# Chapter 5 - Cost-Volume-Profit Relationships Flashcards

1
Q

What is the format of the contribution income statement?

A
```Sales
Less: Variable Expense
Contribution Margin
Less: Fixed Expense
Net Operating Income```
2
Q

What is the equation to find the contribution margin?

A

Sales - variables expense

3
Q

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

A

Sales per unit - variable expense per unit

4
Q

What is the equation to find the net operating income?

A

Contribution margin - fixed expense

5
Q

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

A

The contribution income statement

6
Q

What does the contribution income statement emphasize?

A

Cost behavior

7
Q

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

A

Contribution Margin

8
Q

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

A

The break-even point

9
Q

Fill in the Blanks:

The break-even point is the point at which ________________

A

Contribution margin = fixed expense

10
Q

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

A

It will increase by the amount of contribution margin per unit

11
Q

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

A

The contribution margin ratio

12
Q

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

A

The contribution margin ratio

13
Q

What are the 2 formulas to find the CM ratio?

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

2. (CM/Sales) x 100

14
Q

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

A

The variable expense ratio

15
Q

What is the formula to find the VE ratio?

A

(VE/S) x 100

16
Q

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

A

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```
17
Q

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

A

FE/CM per unit

18
Q

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

A

FE/CM ratio

19
Q

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

A

B. \$1,715

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

20
Q

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

A

D. 1,150 cups

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

21
Q

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

A

(Target Profit + FE)/CM per Unit

22
Q

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

A

(Target Profit + FE)/CM ratio

23
Q

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

A

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```
24
Q

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

A

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```
25
Q

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

A

The margin of safety

26
Q

Fill in the Blanks:

The _____ the margin of safety, the _____ the risk of not breaking even and incurring a loss.

A
1. Higher

2. Lower

27
Q

What is the formula to find the margin of safety?

A

Total sales − Break-even unit sales

28
Q

True or False:

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

A

True

29
Q

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?

A
```MoS = TS - BEUS
MoS = 250,000 - 200,000
MoS = 50,000```
30
Q

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

A

MoS/Total unit sales

31
Q

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

A

MoS/Selling price

32
Q

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

A

B. 950 cups

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

33
Q

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

A

The cost structure

34
Q

Fill in the Blanks:

Companies with ____ fixed cost structures enjoy _____ stability in income across good and bad years

A
1. Low

2. Greater

35
Q

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

A

Operating leverage

36
Q

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.

A

True

37
Q

What is the formula to find operating leverage?

A

CM/NOI

38
Q

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

A

Percent increase in sales x Operating leverage

39
Q

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

A

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```
40
Q

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%

A

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%

41
Q

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

A

Lower profits

42
Q

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

A

Sales mix

43
Q

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

A

MoS x Selling price per unit

44
Q

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

A

Selling price per U - CM per U

45
Q

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

A

High-low method

46
Q

What is variable cost equal to?

A

The slope of the line

47
Q

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

A
1. Change in cost / change in activity

2. (Highest activity level cost - lowest activity level cost) / (highest activity level - lowest activity level)

48
Q

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

A

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

49
Q

True or False:

Sales will always have a CM ratio of 100%

A

True

50
Q

True or False:

The CM ratio is the same thing as the CM’s percentage of sales

A

True