Managerial Accounting

Session 3
Cost-Volume-Profit
Analysis

Ng Eng Wan
FCPA CIA ACMA CGMA

1
Learning Objectives
•
3.1 Calculate the unit contribution margin and the
contribution margin ratio
•
3.2 Use CVP analysis to find breakeven points and
target profit volumes
•
3.3 Use CVP analysis to measure the impact of
changing business conditions
•
3.4 Find breakeven and target profit volumes for
multiproduct companies
•
3.5 Determine a firm’s margin of safety, operating
leverage, and most profitable cost structure
2
Learning Objective 1

Calculate the unit contribution

margin and the contribution margin
ratio

3
Cost-Volume-Profit Analysis
• Powerful tool that helps managers make
decisions
• Expresses relationship among costs, volume,
and the company’s profit
• Determine sales volume needed to break even
or earn a target profit

4
Components of CVP
Analysis

5
CVP Assumptions
1. Sales price remains constant throughout the relevant
range of volume.
2. Managers can classify each cost as either variable or
fixed.
3. Inventory levels will not change.
4. The product mix offered for sale remains constant.
5. Fixed costs remain ‘fixed’ over the time period and/or a
given range of activity (often referred to as the relevant
range)
6. Variable cost per unit remain constant over the time
period and relevant range
6
The Unit Contribution
Margin
• Contribution margin: Sales revenue - variable
expenses.
• Unit contribution margin (or CM per unit):
Selling price per unit - variable cost per unit.
• All variable costs (product and period) must be
included when calculating the unit contribution
margin.

7
Unit Contribution Margin
Example—Kay’s Posters (1 of
3)
Kay has an online poster business. She currently
sells each poster for $35, while each poster has a
variable cost of $21. Kay has monthly fixed costs
of $7,000. Her relevant range is 0 to 2,000 and
she is currently selling 550 posters.

8
Unit Contribution Margin
Example—Kay’s Posters (2 of
3)

9
Unit Contribution Margin
Example—Kay’s Posters (3 of
3)

Sales price per unit $35

Less: Variable cost per unit (21)
Unit contribution margin $14

• Kay earns $14 every time she sells a poster that can
be used to:
• Pay fixed expenses
• Earn a profit

10
Contribution Margin Ratio
• Unit contribution margin ÷ Sales price per unit
• Contribution margin ÷ Sales revenue
• Kay’s calculations:
$14 / $35 = 40%

$7,700 / $19,250 = 40%

11
The Contribution Approach
Sales, variable expenses, and contribution margin
can also be expressed on a per unit basis. If Racing
sells an additional bicycle, $200 additional CM will
be generated to cover fixed expenses and profit.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bicycles) $ 250,000 $ 500
Less: Variable expenses 150,000 300
Contribution margin 100,000 $ 200
Less: Fixed expenses 80,000
Net operating income $ 20,000
 The Contribution Approach
Each month, RBC must generate at least
$80,000 in total contribution margin to break-even
(which is the level of sales at which profit is zero).
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bicycles) $ 250,000 $ 500
Less: Variable expenses 150,000 300
Contribution margin 100,000 $ 200
Less: Fixed expenses 80,000
Net operating income $ 20,000
The Contribution Approach
If RBC sells 400 units in a month, it will be
operating at the break-even point.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (400 bicycles) $ 200,000 $ 500
Less: Variable expenses 120,000 300
Contribution margin 80,000 $ 200
Less: Fixed expenses 80,000
Net operating income $ -
The Contribution Approach
If RBC sells one more bike (401 bikes), net
operating income will increase by $200.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (401 bicycles) $ 200,500 $ 500
Less: Variable expenses 120,300 300
Contribution margin 80,200 $ 200
Less: Fixed expenses 80,000
Net operating income $ 200
 The Contribution Approach
We do not need to prepare an income statement to
estimate profits at a particular sales volume. Simply
multiply the number of units sold above break-even
by the contribution margin per unit.
If Racing sells
430 bikes, its net
operating income
will be $6,000
($30*$200).

