Ch. 11 HW Solutions - CHAPTER 11 COST-VOLUME-PROFIT...

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CHAPTER 11 COST-VOLUME-PROFIT ANALYSIS: A MANAGERIAL PLANNING TOOL QUESTIONS FOR WRITING AND DISCUSSION 1. CVP analysis allows managers to focus on selling prices, volume, costs, profits, and sales mix. Many different “what if” questions can be asked to assess the effect on profits of changes in key variables. 2. The units-sold approach defines sales volume in terms of units of product and gives answers in these same terms. The sales-revenue approach defines sales volume in terms of revenues and provides answers in these same terms. 3. Break-even point is the level of sales activity where total revenues equal total costs, or where zero profits are earned. 4. At the break-even point, all fixed costs are covered. Above the break-even point, only variable costs need to be covered. Thus, contribution margin per unit is profit per unit, provided that the unit selling price is greater than the unit variable cost (which it must be for break-even to be achieved). 6. Variable cost ratio = Variable costs/Sales. Contribution margin ratio = Contribution margin/Sales. Contribution margin ratio = 1 – Variable cost ratio. 11. Package contribution margin: (2 × $10) + (1 × $5) = $25. Break-even point = $30,000/$25 = 1,200 packages, or 2,400 units of A and 1,200 units of B. 15. Operating leverage is the use of fixed costs to extract higher percentage changes in profits as sales activity changes. It is achieved by increasing fixed costs while lowering variable costs. Therefore, increased leverage implies increased risk, and vice versa.
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Ch. 11 HW Solutions - CHAPTER 11 COST-VOLUME-PROFIT...

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