Chapter 5 answers Managerial

Chapter 5 answers Managerial - Chapter 5 Cost-Volume-Profit...

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Chapter 5 Cost-Volume-Profit Relationships Chapter 5 Cost-Volume-Profit Relationships Solutions to Questions 5-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales  revenue. It is used in target profit and break-even analysis and can be used to quickly estimate the effect  on profits of a change in sales revenue.  5-2 Incremental analysis focuses on the changes in revenues and costs that will result from a  particular action. 5-3 All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a  higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in  contribution margin and in profits when sales increase.  5-4 Operating leverage measures the impact on net operating income of a given percentage change  in sales. The degree of operating leverage at a given level of sales is computed by dividing the  contribution margin at that level of sales by the net operating income at that level of sales. 5-5 The break-even point is the level of sales at which profits are zero. 5-6 (a) If the selling price decreased, then the total revenue line would rise less steeply, and the  break-even point would occur at a higher unit volume. (b) If the fixed cost increased, then both the fixed  cost line and the total cost line would shift upward and the break-even point would occur at a higher unit  volume. (c) If the variable cost increased, then the total cost line would rise more steeply and the break- even point would occur at a higher unit volume. 5-7 The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of  sales. It is the amount by which sales can drop before losses begin to be incurred. 5-8 The sales mix is the relative proportions in which a company’s products are sold. The usual  assumption in cost-volume-profit analysis is that the sales mix will not change. 5-9 A higher break-even point and a lower net operating income could result if the sales mix shifted  from high contribution margin products to low contribution margin products. Such a shift would cause the  average contribution margin ratio in the company to decline, resulting in less total contribution margin for  a given amount of sales. Thus, net operating income would decline. With a lower contribution margin  ratio, the break-even point would be higher because more sales would be required to cover the same  amount of fixed costs.
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