Accounting Chapter 15 - CVP Analysis

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Questions and Answers

What is the contribution margin for the ice cream bars sold?

$2,623

$2,780 (correct)

$1,623

$1,000

What is the total fixed costs associated with the production and selling of the ice cream bars?

$2,780

$1,780 (correct)

$580

$1,200

How much is attributed to variable selling and administrative expenses for the period?

$2,780

$1,043 (correct)

$1,000

$580

What is the profit for the month of selling 6,950 ice cream bars?

$1,000 Signup and view all the answers

What cost contributes the most to the total variable costs for producing 6,950 ice cream bars?

Direct materials Signup and view all the answers

What is the contribution margin per unit for Chillin’ Time?

$0.40 Signup and view all the answers

What does the contribution margin ratio indicate?

0.2667 Signup and view all the answers

Which of the following is NOT an assumption of the Cost-Volume-Profit (CVP) analysis?

Total revenues vary non-linearly. Signup and view all the answers

For what purpose is CVP analysis primarily utilized?

To examine relationships among volume, costs, revenues, and profits. Signup and view all the answers

How can a business determine its Break Even point using CVP analysis?

By calculating total fixed costs divided by contribution margin per unit. Signup and view all the answers

What does a contribution income statement primarily classify costs by?

Behavior Signup and view all the answers

What does the contribution margin represent?

Total revenues less total variable costs Signup and view all the answers

How is the break-even point typically calculated in CVP analysis?

Fixed Costs divided by Contribution Margin per unit Signup and view all the answers

Which type of income statement shows gross margin?

Functional income statement Signup and view all the answers

What is the formula for calculating the operating leverage ratio?

Contribution Margin divided by Operating Income Signup and view all the answers

Which of the following is NOT an assumption needed to apply CVP analysis?

Market demand for products fluctuates significantly Signup and view all the answers

Which statement is true about fixed costs in the context of contribution income statements?

They do not change with the level of production. Signup and view all the answers

What would be the contribution margin per ice cream bar sold for Chillin’ Time?

$0.75 Signup and view all the answers

What represents the fixed manufacturing overhead for Chillin’ Time?

Costs associated with converting raw materials into finished goods Signup and view all the answers

How many ice cream bars must Chillin’ Time sell to achieve a profit of $1,000?

6,950 ice cream bars Signup and view all the answers

What is the total variable cost per ice cream bar produced by Chillin’ Time?

$0.95 Signup and view all the answers

What formula is used to calculate the break-even point in units?

Fixed costs / (Variable costs per unit - Selling price per unit) Signup and view all the answers

What is the unit contribution margin for Chillin’ Time's ice cream bars?

$0.50 Signup and view all the answers

What does the margin of safety represent?

Units sold minus the break-even point in units Signup and view all the answers

Which cost is included in variable selling and administrative costs?

Packaging costs Signup and view all the answers

What is the total fixed costs incurred by Chillin’ Time per month?

$1,580 Signup and view all the answers

What is the contribution margin per unit if the total revenue is $12,000 and the total costs are $8,000?

$2.00 Signup and view all the answers

Which line on the cost-volume-profit graph represents fixed costs?

Total costs line Signup and view all the answers

If fixed costs are $1,780 and variable costs are $1.10 per unit, what is the break-even point in units?

4,450 units Signup and view all the answers

What is the total revenue if 6,000 units are sold at $1.50 per unit?

$12,000 Signup and view all the answers

Which of the following statements is true regarding the multiple product break-even point?

Mixed products can complicate calculating the break-even point. Signup and view all the answers

The variable cost for each unit is mentioned as $1.10. If 500 units are produced, what is the total variable cost?

$1,100 Signup and view all the answers

How does total revenue compare at the break-even point?

Total revenue equals total costs. Signup and view all the answers

What occurs if the selling price per unit is set below the variable cost per unit?

The company suffers a loss. Signup and view all the answers

What is the concept of sales mix in a business?