16
 CVP Relationships in Equation
Form
The contribution format income statement can be
expressed in the following equation:

Profit = (Sales – Variable expenses) – Fixed expenses

Racing Bicycle Company

Contribution Income Statement
For the Month of June
Total Per Unit
Sales (401 bicycles) $ 200,500 $ 500
Less: Variable expenses 120,300 300
Contribution margin 80,200 $ 200
Less: Fixed expenses 80,000
Net operating income $ 200

17
 CVP Relationships in Equation
Form
This equation can be used to show the profit RBC
earns if it sells 401. Notice, the answer of $200 mirrors
our earlier solution.
Profit = (Sales – Variable expenses) – Fixed expenses

$80,000
401 units × $500
401 units × $300

Profit
$200 = ($200,500 – $120,300)
Variable expenses)
– $80,000
Fixed expenses
– Fixed

18
 CVP Relationships in Equation
Form
When a company has only one product we can further
refine this equation as shown on this slide.

Profit = (Sales – Variable expenses) – Fixed expenses

Quantity sold (Q) Quantity sold (Q)

× Selling price per unit (P) × Variable expenses per unit (V)
= Sales (Q × P) = Variable expenses (Q × V)

Profit = (P × Q – V × Q) – Fixed expenses

19
 CVP Relationships in Equation
Form
This equation can also be used to show the $200
profit RBC earns if it sells 401 bikes.

Profit = (Sales – Variable expenses) – Fixed expenses

Profit = (P × Q – V × Q) – Fixed expenses

$200 = ($500 × 401 – $300 × 401) – $80,000
Profit

20
 CVP Relationships in Equation
Form
It is often useful to express the simple profit equation in
terms of the unit contribution margin (Unit CM) as follows:

Unit CM = Selling price per unit – Variable expenses per unit

Unit CM = P – V
Profit = (P × Q – V × Q) – Fixed expenses
Profit = (P – V) × Q – Fixed expenses
Profit = Unit CM × Q – Fixed expenses

21
 CVP Relationships in Equation
Form
Profit = (P × Q – V × Q) – Fixed expenses
Profit = (P – V) × Q – Fixed expenses
Profit = Unit CM × Q – Fixed expenses
Profit = ($500 – $300) × 401 – $80,000
Profit = $200 × 401 – $80,000
This equation
Profit = $80,200 – $80,000 can also be
Profit = $200 used to
compute RBC’s
$200 profit if it
sells 401 bikes.
22
Learning Objective 2

Use CVP analysis to find breakeven

points and target profit volumes

23
Breakeven Point
• The sales level at which operating income is zero
• Total revenues = Total expenses
• Sales below breakeven point  loss
• Sales above breakeven point  profit
• Three ways to calculate:
• The income statement approach
• The shortcut approach using unit contribution margin
• The shortcut approach using contribution margin ratio

24
Breakeven Point—The
Income Statement
Approach

Example: Find Kay’s breakeven point:

25
Breakeven Point—Using
the Unit Contribution
Margin

Shortcut formula:

Example: Kay’s breakeven point

Sales in units = ($7,000 + $0) = 500 posters
$14
26
Breakeven Point—Using
the Contribution Margin
Ratio
Shortcut formula:

Example: Kay’s breakeven point

Sales in dollars = $7,000 + $0 = $17,500
40%

27
Break-even in Unit Sales:
Equation Method
Profits = Unit CM × Q – Fixed expenses
Suppose RBC wants to know how many
bikes must be sold to break-even
(earn zero profit).

$0 = $200 × Q + $80,000

Profits are zero at the break-even point.

28
Break-even in Unit Sales:
Equation Method
Profits = Unit CM × Q – Fixed expenses
$0 = $200 × Q + $80,000

$200 × Q = $80,000

Q = 400 bikes

29
Break-even in Unit Sales:
Formula Method
Let’s apply the formula method to solve for
the break-even point.

Unit sales to Fixed expenses

=
break even CM per unit

$80,000
Unit sales =
$200
Unit sales = 400
 Break-even in Dollar Sales:
Equation Method
Suppose Racing Bicycle wants to compute
the sales dollars required to break-even (zero
profit). Let’s use the equation method to solve
this problem.

Profit = CM ratio × Sales – Fixed expenses

Solve for the unknown “Sales.”

31
 Break-even in Dollar Sales:
Equation Method
Profit = CM ratio × Sales – Fixed expenses
$ 0 = 40% × Sales – $80,000

40% × Sales = $80,000

Sales = $80,000 ÷ 40%

Sales = $200,000

32
Break-even in Dollar Sales:
Formula Method
Now, let’s use the formula method to calculate the
dollar sales at the break-even point.

