chapter 7

Question 1

how to calculate how many goods were sold in period revenue/sales

Answer 1

total sales $ / per unit sales $

Question 2

how to calculate cm ratio

Answer 2

TOTAL CM / TOTAL Sales

Question 3

what does cm per unit mean

Answer 3

• the dollar amount is the amount left over to cover fixed expenses
• ex. if CM per unit = $25, every item sold, there would be $25 left to cover fixed expenses
• also means that operating income increases by $25 as each item is sold

Question 4

how to calculate operating ratio

Answer 4

operating income / TOTAL sales

Question 5

what does operating ratio mean

Answer 5

percent means the amount of money from sales left over after variable and fixed expenses

Question 6

if you expect sales to increase from the previous month, what can you expect to increase on the CM income statement

Answer 6

• total sales
• variable expenses
• CM
• operating income

Question 7

if you expect sales to increase from the previous month, what can you expect to not change on the CM income statement

Answer 7

• sales per unit
• variable expenses per unit
• CM per unit
• total fixed expenses within relevant range

Question 8

if you expect sales to increase from the previous month, what can you expect to decrease on the CM income statement

Answer 8

fixed expenses per unit (fixed expenses / # of units sold)

Question 9

how much CM is needed to break even

Answer 9

CM should be the same amount of fixed expenses
(CM is after deducting variable expenses, so if it is the same # as fixed expenses, means it can cover all of the expenses)

Question 9

if you expect sales to increase from the previous month, what changes can you expect for the ratios on the CM income statement

Answer 9

• CM ratio should stay the same
• operating income ratio increases (more CM to cover the same amount of fixed expenses = more operating income)

Question 10

should you expect the amount of units needed to break-even change if there was an expected increase in sales

Answer 10

should stay the same b/c fixed expenses and CM per unit both dont change

Question 11

who uses CVP analysis

Answer 11

used by internal stakeholders to make operating decisions to improve operating income

Question 12

what is cvp analysis

Answer 12

cost-volume profit analysis

Question 13

what is incremental analysis

Answer 13

• one approach to perform CVP analysis
• Tool that only considered items that change (ex. revenue & costs) when a decision is made

Question 14

what is the CVP decision rule (used to make operating decisions):

Answer 14

Proceed with the decision if operating income will increase
Do not proceed with the decision if operating income decreases

Question 15

how do you do the contribution margin approach for CVP analysis

Answer 15

• make a cm statement with the expected changes
• compare with the cm statement without the changes (the one from before)
• compare the operating income number - does it increase? decrease? (proceed if increases, don’t proceed if decreases)

Question 16

how do you do the incremental analysis approach for CVP analysis

Answer 16

• only consider things that change
  do:
  expected cm - current cm = incremental cm - (incremental) fixed expense = change in operating income

if change in operating income = negative, don’t proceed, if positive, proceed

expected cm = expected units sold * expected CM per unit
current cm = current units sold * current cm per unit

Question 17

what is break-even point

Answer 17

• another component of CVP
• The level of sales volume at which a company makes $0 of operating income
• Helps internal stakeholders understand how many units need to be sold for the company to generate an operating income

Question 18

what is the formula for break-even in # of units sold (sales volume) (how many units need to be sold to break even)

Answer 18

sales volume = fixed expenses / cm per unit

Question 19

what is true at break even point

Answer 19

• Total sales dollars = total expenses
• Contribution margin dollars = fixed expenses
• Operating income = $0

Question 20

what is the formula for break-even in total sales dollars (how much sales needed to break even)

Answer 20

sales dollars = fixed expenses / cm ratio

Question 21

what is margin of safety

Answer 21

• The difference between the actual sales dollars and the break-even sales dollars
• Helps understand the amount current sales are over break-even sales
• Like a “safety cushion” in case the company makes less than they anticipated, they won’t operate at a loss
• Larger the safety cushion, lower the risk that the company will operate at a loss

Question 21

what is the formula to calculate margin of safety %

Answer 21

Margin of safety % = margin of safety / total actual sales dollars

Question 22

what is the formula to calculate margin of safety

Answer 22

Margin of safety = total actual sales dollars - break-even sales dollars

Question 23

what is sales mix

Answer 23

The percentage of total sales dollars generated by each product

Question 24

when given a contribution margin income statement for a company that sells multiple goods what do you do first?

Answer 24

calculate cm ratio for each product & as a total company

Question 25

how do you calculate the sales mix of a company

Answer 25

• add up all of the sales dollars of each product & find the total sales
• then divide the sales dollars of each product by the total sales dollars to find the % they make up of the total sales mix

Question 26

how do you calculate the break-even point in total sales dollars for a company that has multiple products

Answer 26

to calculate for the entire company, it is the same as when there was only one product: fixed expenses / cm ratio
to calculate for each product:
- take the total break even sales dollars (break even sales dollars of the entire company)
- multiply each sales mix % (the % of sales mix for each product) by the total break-even sales dollars to get the break-even sales dollars for each product

Question 27

how do you calculate the break-even point in units for a company that sells multiple products

Answer 27

Calculate for each product by dividing break even sales dollars by the price per unit
- take the break-even sales dollars for each product, and divide them by their price per unit to get the break even in units sold

Question 27

how do you calculate margin of safety for a company with multiple products

Answer 27

same as when there’s only one product
margin of safety = total actual sales dollars - total break-even sales dollars

Question 28

how do you calculate margin of safety % for a company with multiple products

Answer 28

same as when there’s only one product
margin of safety % = margin of safety / total actual sales dollars

Question 29

what are the ranges for determining if margin of safety % is good or not

Answer 29

• If it’s =< 5%, high risk that the company will operate at a loss
• If it’s 6%-15%, medium risk that the company will operate at a loss
• If it’s >=16%, low risk that the company will operate at a loss

Question 29

if internal stakeholders want to change the operating income, how do they calculate how much sales volume is needed to meet that new operating income

Answer 29

sales volume = (fixed expenses + target operating income) / cm per unit