The relative portion of unit or dollar sales derived from each product. Signup and view all the answers

How is the degree of operating leverage calculated?

Contribution margin divided by income before taxes. Signup and view all the answers

What does high operating leverage indicate about a company's risk when sales decrease?

There is a high risk of loss. Signup and view all the answers

Which company has a greater degree of operating leverage from the data provided?

Mia’s Cantina. Signup and view all the answers

What is the impact of a 20% sales decrease for a company with high operating leverage?

Significant loss in profit. Signup and view all the answers

What happens when the sales mix is not constant?

Average unit contribution margin must be calculated. Signup and view all the answers

If Taco Express and Mia’s Cantina both report a before-tax profit of $10,000 but differ in fixed costs, which factor significantly contributes to their profit stability?

The contribution margin that varies by company. Signup and view all the answers

What does a company's operating leverage indicate overall?

The mix of fixed and variable costs within the organization. Signup and view all the answers

Study Notes

Chapter 15 - CVP Analysis

Chapter Objectives: Students should be able to explain the difference between contribution (variable) income statements and functional (GAAP) income statements, discuss and calculate Contribution Margin, identify assumptions needed for CVP analysis, use the CVP model to calculate break-even point, margin of safety, and define operating leverage and apply operating leverage ratio.

Income Statement Formats

Contribution Income Statement: Classifies costs by behavior (variable or fixed). Contribution margin is calculated by subtracting total variable costs from total revenues. This margin is used to cover fixed costs and generate profit.
Functional (GAAP) Income Statement: Classifies costs by function (manufacturing, selling, administrative). Gross margin is calculated by subtracting the cost of goods sold from total revenues. This margin is used to cover all other expenses and generate profit.

Example

Chillin' Time: Produces and sells one product (ice cream bars) at $1.50 each. No inventories are maintained.
Variable Costs Per Ice Cream Bar: Direct materials (0.43),directlabor(0.43), direct labor (0.43),directlabor(0.32), manufacturing overhead (0.20),sellingandadministrative(0.20), selling and administrative (0.20),sellingandadministrative(0.15) totaling $1.10 per bar.
Fixed Costs Per Month: Manufacturing overhead (1,200),sellingandadministrative(1,200), selling and administrative (1,200),sellingandadministrative(580), totaling $1,780.

Functional Income Statement Example (Chillin' Time)

Sales (6,950 bars x 1.50)=1.50) = 1.50)=10,425
Less Cost of Goods Sold: Direct materials (2,988),directlabor(2,988), direct labor (2,988),directlabor(2,224), variable manufacturing overhead (1,390),fixedmanufacturingoverhead(1,390), fixed manufacturing overhead (1,390),fixedmanufacturingoverhead(1,200) = $7,802
Gross Margin: $2,623
Less Other Expenses: Variable selling and administrative (1,043),fixedsellingandadministrative(1,043), fixed selling and administrative (1,043),fixedsellingandadministrative(580) = $1,623
Profit: $1,000

Contribution (Variable) Income Statement Example (Chillin' Time)

Sales (6,950 bars x 1.50)=1.50) = 1.50)=10,425
Less Variable Costs: Direct materials (2,988),directlabor(2,988), direct labor (2,988),directlabor(2,224), manufacturing overhead (1,390),sellingandadministrative(1,390), selling and administrative (1,390),sellingandadministrative(1,043) = $7,645
Contribution Margin: $2,780
Less Fixed Costs: Manufacturing (1,200),sellingandadministrative(1,200), selling and administrative (1,200),sellingandadministrative(580) = $1,780
Profit: $1,000

Contribution Margin Calculations

Total Sales: $10,425
Total Variable Costs: $7,645
Contribution Margin: $2,780
Contribution Margin Per Unit: $.40
Contribution Margin Ratio: 26.7%

Cost-Volume-Profit Analysis (CVP)

A technique to analyze the relationship between volume, costs, revenues, and profits during a specific period. CVP is useful in early planning stages. Provides a simple framework for discussing planning issues and organizing relevant data
Assumptions: All costs are either fixed or variable, total cost function is linear within the relevant range, total revenue function is linear within the relevant range, the analysis is for a single product or a constant sales mix of multiple products.