Dollar sales to Fixed expenses

=
break even CM ratio

$80,000
Dollar sales =
40%
Dollar sales = $200,000

33
 Break-even:
The Percentage Method
Now, let’s use the 3 method: the break-even percentage
rd

(BE%) method to calculate the break-even point in units as

well as in sales $. This method also efficiently calculates
break-even for multiple products.
BE%
Since

Since


34
Break-even Units and Dollars:
The Percentage Method
Applying the BE% formula to the same company RBC

 This means that the company requires 80% of its current

sales in order to break-even.
 Currently, the company’s sales are $250,000 or 500 units.
 A BE% of 80% means if the company sales are $200,000
($250,000 x 80%) or 400 units (500 units x 80%), the
company is break-even.
 These figures are consistent with both the equation and
the formula methods.
35
Target Profit—Unit
Contribution Margin
How many posters does Kay need to sell to earn
$4,900 profit?

36
Target Profit—Contribution
Margin Ratio
How much sales revenue does Kay need to
generate to earn $4,900 profit?

37
Target Profit—Income
Statement Approach
How many posters does Kay need to sell to earn
$4,900 profit?

38
Graphing CVP
Relationships
• Step 1: Choose a sales volume. Plot the point for
total sales revenue at that volume. Draw the sales
revenue line from the origin through the point.
• Step 2: Draw the fixed expense line; a horizontal line
that intersects the y-axis.
• Step 3: Draw the total expense line. Sum of variable
plus fixed expenses.
• Step 4: Identify the breakeven point. Where sales
revenue intersects total expense.
• Step 5: Mark the operating income and operating
loss areas.
39
CVP Graph

40
Learning Objective 3

Use CVP analysis to measure the

impact of changing business
conditions

41
Sensitivity Analysis
• Prepare for increasing costs, pricing pressures,
and other changing business conditions
• “What-if” technique
• What if sales price changes?
• What if costs change?
• What is the sales mix changes?
• Use CVP to conduct sensitivity analysis

42
Changing the Sales Price
and Volume
• Breakeven point changes
• Unit contribution margin changes

43
Changing Variable Costs
• Breakeven point changes
• Unit contribution margin changes
• Higher variable costs have the same effect as lower
selling prices—reduce unit contribution margin

44
Changing Fixed Costs
• Changes breakeven point
• Does NOT change unit contribution margin

45
The Variable Expense Ratio
The variable expense ratio is the ratio of variable
expenses to sales. It can be computed by dividing the total
variable expenses by the total sales, or in a single product
analysis, it can be computed by dividing the variable
expenses per unit by the unit selling price.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit CM Ratio
Sales (500 bicycles) $ 250,000 $ 500 100%
Less: Variable expenses 150,000 300 60%
Contribution margin 100,000 $ 200 40%
Less: Fixed expenses 80,000
Net operating income $ 20,000

46
Changes in Fixed Costs and
Sales Volume
What is the profit impact if Racing
Bicycle can increase unit sales from
500 to 540 by increasing the monthly
advertising budget by $10,000?
Changes in Fixed Costs and
Sales Volume
$80,000 + $10,000 advertising = $90,000

500 units 540 units

Sales $ 250,000 $ 270,000
Less: Variable expenses 150,000 162,000
Contribution margin 100,000 108,000
Less: Fixed expenses 80,000 90,000
Net operating income $ 20,000 $ 18,000

Sales increased by $20,000, but net operating income

decreased by $2,000.
48
Changes in Fixed Costs and
Sales Volume
A shortcut solution using incremental
analysis
Increase in CM (40 units X $200) $ 8,000
Increase in advertising expenses 10,000
Decrease in net operating income $ (2,000)
Change in Variable Costs and
Sales Volume
What is the profit impact if Racing
Bicycle can use higher quality raw
materials, thus increasing variable costs
per unit by $10, to generate an increase
in unit sales from 500 to 580?

