Chapter 2: Cost Volume Profit Analysis, Breakeven, and Target Profit

Question 1

What is the contribution margin income statement?

Answer 1

Product profitability (the amount of revenue left over to cover fixed costs - contribute to net income)

Sales
- Variable Costs
= Contribution margin
-Fixed Costs
Net income

Question 2

what is the contribution margin per unit?

Answer 2

Sales price per unit
- Variable costs per unit
= Contribution margin per unit

Question 3

What is the break-even point formula in units?

Answer 3

FC + TP(0) / CM Per unit
- Not in sales $’s

The breakeven point is the level of sales at which total sales equals variable costs plus fixed costs.

For every unit sold above B/e we will add the CM per unit to net income.

Increasing sales price, decreasing variable cost, and decreasing fixed costs all decrease the B/e point.

Fixed cost = 11,000
Target profit = 0
Contribution margin per unit = 55
11,000 + 0 / 55
B/e = 200 units

Question 4

What is the Margin of safety formula?

Answer 4

The amount of actual or expected (budgeted) less the # of units to breakeven.

Budgeted B/e = 564
Number of units to B/e = 200
Margin of safety = 364

Question 5

What is the target profit formula?

Answer 5

FC + TP / CM per unit
- Not in sales $’s

Fixed cost = 11,000
Target profit = 20,000

Question 6

What is the break-even point formula in sales $$?

Answer 6

FC + 0 / CM ratio.
CM ratio - CM / sales $.

Question 7

What is gross margin formula?

Answer 7

Net sales - COGS