CVP Model Applications

How many cappuccinos must Starbucks sell to earn a $50,000 profit?
At what sales volume will McDonald's total revenues and costs be equal (break-even)?
What profit will Office Max earn at $200 million in sales?
What happens to Disney's profit when ticket prices increase by 10% and fixed costs increase by 8%?

CVP Assumptions

All costs are categorized as either fixed or variable.
The total cost function is linear within the relevant range.
The total revenue function is linear within the relevant range.
The analysis is for a single product, or a constant sales mix of multiple products.

Variable and Fixed Components

Variable Costs: Variable manufacturing costs, variable selling, and administrative costs.
Fixed Costs: Fixed manufacturing overhead, fixed selling, and administrative costs.

Calculating Target Profit Example

Chillin' Time wants a monthly profit of 800.Howmanyicecreambarsneedtobesold?6,450.(800. How many ice cream bars need to be sold? 6,450. (800.Howmanyicecreambarsneedtobesold?6,450.(1,780 + 800=800 = 800=2,580 / $0.40 = 6,450)

Break-Even Point in Units

Break-even point occurs when total revenues equal total costs.
Formula: Fixed Costs / (Selling Price Per Unit - Variable Costs Per Unit)

Break-Even Point Example

Chillin' Time sells ice cream bars for 1.50each.Variablecost=1.50 each. Variable cost = 1.50each.Variablecost=1.10 per unit. How many bars must be sold to break even? 4,450 units. (1,780/(1,780 / (1,780/(1.50 - $1.10))

Target Profit Example

If Chillin' Time wants to earn a monthly profit of 800,howmanyicecreambarsmustitsell?6,450units.((800, how many ice cream bars must it sell? 6,450 units. ((800,howmanyicecreambarsmustitsell?6,450units.((1,780 + 800=800 = 800=2,580 / (1.50−1.50 - 1.50−1.10)) = 6,450)

Net Income Change Examples

If sales increase by 100 ice cream bars, net income increases by $40.
If sales increase by 1,050,netincomeincreasesby1,050, net income increases by 1,050,netincomeincreasesby280. (Based on contribution margin ratio).

Cost-Volume-Profit Graph

Shows the relationship between total costs and total revenues at different sales volume levels. Highlights the break-even point, profit area, and loss area. Depicts total revenue line and total costs line.

Multiple Product Break-Even Point

Applicable when a company sells more than one product.
Formula: Fixed Costs / Contribution Margin Per Unit.
Considers different contribution margins for multiple products.

Sales Mix Analysis

Sales mix refers to the relative portion of unit or dollar sales derived from different products.
If sales mix is constant, basic cost-volume-profit model works well.
If sales mix isn't constant, calculate average unit contribution margin or contribution margin ratio for each mix.

Operating Leverage

A measure of the extent to which an organization's costs are fixed.
Formula: Contribution Margin / Income Before Taxes
High operating leverage = higher profit potential but also risk of large losses with sales decreases.
Used to evaluate the risk and opportunity of profit increases and losses with sales variations.

Operating Leverage Risk and Opportunity

High operating leverage = High profit potential with sales increases but high risk of losses with sales decreases.
Low operating leverage = Low profit potential with sales increases but low risk of losses with sales decreases.

Measuring Expected Change in Profit

Demonstrates how changes in sales volumes affect profit for companies with different operating leverages.
Higher operating leverage leads to larger shifts in profits in response to changes in sales volumes.

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Description

This quiz focuses on Chapter 15 of the Accounting curriculum, which covers Cost-Volume-Profit (CVP) Analysis. Students will learn the differences between contribution and functional income statements, how to calculate contribution margins, and the importance of break-even points and operating leverage. Test your understanding of these critical concepts in managerial accounting.