50
Change in Variable Costs and
Sales Volume
580 units × $310 variable cost/unit = $179,800

500 units 580 units

Sales $ 250,000 $ 290,000
Less: Variable expenses 150,000 179,800
Contribution margin 100,000 110,200
Less: Fixed expenses 80,000 80,000
Net operating income $ 20,000 $ 30,200

Sales increase by $40,000, and net operating income

increases by $10,200.
51
 Change in Fixed Cost, Sales Price
and Volume
What is the profit impact if RBC: (1) cuts its
selling price by $20 per unit, (2) increases its
advertising budget by $15,000 per month,
and (3) increases sales from 500 to 650
units per month?

52
Change in Fixed Cost, Sales
Price and Volume
650 units × $480 = $312,000

500 units 650 units

Sales $ 250,000 $ 312,000
Less: Variable expenses 150,000 195,000
Contribution margin 100,000 117,000
Less: Fixed expenses 80,000 95,000
Net operating income $ 20,000 $ 22,000

Sales increase by $62,000, fixed costs increase by $15,000, and

net operating income increases by $2,000.
53
 Change in Variable Cost, Fixed Cost and Sales Volume

What is the profit impact if RBC: (1) pays a

$15 sales commission per bike sold instead
of paying salespersons flat salaries that
currently total $6,000 per month, and (2)
increases unit sales from 500 to 575 bikes?

54
 Change in Variable Cost, Fixed Cost and
Sales Volume
575 units × $315 = $181,125
500 units 575 units
Sales $ 250,000 $ 287,500
Less: Variable expenses 150,000 181,125
Contribution margin 100,000 106,375
Less: Fixed expenses 80,000 74,000
Net operating income $ 20,000 $ 32,375

Sales
Sales increase
increase by
by $37,500,
$37,500, fixed
fixed expenses
expenses decrease
decrease by
by $6,000.
$6,000.
Net
Net operating
operating income
income increases
increases by
by $12,375.
$12,375.
55
Change in Regular Sales Price
If RBC has an opportunity to sell 150
bikes to a wholesaler without disturbing
sales to other customers or fixed
expenses, what price would it quote to
the wholesaler if it wants to increase
monthly profits by $3,000?

56
Change in Regular Sales Price
$$ 3,000
3,000 ÷÷ 150
150 bikes
bikes == $$ 20
20 per
per bike
bike
Variable
Variable cost
cost per
per bike
bike == 300
300 per
per bike
bike
Selling
Selling price
price required
required == $$ 320
320 per
per bike
bike

150
150 bikes
bikes ×× $320
$320 per
per bike
bike == $$ 48,000
48,000
Total
Total variable
variable costs
costs == 45,000
45,000
Increase
Increase in
in net
net operating
operating income
income == $$ 3,000
3,000

57
Sustainability and CVP
• Reducing costs and helping the environment
• Example: decreasing use of plastic reduces
variable costs
• Decreasing variable costs makes it easier to
reach a target profit

58
Learning Objective 4

Find breakeven and target profit

volumes for multiproduct companies

59
Changing Sales Mix
• Sales mix: combination of products that make up
total sales
• All else equal, company earns more operating
income by selling high-contribution margin
products
• Weighted-average contribution margin: weights
each contribution margin by the relative number of
units sold

60
Multiproduct Company:
Breakeven in Sales Units (1
of 2)

61
Multiproduct Company:
Breakeven in Sales Units (2
of 2)

62
Multiproduct Company:
Breakeven in Sales
Revenue (1 of 2)

63
Multiproduct Company:
Breakeven in Sales
Revenue (2 of 2)

64
Learning Objective 5

Determine a firm’s margin of safety,

operating leverage, and most
profitable cost structure

65
Common Risk Indicators
• Risk depends on many factors
• General health of economy
• Industry of operation
• Current volume of sales
• Fixed and variable costs
• Margin of safety
• Operating leverage

66
Margin of Safety (1 of 2)

• Excess of actual or expected sales over breakeven

sales
• Drop in sales the company can absorb without
incurring a loss
• Higher margin of safety—less risky

67
Margin of Safety (2 of 2)

Assume Kay generally sells 950 posters a month.

