Chapter 7

Question 1

When a company is operating at its breakeven point

Answer 1

its total revenues will be equal to its total expenses.

Question 1

Total contribution margin less total fixed expenses equals

Answer 1

Operating income

Question 2

If a company sells one unit above its breakeven sales column, then its operating income would equal to

Answer 2

the unit contribution margin

Question 3

How is the sales volume in dollars necessary to reach a target profit calculated?

Answer 3

(fixed expenses + target profit) / contribution margin ratio

Question 4

The number of units to be sold to reach a certain target profit is calculated as

Answer 4

(fixed expenses + target profit) unit contribution margin

Question 5

The breakeven point on a CVP graph is

Answer 5

the intersection of the sales revenue line and the total expense line.

Question 6

If the sales price of a product increases while everything else remains the same, what happens to the breakeven point?

Answer 6

The breakeven point will decrease

Question 7

Target profit analysis is used to calculate the sales volume that is needed to

Answer 7

earn a specific amount of net operating income

Question 8

A shift in the sales mix from a product with a high contribution margin ratio towards a product with a low contribution margin ratio will cause the breakeven point

Answer 8

Increase.

Question 9

What is the margin of safety?

Answer 9

the excess of expected sales over breakeven sales

Question 10

All of the following would be considered a company with high operating leverage,

Answer 10

T-shirt kiosk in a mall

Question 11

When analyzing the impact of various combinations of sales price and volume on profit by using a What-if analysis in Excel, which of the following items would be needed?

Answer 11

Total fixed expenses, sales price per unit, variable cost per unit

Question 12

Rachel runs her own hot dog stand on the U of A campus. The monthly cost of the cart rental and business permit is $300. Rachel’s COntribution margin per unit is $1.50, and her contribution margin ratio is 75%.

1. How many hot dogs does Rachel need to sell each month to earn a target profit of $900 a month?
2. How much sales revenue does Rachel need to generate each month to earn a target profit of $900 per month

Answer 12

1. $300+$900/$150
   = 800 hot dogs
2. Fixed exp + op lne= $300 +$900/75%
   = $1,600 sales r

Question 13

Kay has now been in business for several months and is typically selling 950 posters a month. Because of new competition, Kay is considering cutting her sales price from $35 to $31 per poster. If her variable expenses remain $21 per poster and her fixed expenses remain at $7,000 how many posters will she need to sell to break even.

Answer 13

$7,000 +$0/$10

= 700 posters

Question 14

Rachel runs her own hot dog stand on the U of A campus. The monthly cost of the cart rental and business permit $300. Rachel’s Contribution margin is $1.50 per hot dog sold. She has recently added individual servings of a potato chips to her product offering. Each bag of potato chips has a contribution margin of $.75 bag. Rachel Sells 5 bags of potato chips for every 10 hot dogs.

1. Rachel’s weighted-average contribution margin per unit?
2. How many total units must Rachel sell in month to earn a target monthly profit of $900?
3. of the total units needed to earn $900 of profit, how many are hot dogs and how many are bags of potato chips?

Answer 14

1.50 .75
x 10    x5      15
15.00 + 3.75  18.75
WACM/unit =1.25
300 + 900/1.25= 960