Equation Method for Break-Even Analysis
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Questions and Answers

What is the sales manager proposing to change regarding the sales staff's compensation?

  • From $10,000 per year to $15 per Phone sold
  • From flat salaries to commission basis (correct)
  • From commission basis to flat salaries
  • From $15 per Phone sold to $10,000 per year

According to CVP analysis assumptions, what is one of the factors that affect costs?

  • Organizational culture
  • Market competition
  • Sales mix variability
  • Changes in activity level (correct)

What does the Margin of Safety measure?

  • Cushion provided by a level of sales (correct)
  • Quality of products sold
  • Difference between fixed and variable costs
  • Expected profit percentage

If the sales manager's confident increase in annual sales by 15% is achieved, what will be the new annual sales amount?

<p>$12,500 (D)</p> Signup and view all the answers

In the context of Margin of Safety, what does 'break-even point' refer to?

<p>Point at which profit is zero (C)</p> Signup and view all the answers

What formula is used to calculate the margin of safety ratio?

<p>(Margin of Safety in dollars) / (Actual sales) (D)</p> Signup and view all the answers

Which assumption of CVP analysis states that all units produced are sold?

<p>All units produced are sold (B)</p> Signup and view all the answers

If the Margin of Safety in dollars for a company is $300,000 and the Expected Sales are $900,000, what is the margin of safety ratio?

<p>$1 : 3 (A)</p> Signup and view all the answers

How does the sales manager believe changing to a commission basis will impact annual sales?

<p>Increase by 20% (D)</p> Signup and view all the answers

'Margin of Safety' can be expressed as __________.

<p>$250,000 cushion provided by sales (C)</p> Signup and view all the answers

Flashcards

Margin of Safety

The amount of sales revenue that exceeds the break-even point.

Break-Even Point

Point where total revenue equals total cost, resulting in zero profit.

Margin of Safety Ratio

The percentage of sales above the break-even point.

Changes in Activity Level

A change in the level of activity, such as production or sales.

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Commission Basis

Paying sales staff based on a percentage of their sales.

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All Units Produced are Sold

An assumption in CVP analysis stating that all units produced are sold.

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How Commission Basis Impacts Sales

The sales manager believes this will motivate the sales staff and increase sales.

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CVP Analysis

A method for analyzing the relationship between costs, volume, and profits.

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New Annual Sales Amount

The expected increase in annual sales is 15%, making the new sales amount $12,500.

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Calculating the Margin of Safety Ratio

A method of calculating the margin of safety using the formula: (Margin of Safety in dollars) / (Actual sales).

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