Ch 3

Question 1

A Five-Step Decision-Making Process in Planning and Control-Revisited

Answer 1

1. Identify the problem/uncertainties.
2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing between alternatives using cost-volume-profit (C V P) analysis.
5. Implement the decision, evaluate performance, and learn.

Question 2

Contribution Margin =

Answer 2

(1) Total Revenue – Total Variable Costs
(2) Contribution Margin per Unit x # of Units Sold

Question 3

Contribution margin % (ratio) =

Answer 3

(1) Contribution Margin/Revenue
(2) Contribution margin per unit/selling price

Question 4

Contribution Margin per unit=

Answer 4

Selling Price – Variable Cost Per Unit

Question 5

Operating Income =

Answer 5

Contribution Margin – Fixed Costs

Question 6

Equation Method:

Answer 6

Revenue – Variable Costs – Fixed Costs = Operating Income

Question 7

CM (Contribution margin) Method:

Answer 7

[(S P x Q) – (V C x Q)] – F C = O I

Question 8

Revenue=

Answer 8

Selling Price (S P) * Quantity of Units Sold (Q)

Question 9

Variable Costs =

Answer 9

Unit Variable Costs (V C) * Quantity Of Units Sold (Q)

Question 10

Operating Income (O I) =

Answer 10

Contribution Margin – Fixed Costs (F C)

Question 11

Operating income=

Answer 11

Revenue- Variable cost- Fixed cost

Question 12

BEP (break even point) is

Answer 12

that quantity of output sold at which total revenue equals total cost. Q so that OI= 0

Question 13

Breakeven revenues =

Answer 13

F C / C M%

Question 14

Breakeven units =

Answer 14

FC / C M per unit

Question 15

After-tax profit (Net Income) =

Answer 15

Operating Income * (1 – Tax Rate)

Question 16

Operating income=

Answer 16

Net Income/(1-Tax rate)

Question 17

The margin of safety (M O S) measures

Answer 17

the distance between budgeted sales and breakeven (B E) sales

Question 18

MOS=

Answer 18

Budgeted Sales – B E Sales

Question 19

MOS Ratio =

Answer 19

MOS / Budgeted Sales

Question 20

Looking at the MOS as a ratio instead of a value, does what?

Answer 20

removes the size of the firm from the output.

Question 21

The cost structure is relationship of

Answer 21

fixed costs and variable costs to total costs.

Question 22

Operating Leverage =

Answer 22

CM/Operating Income

Question 23

Organizations with a high proportion of fixed costs in their cost structure have

Answer 23

high operating leverage.

Question 24

In cost structures with high operating leverage, small decreases in sales result in

Answer 24

in large decreases in operating income.

Question 25

% change in Operational Income=

Answer 25

Operating Leverage x % Change in Sales

Question 26

Sales Mix is

Answer 26

the quantity or proportion of various products or services that constitute a company’s total unit sales

Question 27

Gross Margin =

Answer 27

Revenue – Cost of Goods Sold

Question 28

Contribution Margin (how much of a company’s revenue is available to cover FC) =

Answer 28

Revenue – All Variable Costs