Chapter 5 - Cost-Volume-Profit Relationships

Question 1

What is the format of the contribution income statement?

Answer 1

Sales
Less: Variable Expense
Contribution Margin
Less: Fixed Expense
Net Operating Income

Question 2

What is the equation to find the contribution margin?

Answer 2

Sales - variables expense

Question 3

What is the equation to find the contribution margin per unit?

Answer 3

Sales per unit - variable expense per unit

Question 4

What is the equation to find the net operating income?

Answer 4

Contribution margin - fixed expense

Question 5

What is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume?

Answer 5

The contribution income statement

Question 6

What does the contribution income statement emphasize?

Answer 6

Cost behavior

Question 7

What is the amount remaining from sales revenue after variable expenses have been deducted?

Answer 7

Contribution Margin

Question 8

What is the level of sales at which profit is zero?

Answer 8

The break-even point

Question 9

Fill in the Blanks:

The break-even point is the point at which ________________

Answer 9

Contribution margin = fixed expense

Question 10

If a company is at the break-even point how much will their net operating income increase by if they sell on more unit?

Answer 10

It will increase by the amount of contribution margin per unit

Question 11

What do you use to compute changes in contribution margin and net operating income resulting from changes in sales volume?

Answer 11

The contribution margin ratio

Question 12

What is referred to as the contribution margin as a percentage of sales?

Answer 12

The contribution margin ratio

Question 13

What are the 2 formulas to find the CM ratio?

Answer 13

1. (CM per U/Sales per U) x 100

2. (CM/Sales) x 100

Question 14

What is referred to as the variable expense as a percentage of sales?

Answer 14

The variable expense ratio

Question 15

What is the formula to find the VE ratio?

Answer 15

(VE/S) x 100

Question 16

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the CM Ratio for Coffee Klatch?

A. 1.319
B. 0.758
C. 0.242
D. 4.139

Answer 16

B. 0.758

CM per U = SP per U - VE per U
CM per U = 1.49 - .36 = 1.13
CM ratio = CM per U/SP per U
CM ratio = 1.13/1.49
CM ratio = 0.758

Question 17

What is the formula to find the break-even point in unit sales?

Answer 17

FE/CM per unit

Question 18

What is the formula to find the break-even point in dollar sales?

Answer 18

FE/CM ratio

Question 19

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars?

A. $1,300
B. $1,715
C. $1,788
D. $3,129

Answer 19

B. $1,715

FE/CM ratio
1,300/0.758 = 1,715

Question 20

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units?

A. 872 cups
B. 3,611 cups
C. 1,200 cups
D. 1,150 cups

Answer 20

D. 1,150 cups

FE/CM per unit
FE/(SP - VE)
1,300/(1.49 - .36) = 1,150

Question 21

What is the formula find the target profit using units sales?

Answer 21

(Target Profit + FE)/CM per Unit

Question 22

What is the formula to find the target profit using dollar sales?

Answer 22

(Target Profit + FE)/CM ratio

Question 23

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Determine how many cups of coffee would have to be sold to attain target profits of $2,500 per month.

A. 3,363 cups
B. 2,212 cups
C. 1,150 cups
D. 4,200 cups

Answer 23

A. 3,363 cups

Q = (TP + FE)/CM PU
Q = (2,500 + 1,300)/(1.49 - .36)
Q = 3,800/1.13
Q = 3,363

Question 24

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Determine the sales dollars that must be generated to attain target profits of $2,500 per month.

A. $2,550
B. $5,013
C. $8,458
D. $10,555

Answer 24

B. $5,013

Q = (TP + FE)/CM ratio
CM ratio = CM/SP
Q = (2,500 + 1,300)/((1.49 - .36)/1.49)
Q = 3,800/0.758
Q = 5,013

Question 25

What is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars?

Answer 25

The margin of safety

Question 26

# Fill in the Blanks: The _____ the margin of safety, the _____ the risk of not breaking even and incurring a loss.

Answer 26

1. Higher | 2. Lower

Question 27

What is the formula to find the margin of safety?

Answer 27

Total sales − Break-even unit sales

Question 28

True or False: The margin of safety is the amount by which sales can drop before losses are incurred

Answer 28

True

Question 29

If we assume that RBC has actual sales of $250,000, given that we have already determined the break-even sales to be $200,000, what is the margin of safety?

Answer 29

``` MoS = TS - BEUS MoS = 250,000 - 200,000 MoS = 50,000 ```

Question 30

What is the formula to find the margin of safety percentage?

Answer 30

MoS/Total unit sales

Question 31

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

Answer 31

MoS/Selling price

Question 32

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups? A. 3,250 cups B. 950 cups C. 1,150 cups D. 2,100 cups

Answer 32

B. 950 cups MoS in units = TS - BES BES = (FC/CM PU) MoS = 2,100 - 1,150 MoS = 950

Question 33

What refers to the relative proportion of fixed and variable costs in an organization?

Answer 33

The cost structure

Question 34

# Fill in the Blanks: Companies with ____ fixed cost structures enjoy _____ stability in income across good and bad years

Answer 34

1. Low | 2. Greater

Question 35

What is a measure of how sensitive net operating income is to percentage changes in sales?

Answer 35

Operating leverage

Question 36

True or False: Operating leverage is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits.

Answer 36

True

Question 37

What is the formula to find operating leverage?

Answer 37

CM/NOI

Question 38

What is the formula to find the percentage increase in net operating income?

Answer 38

Percent increase in sales x Operating leverage

Question 39

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage? A. 2.21 B. 0.45 C. 0.34 D. 2.92

Answer 39

A. 2.21 ``` CM = (SP - VE) x Q NOI = CM - FE ``` ``` OL = ((SP - VE) x Q) / (CM - FE) OL = ((1.49 - .36) x 2,100) / (2,373 - 1,300) OL = 2.21 ```

Question 40

At Coffee Klatch the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300, and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase? A. 30.0% B. 20.0% C. 22.1% D. 44.2%

Answer 40

D. 44.2% ``` OL = ((1.49 - .36) x 2,100) / (2,373 - 1,300) OL = 2.21 ``` NOI Inc = OL x SI% NOI Inc = 2.21 x 20% NOI Inc = .442 = 44.2%

Question 41

What can commissions based on sales dollars lead to in a company?

Answer 41

Lower profits

Question 42

What is the relative proportion in which a company’s products are sold?

Answer 42

Sales mix

Question 43

What is the formula to find the margin of safety in dollars?

Answer 43

MoS x Selling price per unit

Question 44

What is the formula to find the variable expense per unit?

Answer 44

Selling price per U - CM per U

Question 45

What is based on the rise-over-run formula for the slope of the line?

Answer 45

High-low method

Question 46

What is variable cost equal to?

Answer 46

The slope of the line

Question 47

What are the 2 formulas to find the high-low method's variable cost per unit?

Answer 47

1. Change in cost / change in activity | 2. (Highest activity level cost - lowest activity level cost) / (highest activity level - lowest activity level)

Question 48

What is the formula to find the high-low method's fixed cost?

Answer 48

Highest activity level cost - (VC x highest activity level)

Question 49

True or False: Sales will always have a CM ratio of 100%

Answer 49

True

Question 50

True or False: The CM ratio is the same thing as the CM's percentage of sales

Answer 50

True