Questions and Answers
If these results occur, what will happen to net operating income?
increase by $6,000
Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.
decrease
What is one way to calculate break-even sales dollar?
Multiplying unit selling price times the number of units required to break-even.
What should be the quoted selling price per unit for the bulk sale opportunity?
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What are the sales dollars to break-even for Company A with fixed costs of $564,000 and a contribution margin of 62%?
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To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to ______.
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What would be the impact on total contribution margin if Sweet Dreams increases variable costs?
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What is the break-even point in units and dollars for Company A selling at $10 per unit with variable expenses of $5 and fixed expenses of $200,000?
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What is the total sales dollars needed to reach the target profit if 90,000 units are sold for $7.50 each?
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What are the sales dollars to break-even for Cakes by Jacki with $144,000 of fixed costs and a contribution margin ratio of 59%?
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What are the sales dollars needed for Company A to reach a profit of $800,000 with fixed costs of $564,000 and a contribution margin ratio of 62%?
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What is the margin of safety in dollars?
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What is the margin of safety percentage?
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What are the sales dollars needed to earn the target profit for Shonda's Shoes if she sells 450 pairs?
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What are the sales dollars needed to earn the target profit for Chitter-Chatter with a target profit of $975,000?
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What is the margin of safety in units for Polly's Day Planners?
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The higher the margin of safety, the lower the risk of incurring a loss.
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What is known as the measure of how sensitive net operating income is to a given percentage change in sales dollars?
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What is the budgeted margin of safety in dollars when budgeted sales are $982,000 and break-even sales are $932,200?
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Which company has greater operating leverage if a 15% increase in sales resulted in a 40% increase in net income for Company A and a 60% increase for Company B?
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What is the margin of safety percentage for Jump-It Corporation with sales of 100,000 units and a margin of safety of $272,000?
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CVP analysis focuses on how profits are affected by which of the following?
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Place the following items in the correct order in which they appear on the contribution margin format income statement:
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Contribution margin is first used to cover ___ expenses. Once the break-even point has been reached, contribution margin becomes ____.
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Given a sales price of $100, variable costs of $70 and a break-even point of 500 units, what is the net operating profit for sale of 501 units?
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What is the break-even point?
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According to the CVP analysis model, what increases profits?
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Total contribution margin equals?
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Contribution margin becomes profit after what?
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When a company sells one unit above the number required to break-even, what happens to the company's net operating income?
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A company has reached its break-even point when the contribution margin?
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The break-even point is reached when the contribution margin is equal to?
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CVP analysis allows companies to easily identify the change in profit due to changes in?
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After reaching the break-even point, a company's net operating income will increase by the ____ per unit for each additional unit sold.
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What is the contribution margin (CM) ratio calculation?
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Given sales of $1,452,000, variable expenses of $958,320 and fixed expenses of $354,000, what is the contribution margin ratio?
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Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.
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The amount by which sales can drop before losses are incurred is called the?
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To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs and the?
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What represents the equation that should be used in setting a target selling price for a special order bulk sale?
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Study Notes
Contribution Margin and CVP Analysis
- CVP analysis examines the impact of selling prices, sales volume, unit variable costs, total fixed costs, and product mix on profits.
- Contribution margin serves to cover fixed expenses first, then contributes to profit after the break-even point.
Break-even Point
- The break-even point occurs at sales levels where profit equals zero, meaning total revenue equals total costs.
- Contribution margin must cover fixed expenses for a business to reach break-even; once achieved, any additional unit sold increases net operating income.
Profit Calculations
- Net operating profit for 501 units sold with a selling price of $100 and variable costs of $70 is $30.
- Profit can be calculated via the formula: (Selling Price × Quantity) - (Variable Cost × Quantity) - Fixed Expenses.
Contribution Margin Ratio
- The contribution margin ratio is calculated as contribution margin divided by sales, aiding in the analysis of profit changes due to sales fluctuations.
- A contribution margin ratio of 53% means that for every $1 increase in sales, net operating income will increase by $0.53.