68
Margin of Safety—As a
Percentage

69
Operating Leverage
• Operating Leverage: relative amount of fixed and
variable costs that make up total costs
• High operating leverage, high fixed costs, higher
contribution margin
• Low operating leverage, low fixed costs, lower
contribution margin

70
Characteristics of High
Operating Leverage Firms

71
Characteristics of Low
Operating Leverage Firms

72
Operating Leverage Factor
(1 of 2)

• Operating Leverage Factor: how responsive a

company’s operating income is to changes in
volume
• At a given level of sales:
Contribution Margin / Operating Income
• Greater the operating leverage factor, greater impact a
change in sales volume has on operating income

73
Operating Leverage and
Operating Leverage Factor
(2 of 2)
• Indicates the percentage change in operating income that
will occur from a 1% change in volume
• Lowest possible value is 1 (i.e. zero fixed costs)
• Example: Assume Kay sells 950 posters per month
• Contribution margin (950 x $14) $13,300
• Less: Fixed expenses 7,000
• Operating income $ 6,300
• Operating leverage factor = $13,300 = 2.11
$6,300
• If Kay’s volume changes by 1%, her operating income will
change by 2.11% (1% × 2.11).
74
Choosing a Cost Structure
• Indifference point: Point at which a company is
indifferent between two options because they result in
the same total cost.
• Example: Kay has two leasing options.

75
Choosing a Cost Structure

76
Exercises & Problems

77
Quick Check 
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. 2,100 cups
are sold each month on average. What is the break-even
sales dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129

78
 Quick Check 
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. 2,100
cups are sold each month on average. What is the break-
even sales dollars?
a. $1,300 Break-even Fixed expenses
b. $1,715 =
sales $ CM Ratio
BE salesc.$$1,788
= x Current sales $ $1,300
=
(1.49-0.36)/1.49
d. $3,129
= x (2,100 x $1.49)
= $1,715
= $1,715
79
Quick Check 
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per
cup is $0.36. The average fixed expense per month is
$1,300. 2,100 cups are sold each month on average.
What is the break-even sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups

80
 BE sales = x Current sales

Quick Check = x 2,100

Coffee Klatch is an espresso=stand
1,150incups
a downtown office
building. The average selling price of a cup of coffee is $1.49
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. 2,100 cups are
sold each month on average. What is the break-even sales
Fixed expenses
in units? Break-even = CM per Unit
a. 872 cups
$1,300
b. 3,611 cups =
$1.49/cup - $0.36/cup
c. 1,200 cups
$1,300
d. 1,150 cups =
$1.13/cup
= 1,150 cups
81
 Quick Check 
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense
per cup is $0.36. The average fixed expense per
month is $1,300. Use the formula method to
determine how many cups of coffee would have to
be sold to attain target profits of $2,500 per month.
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups

82
 Targeted sales = x Current sales

Quick Check 
= x 2,100

Coffee Klatch is an espresso stand in a downtown office

= 3,363 cups
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is
$0.36. The Unit salesfixed expense per month is $1,300.
average Target profit + Fixed expenses
to attain
Use the formula method = to determineUnit
howCMmany cups of
target
coffee would profit
have to be sold to attain target profits of
$2,500 per month. $2,500 + $1,300
= $1.49 - $0.36
a. 3,363 cups
b. 2,212 cups $3,800
=
c. 1,150 cups $1.13
d. 4,200 cups = 3,363 cups
83
 Quick Check 
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense
per cup is $0.36. The average fixed expense per
month is $1,300. Use the formula method to
determine the sales dollars that must be generated
to attain target profits of $2,500 per month.
a. $2,550
b. $5,011
c. $8,458
d. $10,555

84
 Targeted sales $ = x Current sales $

Quick Check  = x (2,100 x $1.49)

= $5,011
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. Use the formula
method to determine
Sales $the sales dollars that must be
Target profit + Fixed expenses
generated to attain target
to attain = profits of $2,500 per month.
CM ratio
a. $2,550 target profit
b. $5,011 $2,500 + $1,300
=
($1.49 – 0.36) ÷ $1.49
c. $8,458
d. $10,555 $3,800
=
0.758
= $5,011
85
Quick Check 
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup
of coffee is $1.49 and the average variable
expense per cup is $0.36. The average fixed
expense per month is $1,300. 2,100 cups are sold
each month on average. What is the margin of
safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups

86
Quick Check 
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per
cup is $0.36. The average fixed expense per month is
$1,300. 2,100 cups are sold each month on average.
What is the margin of safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
Margin of safety = Total sales – Break-even sales
d. 2,100 cups = 2,100 cups – 1,150 cups
= 950 cups
87
Quick Check 
Coffee Klatch is an espresso stand in a
downtown office building. The average selling
price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average
fixed expense per month is $1,300. 2,100 cups
are sold each month on average. What is the
operating leverage?
a. 2.21
b. 0.45
c. 0.34
d. 2.92

