Exam 2 - Chapter 5

Question 1

Contribution Margin Formula:

Answer 1

Sales - Variable Costs = CM

Question 2

Contribution Margin Income Statement Formula:

Answer 2

Sales - Variable Costs = CM - Fixed Costs = Net Income

Question 3

Define the Breakeven Point:

Answer 3

Net income is equal to zero

Question 4

Contribution Margin Approach B/E formula:

Answer 4

B/E in units = Fixed Costs / CM per unit

Question 5

Contribution Margin Approach T/P formula:

Answer 5

T/P = Fixed Costs + Wanted Profit / CM per unit

Question 6

Contribution Margin Ratio Approach Formula:

Answer 6

CM / Sales

Question 7

Contribution Margin Ratio Approach B/E Formula:

Answer 7

B/E in Sales $ = Fixed Costs / CM Ratio percentage

Question 8

Explain how to find the B/E Point and T/P using the Equation Method:

Answer 8

• If trying to find the breakeven point, set the equation to zero
• If trying to find a target profit amount set it equal to the amount of profit

Question 9

Find Fixed Costs, Total Cost, Profit margin, Loss margin, the B/E Point, and Total Revenue on a Cost-Volume Graph:

Answer 9

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Question 10

How do you Calculate the Margin of Safety:

Answer 10

Budgeted Sales @ T/P - B/E Point in Sales $ = Margin of Safety in Sales $

Question 11

How do you Express the Margin of Safety as a Percentage:

Answer 11

Margin of Safety in Sales $ / Budgeted Sales = M/S %

Question 12

Name 3 of the limitations of CVP:

Answer 12

Have to assume that:

• The price is constant
• Costs are linear
• All variables are within the relevant range

Question 13

Degree of Operating Leverage Formula:

Answer 13

Total CM / Net Income

Question 14

How do you Find a Percentage Increase in Net Operating Income, Resulting from an Increase in Unit Sales:

Answer 14

Multiply the Percentage Increase by the Degree of Operating Leverage (5% x 4 = 20%)