Chapter 5: Cost-Volume-Profit Relationships

Question 1

What is the contribution margin (CM)

Answer 1

Sales - variable costs

Question 2

Contribution format in both equation form

Answer 2

Profit = Sales - Variable expenses - Fixed expenses

Profit = (PQ - VQ) - Fixed expenses
P = price per unit
Q = quantity sold
V = variable cost per unit

Question 3

Contribution format in unit CM equation form

Answer 3

(P-V)*Q - Fixed expenses = Profit
P = price per unit
V = Variable cost per unit
Q = Quantity

Question 4

Price per unit - Variable cost per unit

Answer 4

Contribution margin per unit

Question 5

Contribution Margin Ration (CM Ratio)

Answer 5

CM/Sales

Question 6

CM Ratio per unit

Answer 6

CM per unit/selling price

Question 7

Variable expense ratio

Answer 7

Variable expenses/sales

Question 8

The result of CM ratio’s mathematical relation to the variable expense ratio

Answer 8

CM ratio = 1 - variable expense ratio

Question 9

Increase in Sales Volume using CM ratio

Answer 9

(CM ratio * Sales) - Fixed expenses = Increased Profit

Question 10

Margin of Safety in dollars

Answer 10

Total Sales - Break Even Sales

Question 11

Margin of Safety Percentage

Answer 11

Margin of Safety in dollars / Actual Sales

Question 12

Margin of Safety in Units

Answer 12

Margin of Safety in dollars / Price per Unit

Total Sales of units - Break Even Sales of units

Question 13

Advantages and disadvantages of high fixed cost structures

Answer 13

Income will be higher in good years because of the lower variable cost, and income will be lower in bad years because of the unchanging high fixed cost in comparison to a low fixed-cost structure

Question 14

Advantages and disadvantages of low fixed cost structures

Answer 14

Income is more stable across good and bad years because of the high variable cost in comparison to a high fixed cost structure

Question 15

Degree of Operating Leverage

Answer 15

CM/Net Operating Income

Question 16

Using operating leverage, how does a change in the volume of sales effect profit

Answer 16

Percent increase in sales * degree of operating leverage = percent increase in profit

Question 17

Dollar sales to break even on Mixed Sales

Answer 17

Fixed expenses / CM ratio

Question 18

Mixed Sales

Answer 18

Mixed sales are when a company’s total sales is a mix of more than one product

Question 19

Unit Sales to attain target profit

Answer 19

= (Target Profit + Fixed Expenses)/Unit CM

Question 20

Dollar Sales to attain target profit

Answer 20

= (Target Profit + Fixed Expenses)/CM Ratio