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Questions and Answers
What is the impact on net operating income when sales increase from 500 to 650 units, considering an increase in fixed expenses by $15,000?
What is the impact on net operating income when sales increase from 500 to 650 units, considering an increase in fixed expenses by $15,000?
What is the primary purpose of plotting total expenses and total sales in a CVP graph?
What is the primary purpose of plotting total expenses and total sales in a CVP graph?
How much does the contribution margin increase when unit sales rise from 500 to 580 units with a variable cost increase of $10 per unit?
How much does the contribution margin increase when unit sales rise from 500 to 580 units with a variable cost increase of $10 per unit?
At what point on the CVP graph do total sales and total expenses intersect?
At what point on the CVP graph do total sales and total expenses intersect?
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What is the sales amount generated from selling 650 units at $480 each?
What is the sales amount generated from selling 650 units at $480 each?
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What do fixed expenses represent in the context of a CVP graph?
What do fixed expenses represent in the context of a CVP graph?
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If variable expenses increase by $25,000 due to higher quality raw materials while sales increase by $40,000, what is the net impact on contribution margin?
If variable expenses increase by $25,000 due to higher quality raw materials while sales increase by $40,000, what is the net impact on contribution margin?
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Which of the following statements best describes the contribution margin?
Which of the following statements best describes the contribution margin?
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What is the total fixed expenses after an increase of $15,000 in advertising budget, when the original fixed expenses were $80,000?
What is the total fixed expenses after an increase of $15,000 in advertising budget, when the original fixed expenses were $80,000?
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If 400 units are sold and total expenses are $300,000, how would one represent this on a CVP graph?
If 400 units are sold and total expenses are $300,000, how would one represent this on a CVP graph?
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Study Notes
CVP Graph
- The cost-volume-profit (CVP) graph helps visualize the relationship between costs, volume, and profit.
- Plot fixed expenses as a horizontal line, which remains constant regardless of sales volume.
- Plot total expenses as a line starting at the fixed expense level and increasing with sales volume.
- The total expense line has a steeper slope due to variable costs.
- Plot total sales as a line starting at the origin and increasing with sales volume.
- The point where the total sales line intersects with the total expense line represents the break-even point.
Break-Even Point
- The break-even point is the level of sales where total revenue equals total expenses, resulting in zero profit.
- It can be calculated using the formula: Break-even point in units = Fixed Expenses / (Sales Price per Unit - Variable Expenses per Unit)
Incremental Analysis
- Incremental analysis focuses on the financial impact of changes, such as increasing advertising expenses or changing variable costs.
- It helps determine the profitability of a specific action by comparing the incremental costs and benefits.
Contribution Margin
- Contribution margin is the difference between sales revenue and variable expenses.
- It represents the amount of money available to cover fixed expenses and contribute to profit.
- Contribution margin can be calculated per unit or in total.
Variable Expense Ratio
- The variable expense ratio is the percentage of sales revenue that goes towards variable expenses.
- It can be calculated by dividing total variable expenses by total sales.
- A lower variable expense ratio indicates a higher contribution margin, which is generally more favorable.
Changes in Costs and Sales Volume
- Increasing advertising expenses increases fixed costs and may decrease profit if the sales increase is not substantial enough to cover the added expense.
- Increasing variable costs may improve product quality or appeal to customers, potentially leading to increased sales and higher profits.
- Decreasing selling price can increase sales volume but may decrease profitability if the price reduction is too significant.
Impact of Changes on Profitability
- An increase in sales volume generally leads to increased contribution margin and profits, assuming fixed costs remain constant.
- A decrease in fixed costs reduces the required contribution margin to break even, potentially increasing profit if sales volume remains the same.
- A decrease in variable costs increases the contribution margin per unit, leading to higher profits, assuming sales volume remains the same.
- An increase in selling price increases contribution margin per unit, assuming sales volume remains the same.
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Description
This quiz explores cost-volume-profit (CVP) analysis, including the construction of CVP graphs and break-even calculations. It will test your understanding of how costs and volume affect profit and the importance of the break-even point in decision-making. Get ready to apply your knowledge of incremental analysis too.
