Chapter 6: CVP

Question 1

The profit equation shows that profit equals ___.

Answer 1

Total sales revenue

• total variable costs
• total fixed costs

Question 2

___ is the relationship among costs, volume, and profit.

Answer 2

CVP

Question 3

___ are costs that vary in total with changes in volume of activity.

Answer 3

Variable costs

Question 4

___ are costs that are fixed and do not change in total with changes in volume of activity.

Answer 4

Fixed costs

Question 5

F. ___ is the number of units or total sales measured in dollars that must be sold to achieve zero profit.

Answer 5

Break-even point

Question 6

F. ___ is found by setting profit to zero using the profit equation, fill in the appropriate information, and solving.

Answer 6

Break-even point

Question 7

How does finding the target profit in units help companies?

Answer 7

Tells company how many units must be sold to achieve a certain profit

Question 8

How do companies find the break-even point if they cannot easily measure sales in units?

Answer 8

Measured in total sales dollars

Question 9

F. Contribution margin per unit is the amount each unit sold contributes to ___ and ___.

Answer 9

Covering fixed costs

Increasing profit

Question 10

___ is the CM as a percentage of sales which measure the amount each sales dollar contributes to covering fixed costs and increasing profits.

Answer 10

CM ratio

Question 11

On a CVP graph, ___ is on the x axis and ___ is on the y axis.

Answer 11

X - dollar amounts for revenues, costs and profits

Y - volume of activity for a period, measured as units produced and sold

Question 12

There are three lines on a CVP graph: ___, ___, and ___.

Answer 12

Total revenue
Total cost
Profit

Question 13

___ shows total revenue based on the number of units produced and sold on a CVP graph.

Answer 13

Total revenue line

Question 14

___ shows total costs based on the number of units produced and sold on a CVP graph.

Answer 14

Total cost line

Question 15

___ shows profit or loss based on the number of units produced and sold on a CVP graph; it is the different between total revenue and total cost lines.

Answer 15

Profit line

Question 16

The ___ is the amount by which sales can fall before the company incurs a loss.

Answer 16

Margin of safety

Question 17

Margin of Safety = ___ - ___

Answer 17

Projected sales - Break-even sales (in units or sales)

Question 18

___ is the proportion of one product’s sales to total sales.

Answer 18

Sales mix

Question 19

For multiple-product companies, solving for break-even point includes a ___ CM per unit.

Answer 19

Weighted average

Question 20

Target profit in units sets the operating income to ___.

Answer 20

The target profit the company would like to achieve, not zero

Question 21

For companies who would find it difficult to measure a unit of product, what approach would they take to find break-even point?

Answer 21

Sales dollars

Question 22

How would a company find the CM ratio for all departments?

Answer 22

Total CM / Total sales

Question 23

What are the assumptions required to perform break-even and target profit calculations with multiple products or services?

Answer 23

• Costs can be separated into fixed and variable components
• CM ration remains constant for each product, segment, or department
• Sales mix remains constant with changes in total sales

Question 24

Benefits of obtaining more accurate data from CVP models must ___.

Answer 24

Outweigh the cost of developing such a model

Question 25

___ shows how a CVP model will alter profit with changes in any of it's variables.

Answer 25

Sensitivity analysis

Question 26

___ is the term used to describe the proportion of fixed and variable costs to total costs.

Answer 26

Cost structure

Question 27

Companies with a relatively high proportion of fixed costs have high ___.

Answer 27

Operating leverage

Question 28

Businesses that rely on DL and DM tend to have higher ___.

Answer 28

Variable costs

Question 29

___ affects how sensitive profits are to changes in sales volume.

Answer 29

Operating leverage

Question 30

Higher operating leverage can lead to ___ profit.

Answer 30

Higher

Question 31

Do high or low operating leverage companies tend to feel the negative impacts of declining sales more?

Answer 31

High

Question 32

___ is the CM per unit divided by the units of constrained resources required to produce one unit of product.

Answer 32

CM per Unit of Constraint

Question 33

How are target profits found for organizations that pay income taxes? Step 1 - ___ Step 2 - ___ Step 3 - ___

Answer 33

Step 1 - Determine the desired target profit after taxes Step 2 - Convert the desired target profit after taxes to the target profit before taxes Step 3 - Use the target profit before taxes in the appropriate formula to calculate the target profit in units or sales dollars

Question 34

Target profit before taxes = ___ / (___ - ___)

Answer 34

Target profit after taxes / (1 - tax rate)

Question 35

Expensing non-manufacturing costs incurred on the income statement as incurred and expensing manufacturing cost incurred on COGS after good are sold is known as ___.

Answer 35

Absorption costing

Question 36

*CM per Units = ___ - ___

Answer 36

Selling price per unit - variable cost per unit Ex. 500 - 300 = $200 per unit

Question 37

___ is the amount of each sales dollar available to apply towards fixed costs and profits.

Answer 37

CM per unit

Question 38

F. *CM Ratio = ___ / ___

Answer 38

CM per unit / Sales price per unit Ex. 200 / 500 = 40%

Question 39

___ is the percentage of each sales dollar available to apply towards fixed costs and profits.

Answer 39

CM Ratio

Question 40

___ helps managers find volume of sales necessary to break-even and make important business decision and analyze the relationship among cost, volume, and profit (or loss).

Answer 40

CVP analysis

Question 41

What are the 5 components of CVP?

Answer 41

- Sales price per unit - Volume sold - Variable cost per unit - Fixed costs - Operating income

Question 42

___ is the sales level at which operating income is zero.

Answer 42

Break-even analysis

Question 43

*What are the three approaches to calculating break-even?

