Chapter 5 Notes
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This 3 page Class Notes was uploaded by Shubham Agarwal on Monday April 25, 2016. The Class Notes belongs to ACCT 116 at Drexel University taught by Stacey Kline in Fall 2015. Since its upload, it has received 23 views. For similar materials see Managerial Accounting in Accounting at Drexel University.
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Date Created: 04/25/16
Chapter 5 Cost-Volume-Profit Relationships 5-1 The contribution margin 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 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 change 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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