Study Guide Chapter 21.docx - Cost-Volume-Profit Analysis...

Cost-Volume-Profit Analysis
Study Guide
Do You Know…?
Learning Objective 1: Classify costs as variable costs, fixed costs, or mixed costs.
□ The characteristics of variable costs, fixed costs, and mixed costs? (See exercises 1–3)
□ How to use the high-low method to determine the fixed and variable costs?
(See exercises 4–6)
Learning Objective 2: Compute the contribution margin, the contribution margin
ratio, and the unit contribution margin.
□ How to calculate the contribution margin, contribution margin ratio, and unit
contribution margin? (See exercises 7–9)
□ How to determine the impact on income from operations using the contribution margin
ratio and unit contribution margin? (See exercises 10–12)
Learning Objective 3: Determine the break-even point and sales necessary to achieve
a target profit.
□ How to calculate the break-even sales point in dollars and units? (See exercises 13–15)
□ The effect of changes in fixed costs, unit selling price, and unit variable costs on the
break-even point? (See exercises 16–18)
□ The sales in dollars and units needed to achieve a target profit? (See exercises 19–21)
Learning Objective 4: Using a cost-volume-profit chart and a profit-volume chart,
determine the break-even point and sales necessary to achieve a target profit.
□ How to prepare and interpret a cost-volume-profit chart? (See exercises 22, 24, and 26)
□ How to prepare and interpret a profit-volume chart? (See exercises 23, 25, and 27)

Learning Objective 5: Compute the break-even point for a company selling more than
one product, the operating leverage, and the margin of safety.
□ How to determine the break-even point if more than one product is sold? (See exercises
28–30)
□ How to calculate and interpret operating leverage? (See exercises 31–33)
□ How to calculate the margin of safety in dollars, units, and percent of current sales?
(See exercises 34–36)
Fill-in-the-Blank Equations
1. = Difference in total cost/Difference in units produced (under the high-low
method)
2. = Total costs – (Variable cost per unit × Units produced) (under the high-
low method)
3. Contribution margin = Sales –
4. Contribution margin ratio = /Sales
5. Change in income from operations = × Contribution margin ratio
6. = Sales price per unit – Variable cost per unit
7. Change in income from operations = × Unit contribution margin
8. = Fixed costs/Unit contribution margin
9. Break-even sales (dollars) = Fixed costs/
10. Sales (units) = ( + Target profit)/Unit contribution margin
11. Sales (dollars) = (Fixed costs + Target profit)/
12. Operating leverage = Contribution margin/
13. = Percent change in sales × Operating leverage
14. Margin of safety (percent of current sales) = (Sales – Sales at break-even
point)/
15. Margin of safety (dollars) = Sales (dollars) –
16. Margin of safety (units) = – Break-even sales (units)

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Exercises
1. Determine if each of the following would be considered a fixed cost, variable cost, or
mixed cost.