4 - Cost Volume Profit Flashcards
what is contribution margin made up of?
sales revenue - variable costs
contribution margin ratio?
CM / revenue
breakeven units formula?
fixed costs / CM per unit
breakeven sales value?
fixed costs / CM ratio
what is CVP analysis used for?
used to determine how changes in costs and volume affect company’s operating and net income
profit equation for BE?
(SP x units) - (VC x units) - FC = 0 for BE
when does decreasing returns to scale occur?
when unit costs rise as volume increases
degree of operating leverage formula?
- CM / profit
- CM ratio / op margin
when does increasing returns to scale occur?
when unit costs fall as volume increases
what is margin of safety?
the amount by which sales may decrease before a loss occurs
what is operating leverage?
a measure of the sensitivity of profits to changes in sales
what is profit-volume ratio?
proportion of sales available to cover FC and provide for profit
assumptions for CVP analysis?
1) SP and VC remain constant with volume changes
2) sales mix remains constant
3) linear relationship between VC and revenue
4) profits are calculated on a variable cost basis
5) costs can be accurately divided into FC and VC
6) CVP is only relevant for decisions within a relevant range
7) CVP only applies in short-term
BE units/sales rev including target profit?
FC + target profit / CM (per unit or ratio)
margin of safety formula?
( budgeted sales - BE sales / budgeted sales ) x 100
