Chapter 6: Cost-Volume-Profit Relationships

Question 1

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

Answer 1

• volume
• selling price
• product mix

Question 2

Contribution margin:

Answer 2

becomes profit after fixed expenses are covered.

Question 3

The calculation of contribution margin (CM) ratio is _____

Answer 3

contribution margin ÷ sales

Question 4

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

Answer 4

leverage

Question 5

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

Answer 5

contribution margin

Question 6

CVP analysis focuses on how profits are affected by _____

Answer 6

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

Question 7

_____ _____ is the amount remaining from sale after all variable expenses have been deducted.

Answer 7

contribution margin

Question 8

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

Answer 8

ratio

Question 9

If operating leverage is ______, a small percentage increase in unit sales can produce a much larger percentage increase in net operating income.

Answer 9

high

Question 10

The measure of how a percentage change in sales affects profits at any given level of sales is the _____

Answer 10

degree of operating leverage

Question 11

The contribution margin equals sales minus all ______ expenses.

Answer 11

variable

Question 12

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

Answer 12

total fixed expenses

Question 13

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the _____

Answer 13

degree of operating leverage

Question 14

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 _____

Answer 14

7,625

Question 15

At the break-even point _____

Answer 15

• total revenue equals total cost
• net operating income is zero

Question 16

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

Answer 16

net operating income

Question 17

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

Answer 17

false

Question 18

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?

Answer 18

2,800

Question 19

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 _____

Answer 19

40,000

Question 20

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

Answer 20

margin; safety

Question 21

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 _____

Answer 21

4,800

Question 22

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 _____

Answer 22

8,400

Question 23

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

Answer 23

incremental

Question 24

Which of the following statements is correct?

Answer 24

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

Question 25

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 _____

Answer 25

21,645

Question 26

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on contribution margin would be a _____

Answer 26

$450 increase

Question 27

When making a decision using incremental analysis, consider the _____

Answer 27

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

Question 28

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

Answer 28

sales mix

Question 29

The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

Answer 29

true

Question 30

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 $_____

Answer 30

decrease; 3000

Question 31

True or False. Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

Answer 31

false

Question 32

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

Answer 32

sales mix

Question 33

When a company produces and sells multiple products _____

Answer 33

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

Question 34

The break-even point calculation is affected by _____

Answer 34

- costs per unit - sales mix - selling price per unit

Question 35

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

Answer 35

decrease