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MAC 2601 > 3. Cost-Volume-Profit Analysis > Flashcards

3. Cost-Volume-Profit Analysis Flashcards

1
Q

What is the purpose of CVP analysis?

A

Incorporate revenue into the equation in order to predict the impact certain management decisions will make on profitability.

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2
Q

What is CVP analysis?

A

Investigates the impact on profit from change in;

  • Activity levels
  • Variable cost per unit
  • Total fixed costs
  • Per unit selling prices
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3
Q

Who and for what use CVP analysis?

A

Management for short-term decision making on profit

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4
Q

What relationships is profit based on?

A

Relationships between;

  • cost
  • volume production
  • selling price
  • expected profit
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5
Q

What activities is CVP applicable to?

A

Service, merchandising and manufacturing activities

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6
Q

What does CVP emphasize on when dealing with a non-profit organizations?

A

Service levels
Funding requirements
Fund raising

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7
Q

What are the underlying assumptions to the CVP analysis?

A
  1. Selling price per unit is constant no matter the sales volume.
  2. All costs are linear and can be divided into fixed and variable costs.
  3. Variable cost per unit is constant where fixed cost in total are constant within relevant range.
  4. Sales mix is constant in multiproduction organizations.
  5. Inventory levels do not change.
  6. Relevant range is crucial, only applies to relevant range.
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8
Q

What’s the relevant range?

A

Upper and lower levels of production or activity levels where the organization operates normally and costs and revenue behavior can be predicted.

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9
Q

What is contribution?

A

The amount remaining after deducting all variables costs from sales.
This amount contributes toward coming fixed costs

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10
Q

Formula for contribution?

A

Sales - total variable costs

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11
Q

What is the contribution ratio?

A

The ratio of contribution to the sales

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12
Q

What else is contribution known as?

A
  1. Profit-volume ratio

2. Contribution margin ratio

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13
Q

Formula for contribution ratio?

A

Contribution / sales x 100%

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14
Q

What does contribution ratio indicate?

A

Percentage of sales available to cover fixed costs

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15
Q

What does contribution indicate once all fixed costs are covered?

A

The increase in net profit

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16
Q

He would the management accounting SOCI differ t from the financial side?

A

It would account for fixed and variable costs

17
Q

Let’s say the contribution ratio is 40%, what does this mean?

A

That 40c out of every rand is used to cover fixed costs. Then once all this fixed costs are covered, it increase net profit.

18
Q

What is the breakeven point?

A

Point where contribution is equal to fixed costs

19
Q

What is the formula for calculating net profit (linear equation)

A 
y = bx - a
Where; 
y = net profit
b = contribution per unit
x = units sold
a = total fixed costs
20
Q

Hw would you calculate the Breakeven point mathematically?

A

Substitute the net profit with 0

21
Q

Formula for break even point in units?

A

Total fixed costs / contribution per unit

22
Q

What else’s the break even point known as?

A

Break even volume

Break even quantity

23
Q

What is the break even value?

A

It’s the sales value of the break even point

24
Q

Formula for the break even value?

A
  1. Breakeven point (units) x selling price per unit

2. Total fixed cost / contribution ratio

25
Q

Another name for cost-volume-profit analysis?

A

Sensitivity analysis

26
Q

What happens to break even point when selling price unit increase?

A

Break even point in units decreases

27
Q

What’s the margin of safety?

A

Excess of sales over break even sales
OR
Amount or percent by which sales may decline before losses commence

28
Q

What is the formula for margin of safety?

A

Total sales - break even sales

This can be done with units or value

29
Q

What is the margin of safety ratio?

A

(total sales - break even sales) / total sales x 100%

Remember to use the units or values

30
Q

What is target profit analysis?

A

Method used to determine the sales value needed to achieve a certain profit

31
Q

What is the formula for target profit in units?

A

Sales units = (fixed costs + expected profit) / contribution per unit

32
Q

What is the formula for target profit value?

A

Sales value = (fixed costs + expected profit) / contribution ratio

33
Q

What must be kept in mind when determining target profit?

A

The activity levels are within the production capacity

34
Q

What is the Breakeven graph?

A

Graphically represents the relationships between cost, volume, sales and profit.

35
Q

What’s another name for the Breakeven graph?

A

Cost-volume-profit graph

MAC 2601 (4 decks)

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