^2

percentage of the variation in cost that is explained by activity

sales mix

relative proportions in which a company's products are sold