Answer 43

- Income statement app. - Unit CM short cut - CM ratio short cut

Question 44

F. *Income statement approach: | Sales revenue - ___ - ____ = operating income.

Answer 44

Variable expense - fixed expenses Ex. 50x - 30x - 10,000 = 0 x = 500 units

Question 45

F. *Unit CM short cut = ___ + operating income / ___

Answer 45

Fixed expenses + operating income (0) / unit contribution margin Ex. 10,000 + 0 / 20 = 500 units

Question 46

F. *CM ratio short cut: | Sales dollars to break-even = ___ + operating income / ___

Answer 46

Fixed expenses + operating expense (0) / CM ratio Ex. 10,000 + 0 / .40 = 40%

Question 47

___ is the relative percentage in which a company sells its products.

Answer 47

Sales mix

Question 48

*CM ratio short cut: | Units sold to break-even = ___ - ___ / ___

Answer 48

Fixed expenses | - operating income (0) / weighted avg unit CM

Question 49

*Weighted CM = ___ x sales mix / ___

Answer 49

Product CM x sales mix / total products Ex. $155 / 10 = $15.50 10,000 + 0 / 15.50 = 645 units to break-even

Question 50

A ___ provides managers with preparedness for changing business conditions such as pricing pressure from competitors and changes in variable or fixed costs (or both).

Answer 50

Sensitivity analysis

Question 51

What are the three steps to a sensitivity analysis?

Answer 51

- Calculate new unit CM using new sales price, variable costs or both - Use new unit CM to compute break-even sales in units or break-even sales to maintain target profit - Using new break-even numbers, decide if a change should be made

Question 52

OPM: ___

Answer 52

Other people's money

Question 53

___ is how responsive a company's operating income is to changes in sales volume.

Answer 53

Operating leverage

Question 54

What are the two types of operating leverage?

Answer 54

Financial leverage - used debt and equity financing to grow (OPM) Operating leverage - grow by using fixed costs

Question 55

Operating leverage factor = ___ / ___

Answer 55

CM / operating income Ex. 11,200 / 9,700 = 1.15 degree of operating leverage

Question 56

___ is the excess of expected sales over brea-even sales; the amount of sales that the company can absorb before incurring a loss.

Answer 56

Margin of safety

Question 57

Margin of safety is used to evaluate ___.

Answer 57

Risk

Question 58

Margin of safety = ___ - ___

Answer 58

Expected sales | - break-even sales

Question 59

Margin of safety as ratio = MOS / ___

Answer 59

Expected sales (units or sales) Ex. 10,000 / 50,000 = 20%

Question 60

quiz: Cinder Block Industries currently produces and sells 20,000 units of product at a selling price of $10. The product has variable costs of $4 per unit and a fixed cost of $50,000. The company currently earns a total contribution margin of a. $200,000 b. $50,000 c. $70,000 d. $120,000

Answer 60

d. $120,000 200,000 - 80,000 = 120,000 CM

Question 61

quiz: Clear Springs Bottling Company produces a soft drink that is sold for a dollar. The company pays $400,000 in production costs, of which $260,000 are variable production costs. General, selling and administrative costs amount to $290,000 of which $90,000 are variable costs. Assuming production and sales of 800,000 units, what is the amount of contribution margin per unit? a. $0.3125 b. $0.5625 c. None of these are correct d. $0.1375

Answer 61

b. $0.5625 260,000 + 90,000 = 350,000 variable costs 350,000 variable costs / 800,000 units = 0.4375 1 - 0.4375 = 0.5625 CM per unit

Question 62

quiz: AMC, Inc. produces a product that has a variable cost of $2.50 per unit. The company's fixed costs are $30,000. The product is sold for $5.00 a unit and the company desires to earn a $20,000 profit. The breakeven in units for AMC is which of the following amounts? a. 12,000 b. 6,000 c. 4,000 d. 5,000

Answer 62

a. 12,000 300,000 + 0 / (5 - 2.50) = 12,000 units

Question 63

quiz: CMA, Inc. produces a product that has a variable cost of $2.50 per unit. The company's fixed costs are $30,000. The product is sold for $5.00 per unit and the company desires to earn a target profit of $20,000. What amount of sales will be necessary to earn the desired profit? a. $100,000 b. $40,000 c. $60,000 d. $20,000

Answer 63

a. $100,000 30,000 + 20,000 / (5 - 2.5) 20,000 x 5 per unit = $100,000 in sales

Question 64

quiz: Domino Industries makes a product that sells for $25 per unit. The product has a $5 per unit variable cost and total fixed costs of $18,000. At budgeted sales of 1,000 units, the margin of safety ratio is a. 80% b. 10% c. 20% d. 90%

Answer 64

b. 10%

Question 65

___ costing provides managers with the information necessary to prepare a CM income statement, which leads to more effective CVP analysis. By separating variable and fixed costs, managers are able to determine CM ratios, break-even points, target profit points, and perform sensitivity analysis.

Answer 65

Variable costing

Question 66

___ meets the requirements of GAAP, but is not useful for internal decision making.

Answer 66

Absorption costing

Question 67

___ costing prevents managers from increasing production solely for the purpose of inflating profit.

Answer 67

Variable costing

Question 68

All fixed manufacturing overhead costs are expensed as incurred, regardless of ___.

Answer 68

Level of sales

Question 69

Three rules apply when comparing absorption costing with variable costing: 1. ___ 2. ___ 3. ___

Answer 69

1. When units produced equals units sold, profit is the same for both costing approaches. 2. When units produced is greater than units sold, absorption costing yields the highest profit. 3. When units produced is less than units sold, variable costing yields the highest profit.