Contribution Margin and Break-Even Analysis

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Questions and Answers

What is the contribution margin per unit for the speakers?

$100 (correct)

$60

$250

$150

Using the formula method, how many units must be sold to break even?

300

350 (correct)

450

400

What does a contribution margin ratio (CM ratio) of 40% indicate?

40% of sales are fixed expenses

The net operating income is 40% of sales

40 cents of each dollar increase in sales will contribute to profits (correct)

40% of total sales are variable expenses

What is the break-even dollar sales amount for the speakers?

$87,500 Signup and view all the answers

What is the net operating income for the sales of 400 speakers?

$5,000 Signup and view all the answers

How is target profit analysis primarily used?

To estimate the sales volume needed for a specific profit Signup and view all the answers

What would be the total contribution margin if sales increased by $1,000 with a 40% CM ratio?

$400 Signup and view all the answers

What is the relationship between fixed expenses and profits at the break-even point?

Profits are zero at the break-even point Signup and view all the answers

What is the required unit sales to achieve a target profit of $40,000 given a contribution margin per unit of $100 and fixed expenses of $35,000?

750 units Signup and view all the answers

How would you calculate the dollar sales needed to attain a target profit of $40,000 with fixed expenses of $35,000 and a contribution margin ratio of 40%?

$187,500 Signup and view all the answers

What does the margin of safety represent in terms of sales?

The excess of budgeted sales over break-even sales Signup and view all the answers

If the sales at the current volume are $100,000 and the break-even sales are $87,500, what is the margin of safety in dollars?

$12,500 Signup and view all the answers

What is the margin of safety percentage if the margin of safety in dollars is $12,500 and total budgeted sales are $100,000?

12.5% Signup and view all the answers

Which of the following describes the contribution margin ratio?

The ratio of contribution margin to selling price Signup and view all the answers

Which method can be used to determine the required unit sales for a target profit?

Equation method Signup and view all the answers

If a company wants to increase its contribution margin to reduce its break-even point, which of the following strategies would most likely achieve this?

Increase selling prices while controlling variable costs Signup and view all the answers

What is the formula to calculate the margin of safety in units?

Margin of safety in units = Margin of safety in dollars / Selling price per unit Signup and view all the answers

How does operating leverage affect net operating income with respect to sales changes?

Higher operating leverage means higher sensitivity of income to sales changes. Signup and view all the answers

What is the degree of operating leverage for Bogside Farm given the contribution margin of $40,000 and net operating income of $10,000?

4 Signup and view all the answers

What would be the expected percentage change in net operating income for Sterling Farm if sales increase by 10%?

70% Signup and view all the answers

Using the formula, what is the expected increase in net operating income for Bogside Farm after a 10% sales increase?

40% Signup and view all the answers

What does the contribution margin represent in the context of CVP analysis?

Total sales revenue minus variable costs Signup and view all the answers

Which statement about the margin of safety is correct?

It shows how much sales can drop before the company incurs a loss. Signup and view all the answers

In a single-product company like Acoustic Concepts, what is the calculated margin of safety in units when the margin of safety in dollars is $12,500 and selling price per unit is $250?

50 speakers Signup and view all the answers

Study Notes

Contribution Margin Ratio

The contribution margin ratio (CM ratio) is calculated by dividing the contribution margin by sales. It can be expressed as a percentage.
A 40% CM ratio indicates that for every $1 increase in sales, the total contribution margin increases by $0.40 (40 cents), after accounting for fixed costs.

Break-Even Analysis

The break-even point is the sales level where the profit is zero.
To calculate the break-even point, managers can use two methods: the equation method and the formula method.
The Equation Method sets the profit to zero and solves for the number of units sold (Q) using the basic profit equation: Profit = (Unit Contribution Margin X Q) - Fixed Expenses
The Formula Method directly calculates the break-even point based on fixed expenses and either unit contribution margin or the contribution margin ratio.

Target Profit Analysis

Target profit analysis determines the sales volume required to achieve a specific profit goal.
The equation method and the formula method can also be used for target profit analysis, adjusting the profit equation or formula to include the desired profit amount.

Margin of Safety

The margin of safety is the difference between actual or budgeted sales and the break-even sales. It represents how much sales can decrease before the company starts incurring losses.
It can be calculated in dollars, units, or as a percentage of total sales.
A larger margin of safety indicates lower financial risk.

Operating Leverage

Operating leverage measures how sensitive net operating income is to changes in sales.
High operating leverage means a small percentage increase in sales can significantly amplify the percentage increase in net operating income.
The degree of operating leverage is calculated by dividing contribution margin by net operating income.
The higher the degree of operating leverage, the more sensitive net operating income is to changes in sales.

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Description

This quiz covers essential concepts in managerial accounting, focusing on contribution margin ratio, break-even analysis, and target profit analysis. Understand how to calculate the contribution margin and analyze break-even points to determine sales strategies. Ideal for students studying managerial accounting principles.