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Chapter 06 - Cost-Volume-Profit AnalysisReq. 31.Buffer zone that identifies how much sales can drop before the business suffers a loss.2.Increases the break-even point because fixed costs are higher, but each unit adds more profit because of the lower variable cost per unit. 3. (Total fixed costs + Target profit) / Contribution margin ratio.4.How a company uses variable costs versus fixed costs to perform its operation.5.The extent to which fixed costs can be used to magnify a given change in sales volume into a larger change in profit. 6.Two alternatives yield the same profit.7.Actual or budgeted sales minus break-even sales.B Margin of safety8.Total fixed costs plus target profit. F Total contribution margin9.Contribution margin / Profit. H Degree of operating leverage10. (Total fixed costs + Target profit)/Contribution margin per unit.J Target UnitsE6−8Req. 1Break-even units = Total fixed cost / Unit contribution marginUnit contribution margin = Sales price – variable cost per unit6-16
Chapter 06 - Cost-Volume-Profit Analysis= $0.50 – $0.20 = $0.30 per mile drivenBreak-even units = Total fixed cost / Unit contribution margin= $215 / $0.30= 717 miles (rounded up from 716.67)6-17
Chapter 06 - Cost-Volume-Profit AnalysisReq. 2Contribution Margin Income StatementFor 4,200 MilesSales revenue (4,200 x $0.50)$2,100Less: Variable costs (4,200 x $0.20)840Contribution margin (4,200 x 0.30)1,260Less: Fixed costs215Income from Operations$1,045Degree of Operating Leverage = Contribution Margin / Profit= $1,260/$1,045= 1.2057Req. 3Effect on Profit = Change in Sales x Degree of Operating Leverage= 25% x 1.2057= 30.1425%Thus, a 25% decrease in sales will result in a 30.1425% decrease in Joyce’s profit.E6-9Req. 1Unit contribution margin = Sales price – Variable cost per unit= $25.00 - $9.00= $16.00Contribution margin ratio = Unit contribution margin / Sales price= $16.00/$25.00= 64%Req. 2Break-even units = Total fixed costs / Unit contribution margin= $2,520 / $16.00= 158 units (rounded from 157.5)Break-even sales dollars = Break-even units x Sales price= 158 x $25.00 = $3,950.00Alternatively, Break-even sales dollars = Fixed costs / Contribution margin ratio= $2,520 / .64= $3,937.50 (difference due to rounding # of units)6-18