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04_Heitger-SM_Ch03

# 04_Heitger-SM_Ch03 - CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS...

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CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS: A MANAGERIAL PLANNING TOOL DISCUSSION QUESTIONS 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 unit contribution margin is needed to solve for the break-even units. The sales revenue ap- proach defines sales volume in terms of rev- enues and provides answers in these same terms. The overall contribution margin ratio can be used to solve for the break-even sales dollars. 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). 5. Variable cost ratio = Variable costs/Sales Contribution margin ratio = Contribution margin/Sales Contribution margin ratio = 1 – Variable cost ratio 6. No. The increase in contribution is \$9,000 (0.3 × \$30,000), and the increase in advert- ising is \$10,000. If the contribution margin ra- tio is 0.40, then the increased contribution margin is \$12,000 (0.4 × \$30,000). This is \$2,000 above the increased advertising ex- pense, so the increased advertising would be a good decision. 7. Sales mix is the relative proportion sold of each product. For example, a sales mix of 3:2 means that three units of one product are sold for every two of the second product. 8. Packages of products, based on the expec- ted sales mix, are defined as a single product. Selling price and cost information for this package can then be used to carry out CVP analysis. 9. This statement is wrong; break-even analys- is can be easily adjusted to focus on tar- geted profit. 10. The basic break-even equation is adjusted for targeted profit by adding the desired tar- geted profit to the total fixed costs in the nu- merator. The denominator remains the con- tribution margin per unit. 11. A change in sales mix will change the contri- bution margin of the package (defined by the sales mix) and, thus, will change the units needed to break even. 12. Margin of safety is the sales activity in excess of that needed to break even. The higher the margin of safety, the lower the risk. 13. 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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