Profit Impact of Sales and Costs
- Changes in sales and fixed expenses impact profit. For example, a sales increase of $35,000 with a 45% contribution margin ratio results in a $15,750 increase in net operating income.
- Decreasing unit variable costs will generally enhance profits, with a greater contribution margin available to cover fixed expenses.
Variable Expenses and Selling Price Relationship
- Variable expense ratio is derived from variable expenses divided by sales; a lower ratio indicates greater profitability on sales.
- The selling price per unit minus variable costs equals contribution margin per unit, influencing overall profit.
Target Profit and Product Sales
- To achieve targeted profit goals, companies need to calculate necessary sales volume based on contribution margin and fixed costs.
- For instance, selling 35 elephants at a profit margin of $45 each yields total profits of $875, demonstrating how fixed costs and volume intertwine.
Special Cases and Strategies
- In bulk sales where fixed expenses remain unchanged, selling price considerations can focus on variable costs and desired profit without including fixed costs.
- Calculating changes in total contribution margins can often help forecast impacts of production shifts, such as switching materials to improve quality.
Important Formulas
- Break-even point in units = Fixed Costs / (Selling Price - Variable Costs).
- Net profit calculation involves direct contributions from sales volume and adjustments for any new expenses.
Decision-Making Tools
- Incremental analysis considers only relevant costs and revenues for specific decisions, excluding unchanged variables.
- Contribution margin format income statements are essential for internal decision-making, facilitating insight into profits resulting from various operational changes.
General Understanding
- A company's sales mix, comprising the relative proportion of different products sold, significantly affects the overall profitability and must be considered in break-even analysis.
- Changes in fixed or variable costs and their effects on pricing strategy directly influence a company’s contribution margin and overall financial health. ### Break-even Point and Sales Calculations
- Break-even point for Company A is 40,000 units or $400,000, calculated as $200,000 fixed expenses divided by $5 variable expenses per unit.
- To achieve a target profit of $180,000, a company must sell 90,000 units, resulting in total sales of $675,000 at a selling price of $7.50 per unit.
- Cakes by Jacki requires $244,068 in sales to break even, determined from fixed costs of $144,000 and a contribution margin ratio of 59%.
- Company A needs sales of $2,200,000 to achieve a profit of $800,000, utilizing a contribution margin ratio of 62 against fixed costs of $564,000.
Margin of Safety
- Margin of safety in dollars is calculated as budgeted (or actual) sales minus break-even sales.
- Margin of safety percentage is derived by dividing the margin of safety in dollars by total budgeted (or actual) sales in dollars.
Sales and Profit Calculations
- To earn a target profit, Shonda's Shoes must make $42,750 from selling 450 pairs at $95 each.
- Chitter-Chatter needs to generate $1,800,000 in sales to meet a target profit of $975,000 with a contribution margin ratio of 65% and fixed costs of $195,000.
Margin of Safety in Units and Risks
- Polly's Day Planners has a margin of safety of $27,300, equivalent to 780 units when calculated based on $927,500 in sales with planners priced at $35.
- A higher margin of safety indicates reduced risk of incurring losses.
Operating Leverage
- Operating leverage measures the sensitivity of net operating income to percentage changes in sales dollars.
- A 15% increase in sales for Company A leads to a 40% increase in net income, while Company B sees a 60% increase, indicating that Company B has greater operating leverage.
Budgeted Margin of Safety
- For a company with budgeted sales of $982,000 and break-even sales of $932,200, the budgeted margin of safety in dollars equals $49,800, determined by subtracting break-even sales from budgeted sales.
Margin of Safety Percentage Example
- Jump-It Corporation's margin of safety percentage stands at 16%, calculated from a margin of safety of $272,000 and total sales of $1,700,000 (100,000 units sold at $17 each).
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Description
Test your knowledge of key concepts in Chapter 2 of Accounting. This quiz covers CVP analysis, contribution margins, and the order of items in a contribution margin income statement. Ideal for students looking to reinforce their understanding of these fundamental accounting principles.