ACC 202 Chapter 5 Flashcards

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Questions and Answers

What is the Contribution Margin (CM)?

The total revenue from sales.

The amount remaining from sales revenue after variable expenses have been deducted. (correct)

The profits made after all costs are covered.

The total expenses incurred in production.

What is the Break-Even Point?

The point at which the costs of producing a product equal the revenue made from selling the product.

What is the equation for CVP relationships?

Profit = (Sales - Variable expenses) - Fixed expenses

What is the formula for Profit (CVP)?

(P x Q - V x Q) - Fixed Expenses Signup and view all the answers

What is the formula for Unit CM?

Selling price per unit (P) - Variable expenses per unit (V) Signup and view all the answers

How is the Contribution Margin Ratio (CM Ratio) calculated?

By dividing the total contribution margin by total sales. Signup and view all the answers

What is the formula for Profit using the Contribution Margin Ratio?

(CM ratio x Sales) - Fixed expenses Signup and view all the answers

What is the formula for Profit using the Equation Method?

Unit CM x Q - Fixed expenses Signup and view all the answers

What is the Variable Expense Ratio?

The ratio of variable expenses to sales. Signup and view all the answers

What is the formula to determine unit sales to attain target profit?

(Target profit + Fixed expenses) / CM per unit Signup and view all the answers

What is the equation for Break-even in Unit Sales?

Profits (0) = Unit CM x Q - Fixed expenses Signup and view all the answers

How do you calculate break-even in sales dollars?

Dollar Sales to break even = Fixed Expenses / CM Ratio Signup and view all the answers

What is the CM Ratio for Coffee Klatch?

0.758 Signup and view all the answers

How many cups of coffee must be sold to attain target profits of $2,500 per month for Coffee Klatch?

3,363 Cups Signup and view all the answers

What are the sales dollars required to attain target profits of $2,500 per month for Coffee Klatch?

$5,013 Signup and view all the answers

What is the break-even sales dollars for Coffee Klatch?

$1,715 Signup and view all the answers

What is the break-even sales in units for Coffee Klatch?

1,150 Cups Signup and view all the answers

What is the margin of safety expressed in cups for Coffee Klatch?

950 Cups Signup and view all the answers

What is the operating leverage for Coffee Klatch?

2.21 Signup and view all the answers

If sales increase by 20% at Coffee Klatch, by how much should net operating income increase?

44.2% Signup and view all the answers

What is the Contribution Approach in accounting?

A presentation format used for the income statement where all variable costs are deducted from revenue to find the contribution margin. Signup and view all the answers

Study Notes

Contribution Margin

Contribution Margin (CM) measures the remaining sales revenue after deducting variable expenses.
Unit CM equals Selling Price per unit (P) minus Variable Expenses per unit (V).

Break-Even Point

The Break-Even Point occurs when the cost of production equals revenue.
Break-even in unit sales can be calculated using the equation: Profits (0) = Unit CM x Q - Fixed Expenses.
Break-even sales in dollars is determined by: Dollar Sales to break even = Fixed Expenses / CM Ratio.

Cost-Volume-Profit (CVP) Relationships

The primary equation for CVP relationships is: Profit = (Sales - Variable Expenses) - Fixed Expenses.
Profit can also be expressed as: (P x Q - V x Q) - Fixed Expenses, where Q represents the quantity sold.

Contribution Margin Ratio

CM Ratio is calculated as the total contribution margin divided by total sales.
Profit using the CM Ratio is calculated as: Profit (CM Ratio) = (CM Ratio x Sales) - Fixed Expenses.

Formula Method for Target Profit

Unit sales needed to achieve a target profit: (Target Profit + Fixed Expenses)/ CM per unit.
Sales dollars to achieve target profits can be found using: Sales Dollars = Fixed Expenses + Target Profit / CM Ratio.

Coffee Klatch Case Study

Selling price per cup: $1.49, variable expense per cup: $0.36, and fixed monthly expenses: $1,300.
Average monthly sales: 2,100 cups.

Key Metrics for Coffee Klatch

CM Ratio: 0.758.
To achieve target profits of $2,500, 3,363 cups need to be sold.
To reach a $2,500 profit, sales dollars must total: $5,013.
Break-even sales in units: 1,150 cups and in dollars: $1,715.
Margin of safety in cups is 950.
Operating leverage measures efficiency at 2.21.
With a 20% increase in sales, net operating income should rise by 44.2%.

Contribution Approach

The contribution approach for income statements aggregates variable costs, allowing clearer visibility of contribution margins before fixed costs are deducted to determine overall profit or loss.

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Description

Test your knowledge of key concepts in Accounting with these flashcards from Chapter 5. Learn important terms like Contribution Margin and Break-Even Point, and understand the relationships between costs and profits. Perfect for revision or quick reference.