3. Cost-Volume-Profit Analysis Flashcards
What is the purpose of CVP analysis?
Incorporate revenue into the equation in order to predict the impact certain management decisions will make on profitability.
What is CVP analysis?
Investigates the impact on profit from change in;
- Activity levels
- Variable cost per unit
- Total fixed costs
- Per unit selling prices
Who and for what use CVP analysis?
Management for short-term decision making on profit
What relationships is profit based on?
Relationships between;
- cost
- volume production
- selling price
- expected profit
What activities is CVP applicable to?
Service, merchandising and manufacturing activities
What does CVP emphasize on when dealing with a non-profit organizations?
Service levels
Funding requirements
Fund raising
What are the underlying assumptions to the CVP analysis?
- Selling price per unit is constant no matter the sales volume.
- All costs are linear and can be divided into fixed and variable costs.
- Variable cost per unit is constant where fixed cost in total are constant within relevant range.
- Sales mix is constant in multiproduction organizations.
- Inventory levels do not change.
- Relevant range is crucial, only applies to relevant range.
What’s the relevant range?
Upper and lower levels of production or activity levels where the organization operates normally and costs and revenue behavior can be predicted.
What is contribution?
The amount remaining after deducting all variables costs from sales.
This amount contributes toward coming fixed costs
Formula for contribution?
Sales - total variable costs
What is the contribution ratio?
The ratio of contribution to the sales
What else is contribution known as?
- Profit-volume ratio
2. Contribution margin ratio
Formula for contribution ratio?
Contribution / sales x 100%
What does contribution ratio indicate?
Percentage of sales available to cover fixed costs
What does contribution indicate once all fixed costs are covered?
The increase in net profit
He would the management accounting SOCI differ t from the financial side?
It would account for fixed and variable costs
Let’s say the contribution ratio is 40%, what does this mean?
That 40c out of every rand is used to cover fixed costs. Then once all this fixed costs are covered, it increase net profit.
What is the breakeven point?
Point where contribution is equal to fixed costs
What is the formula for calculating net profit (linear equation)
y = bx - a Where; y = net profit b = contribution per unit x = units sold a = total fixed costs
Hw would you calculate the Breakeven point mathematically?
Substitute the net profit with 0
Formula for break even point in units?
Total fixed costs / contribution per unit
What else’s the break even point known as?
Break even volume
Break even quantity
What is the break even value?
It’s the sales value of the break even point
Formula for the break even value?
- Breakeven point (units) x selling price per unit
2. Total fixed cost / contribution ratio
Another name for cost-volume-profit analysis?
Sensitivity analysis
What happens to break even point when selling price unit increase?
Break even point in units decreases
What’s the margin of safety?
Excess of sales over break even sales
OR
Amount or percent by which sales may decline before losses commence
What is the formula for margin of safety?
Total sales - break even sales
This can be done with units or value
What is the margin of safety ratio?
(total sales - break even sales) / total sales x 100%
Remember to use the units or values
What is target profit analysis?
Method used to determine the sales value needed to achieve a certain profit
What is the formula for target profit in units?
Sales units = (fixed costs + expected profit) / contribution per unit
What is the formula for target profit value?
Sales value = (fixed costs + expected profit) / contribution ratio
What must be kept in mind when determining target profit?
The activity levels are within the production capacity
What is the Breakeven graph?
Graphically represents the relationships between cost, volume, sales and profit.
What’s another name for the Breakeven graph?
Cost-volume-profit graph
