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Questions and Answers
What does CVP analysis primarily study?
What does CVP analysis primarily study?
Which statement accurately describes a CVP income statement?
Which statement accurately describes a CVP income statement?
What does a contribution margin of $200 indicate?
What does a contribution margin of $200 indicate?
If Vargo Electronic's contribution margin per unit is $200, what is its contribution margin ratio if the selling price is $500?
If Vargo Electronic's contribution margin per unit is $200, what is its contribution margin ratio if the selling price is $500?
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What is the primary effect of sales mix on break-even sales?
What is the primary effect of sales mix on break-even sales?
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Which of the following concepts relates closely to operating leverage?
Which of the following concepts relates closely to operating leverage?
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How does CVP analysis assist in product mix decisions?
How does CVP analysis assist in product mix decisions?
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What is one common application of CVP analysis in management decisions?
What is one common application of CVP analysis in management decisions?
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What is the break-even point in units for Krisanne Company if fixed expenses are $100,000 and the contribution margin per unit is $24?
What is the break-even point in units for Krisanne Company if fixed expenses are $100,000 and the contribution margin per unit is $24?
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If Croc Catchers has a contribution margin less than zero, what does this imply about their selling price and variable costs?
If Croc Catchers has a contribution margin less than zero, what does this imply about their selling price and variable costs?
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What is the margin of safety in dollars for Krisanne Company if total sales are $300,000 and break-even sales are $250,000?
What is the margin of safety in dollars for Krisanne Company if total sales are $300,000 and break-even sales are $250,000?
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How will a 10% reduction in selling price affect unit sales if it leads to a 25% increase in units sold?
How will a 10% reduction in selling price affect unit sales if it leads to a 25% increase in units sold?
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Which of the following statements is true if variable costs for a company exceed fixed costs?
Which of the following statements is true if variable costs for a company exceed fixed costs?
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In the context of CVP analysis, what does a contribution margin ratio of 0.40 indicate?
In the context of CVP analysis, what does a contribution margin ratio of 0.40 indicate?
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What would be the impact on the break-even point in units if management successfully increases unit sales without changing costs?
What would be the impact on the break-even point in units if management successfully increases unit sales without changing costs?
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During CVP analysis, if a company's fixed costs are $100,000 and the total sales are $300,000 with a contribution margin of $24 per unit, how much pre-tax income does the company generate?
During CVP analysis, if a company's fixed costs are $100,000 and the total sales are $300,000 with a contribution margin of $24 per unit, how much pre-tax income does the company generate?
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What does the margin of safety indicate?
What does the margin of safety indicate?
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If Vargo's actual sales are $800,000 and the break-even sales are $500,000, what is the margin of safety in dollars?
If Vargo's actual sales are $800,000 and the break-even sales are $500,000, what is the margin of safety in dollars?
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What is the margin of safety ratio if Vargo's sales are $800,000 and the margin of safety is $300,000?
What is the margin of safety ratio if Vargo's sales are $800,000 and the margin of safety is $300,000?
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How many units must Vargo sell to break even if the unit selling price is $500 and total fixed costs are $200,000?
How many units must Vargo sell to break even if the unit selling price is $500 and total fixed costs are $200,000?
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What will be the new break-even sales if Vargo's selling price is reduced by 10%?
What will be the new break-even sales if Vargo's selling price is reduced by 10%?
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What will happen to Vargo's margin of safety if sales price decreases due to competition?
What will happen to Vargo's margin of safety if sales price decreases due to competition?
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If Vargo's fixed costs increased to $300,000 while other costs remained the same, what would be the new break-even point in sales?
If Vargo's fixed costs increased to $300,000 while other costs remained the same, what would be the new break-even point in sales?
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Which formula correctly calculates the contribution margin per unit for Vargo's products?
Which formula correctly calculates the contribution margin per unit for Vargo's products?
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Study Notes
Managerial Accounting: Cost-Volume-Profit Analysis
- Cost-Volume-Profit (CVP) analysis studies how changes in costs and volume affect a company's profit.
- CVP analysis is crucial for profit planning and decision-making, including: product mix determination, production facility optimization, and pricing strategies.
- Management often requires income statements formatted in a specific way for internal use.
- CVP income statements classify costs and expenses as either fixed or variable.
- CVP statements often report contribution margin as a total amount and on a per-unit basis.
- Vargo Electronics Company's CVP income statement for June 30, 2020 shows a total contribution margin of $320,000 and a per-unit contribution margin of $200 (with total sales of $800,000).
- Break-even analysis examines the point where a company's total revenue equals its total costs (resulting in zero profit).
- Vargo Electronics' break-even point in units is 1,000 units.
- Vargo Electronics' break-even point in sales dollars is $500,000 (with fixed costs of $200,000 and a contribution margin ratio of 40%).
- Target net income means setting a sales goal resulting in a desired profit.
- To achieve a target net income of $250,000, Vargo Electronics needs to sell 2,250 units (fixed costs of $200,000).
- Margin of safety indicates the amount by which sales can decrease before a company incurs a loss.
- Vargo's margin of safety in dollars is $300,000 assuming sales of $800,000 (with a break-even point of $500,000).
- A 10% discount on selling price ($50) increases the break-even point to 1,333 units.
- CVP analysis assists to understand how changes in the business environment (e.g., price cuts, cost reductions, or changes in sales volumes) affect a company.
- Determining the sales mix for several products is an essential function of the CVP analysis.
- Companies can compute break-even sales for multiple products (e.g. for a sales mix of 75% cell phones and 25% TVs) by calculating a weighted-average of total contribution margins per unit per product.
- Companies with limited resources (like machine hours) need to prioritize which products to emphasize to maximumize net income.
- The theory of constraints focuses on identifying and managing constraints to achieve company goals.
- Using CVP to address changes in the business environment assists to analyze a company's cost structure considering fixed versus variable costs, and the operating leverage.
CVP Analysis: Additional Issues
- Sales mix refers to the percentage of different products sold in a company's portfolio.
- A company's sales mix can be critical because products typically have different contribution margins.
Operating Leverage
- Operating leverage is the extent to which net income reacts to sales changes.
- Higher fixed costs mean higher operating leverage.
- Higher operating leverage leads to faster profit growth with increasing sales (and substantial losses if sales decline), making the company more risky.
- Degree of operating leverage can be calculated by dividing total contribution margin by net income.
- A higher degree of operating leverage implies greater vulnerability to fluctuations in sales.
Absorption vs. Variable Costing
- Absorption costing includes all manufacturing costs (including fixed) as product costs.
- Variable costing treats only variable manufacturing costs as product costs, and fixed manufacturing overhead as a period cost.
- Variable costing is often used internally for decision-making.
- GAAP requires absorption costing for external financial reporting.
- Use of differing costing methods across companies can create discrepancies in net income.
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Description
This quiz covers the principles of Cost-Volume-Profit analysis, focusing on its significance in profit planning and decision-making. Topics include the classification of costs, contribution margins, and break-even analysis, using Vargo Electronics as a case study. Test your understanding of how these concepts apply to managerial accounting.