88
Quick Check 
Coffee Klatch is an espresso stand in a Actual sales
2,100 cups
downtown office building.
Sales
The average selling
$ 3,129
price of a cup of coffeeLess:
is $1.49 andexpenses
Variable the average756
variable expense per cup is $0.36.
Contribution The average2,373
margin
fixed expense per month isFixed
Less: $1,300. 2,100 cups1,300
expenses
are sold each month on Netaverage.
operating What
incomeis the
$ 1,073
operating leverage?
a. 2.21
b. 0.45 Operating Contribution margin
c. 0.34 leverage = Net operating income
d. 2.92 $2,373
= $1,073 = 2.21
89
Quick Check 
At Coffee Klatch the average selling price of a cup of coffee
is $1.49, the average variable expense per cup is $0.36, the
average fixed expense per month is $1,300 and an average
of 2,100 cups are sold each month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0%
c. 22.1%
d. 44.2%

90
Quick Check 
At Coffee Klatch the average selling price of a cup of coffee
is $1.49, the average variable expense per cup is $0.36, the
average fixed expense per month is $1,300 and an average
of 2,100 cups are sold each month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0%
Percent increase in sales 20.0%
c. 22.1% × Degree of operating leverage 2.21
d. 44.2% Percent increase in profit 44.20%

91
The contribution margin is
a. sales revenue minus fixed expenses.
b. sales revenue minus cost of goods sold.
c. sales revenue minus variable expenses.
d. sales revenue minus operating expenses.

92
The contribution margin ratio is
a. contribution margin divided by variable
expenses.
b. sales revenue divided by contribution margin.
c. contribution margin divided by sales revenue.
d. fixed expenses divided by variable expenses.

93
On a CVP graph, the breakeven point is
a. the intersection of the total revenue line and
the fixed expense line.
b. the intersection of the total revenue line and
the total expense line.
c. the area between the variable expense line
and the fixed expense line.
d. the area between the total revenue line and
the total expense line.

94
All else being equal, if a company’s variable
expenses increase
a. its breakeven point will decrease.
b. there will be no effect on the breakeven
point.
c. its contribution margin ratio will increase.
d. its contribution margin ratio will decrease.

95
All else being equal, a decrease in a company’s fixed
expenses will
a. increase the sales needed to break even.
b. increase the contribution margin.
c. decrease the sales needed to break even.
d. decrease the contribution margin.

96
Which of the following is true regarding a company
that offers more than one product?
a. Breakeven should be found using a simple
average contribution margin.
b. Breakeven should be found for each product
individually.
c. It has one unique breakeven point.
d. The breakeven point is dependent on sales
mix assumptions.

97
A company with a low operating leverage
a. has relatively more risk than a company with
high operating leverage.
b. has relatively more variable costs than fixed
costs.
c. has relatively more fixed costs than variable
costs.
d. has an equal proportion of fixed and variable
costs.

98
For a given level of sales, a company’s operating
leverage is defined as
a. Contribution margin ÷ Operating income.
b. Sales revenue ÷ Contribution margin.
c. Contribution margin ÷ Sales.
d. Operating income ÷ Contribution margin.

99
Which of the following is false regarding choosing
between two cost structures?
a. The indifference point is the point where total
revenues equal total expenses.
b. The indifference point is the point at which costs
under two options are the same.
c. Choose the higher operating leverage option
when sales volume is expected to be higher than
the indifference point.
d. Choose the lower operating leverage option
when sales volume is expected to be lower than
the indifference point.

100
Exercise
V Company manufactures and sells a specialized cordless telephone for high
electromagnetic radiation environments. The company’s contribution format income
statement for the most recent year is given below. Management is anxious to increase
the company’s profit and has asked for an analysis of a number of items.

Required:
1. Compute the company’s CM ratio and variable expense ratio.
2. Compute the company’s break-even point in both unit sales and dollar sales. Use the
equation
method.
3. Assume that sales increase by $400,000 next year. If cost behavior patterns remain
unchanged, by how much will the company’s net operating income increase?