Pre-Work Terms

If operating leverage is high, a small percentage increase in sales produces a _____ (higher/lower) percentage increase in net operating income than if operating leverage is low.

higher

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

contribution margin ÷ sales

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

decrease

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

contribution margin

When preparing a CVP graph, the horizontal axis represents:

unit volume

Cost structure refers to the relative portion of product and period costs in an organization.

False

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

False

Company A has fixed costs of $564,000 and has set a target profit of $800,000. If Company A has a contribution margin ratio of 62%, sales dollars needed to reach the target profit equals ______.

$2,200,000 Explanation: ($564,000 + $800,000) ÷ 0.62 = $2,200,000

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

sales mix

Softie, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Softies' sales must be ______.

$1,520,000 Explanation: ($240,400 + $930,000) ÷ 0.77 = $1,520,000

The break-even point is the level of sales at which the profit equals ______.

zero

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by ______.

$0.35

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

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Which of the following statements are correct?

Baron's net income grows twice as fast as its sales Adams has a higher degree of operating leverage than Baron

A 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase in net income for Company B. Based on this, which company has the greater operating leverage?

Company B

Budgeted sales are $982,000, break-even sales are $932,200, and fixed expenses are $429,000. The company's budgeted margin of safety in dollars is ______.

$49,800 Explanation: $982,000 - $932,200 = $49,800

Profit equals:

(P × Q - V × Q) - fixed expenses

Net operating income equals:

(unit sales - unit sales to break even) x unit contribution margin

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 Explanation: (25,000 - 15,000) x ($25 - $12)

A company sold 20,000 units of its product for $20 each. Variable cost per unit is $11. Fixed expenses total $150,000. The company's contribution margin is ______.

180,000 Explanation: 20,000 x ($20 - $11) = $180,000

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

Adams, Inc. has sales of $100,000 with a contribution margin of $60,000 and net income of $20,000. Baron, Inc. has sales of $110,000 with a contribution margin of $44,000 and net income of $22,000. Thus, the degree of operating leverage is ______ for Adams, Inc. and ______ for Baron, Inc

3, 2

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 Explanation: 30,000 x ($40 - $19) - $250,000 = $380,000

Paula's Perfumes has a target profit of $4,000 per month. Perfume sells for $15.00 per bottle and variable costs are $13.50 per bottle. Fixed costs are $3,200 per month. The number of bottles that must be sold each month to earn the target profit is ______.

4,800 Explanation: ($4,000 + $3,200) ÷ ($15.00 - $13.50) = 4,800

Blissful Blankets' target profit is $520,000. Each blanket has a contribution margin of $21. Fixed costs are $320,000. The number of blankets that must be sold to achieve the target profit is ______.

40,000 Explanation: ($520,000 + $320,000) ÷ $21 = 40,000

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 Explanation: ($10 - $6) x 10,000 - 35,000 = 5,000

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 Explanation: $305,000 ÷ $40 = 7,625

True or false: Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs.

True

Margin of safety in dollars is ______.

budgeted (or actual) sales minus break-even sales

Company A produces and sells 10,000 units of its product for $10 per unit. Variable costs are $4 per unit and fixed costs total $30,000. A move to a larger facility would increase rent expense by $8,000, and allow the company to meet its demand for an additional 1,000 units. If the move is made, profits will ______.

decrease by $2,000 Explanation: New contribution margin = $6,000 (1,000 × ($10 - $4)) - $8,000 new cost = ($2,000) decrease in profits

Total contribution margin equals ______.

fixed expenses plus net operating income

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

fixed, variable

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

net operating income

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

total expense, and total fixed expense

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

total fixed expenses

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, ______.

total variable costs = $350 (35 x $10) = $350 total sales = $1,925 35 x $55 = $1,925 profits = $875 35 x ($55- $10) - $700 = $875

The contribution margin equals sales minus all ______ expenses.

variable

The variable expense ratio equals variable expenses divided by ______.

sales

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 Explanation: ($470,000 + $222,640) ÷ $32 = 21,645

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

A company's current sales are $300,000 and fixed expenses total $85,000. 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 Explanation: ($70,000 x 30%) - $15,000 = $6,000 increase

A company reported $100,000 in sales and $80,000 in variable costs at the breakeven point of 200 units. If the company sells 201 units, net profit will be ______.

$100 Explanation: ($100,000 - $80,000) ÷ 200 = $100

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 Explanation: $184,000 - $85,000 = $99,000

Which of the following statements is correct?

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

Contribution margin:

becomes profit after fixed expenses are covered

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

decrease, $3,000

A company with a high ratio of fixed costs:

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

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

leverage

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales ______.

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

The contribution margin as a percentage of sales is referred to as the contribution margin or CM ______.

ratio

The variable expense ratio is the ratio of variable expense to ______.

sales

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

sales mix

Which of the following items are found above the contribution margin on a contribution margin format income statement?

sales, variable expenses

The break-even point calculation is affected by:

selling price per unit, sales mix, costs per unit

CVP analysis focuses on how profits are affected by ______.

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

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

selling price, volume, costs

Once the break-even point has been reached, net operating income will increase by the amount of the unit _____ _____ for each additional unit sold.

contribution margin

The degree of operating leverage = ______.

contribution margin ÷ net operating income

When a company produces and sells multiple products ______.

each product most likely has different costs each product most likely has a unique contribution margin a change in the sales mix will most likely change the break-even point

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

When the analysis of a change in profits only considers the costs and revenues that will change as a result of the decision, the decision is being made using _____ analysis.

incremental