ACCCOB 3 TERMS DECK

Question 1

Cost-volume-profit analysis (CVP)

Answer 1

-helps managers make many important decisions such as what products and services to offer, what prices to charge, and what marketing strategy to use.

-used to easily calculate the change in profit resulting from a change in sales price, sales volume, variable costs, or fixed costs

Question 2

Its primary purpose is to estimate how profits are affected by the 5 factors:

Answer 2

Selling Prices
Unit Sales (also called sales volume)
Unit variable cost
Total fixed cost
Mix of products sold

Question 3

To simplify CVP calculations, managers adopt the following assumptions with these factors:

Answer 3

Selling price is constant - The price of a product or service will not change as volume changes.

Unit Sales/Sales Volume

Costs are linear and can be accurately divided into variable and fixed components.

The variable costs are constant per unit

Fixed costs are constant in total over the entire relevant range.

In multiproduct companies, the mix of products sold remains constant.

Question 4

The danger lies in relying?

Answer 4

on simple CVP analysis when contemplating large changes in unit sales outside the relevant range.

Question 5

CVP can be adjusted to account for anticipated changes in?

Answer 5

selling prices, variable cost per unit, total fixed costs, and sales mix that arise when estimated sales fall outside the relevant range.

Question 6

Contribution Approach Income Statement

Answer 6

The contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.

The emphasis is on cost behavior.

CM is used first to cover fixed expenses.

Any remaining CM contributes to net operating income.

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.

Question 7

Contribution Approach

Answer 7

Separated cost into variable and fixed

First, deduct all variable expenses from sales to get a contribution margin

Question 8

Contribution Margin

Answer 8

amount remaining from sales after variable expenses are deducted

Question 9

Variable Expenses

Answer 9

expresses variable expenses as a percentage of sales

Question 10

CM Ratio

Answer 10

Quantifies the portion of each sales dollar that helps cover fixed expenses

When all fixed expenses are covered, the CM ratio defines the portion of each sales dollar contributing to profits

Variable expenses and CM ratio always add up to 1

Question 11

Variable Expense Ratio and Contribution Margin Ratio

Answer 11

Emphasize that the contribution margin ratio and the variable expense ratio can be mathematically related to one another

Question 12

CVP Relationships in Equation Form

Answer 12

It is often useful to express the simple profit equation in terms of the unit contribution margin (Unit CM)

Question 13

Operating Leverage

Answer 13

A measure of how sensitive net operating income is to percentage changes in sales.

A measure at any level of sales of how a percentage change in sales volume will affect profits

Acts as a multiplier

If operating leverage is high, small percentage increase in unit sales can produce a much larger percentage increase in net operating income

Question 14

Degree of Operating Leverage

Answer 14

Degree of operating leverage = Contribution Margin Net Operating Income

The Degree of Operating Leverage is not constant

The greatest at the sales level corresponds with zero profits and decreases as sales and profits rise.

Greatest at sales levels near the break-even point

It quickly estimates the impact various percentage changes in unit sales will have on profit, without preparing a contribution format income statement.

If a company’s profits are near zero, a small percentage increase in unit sales can cause a huge percentage increase in profit.

This is the reason why they usually work hard for only a small percentage increase in sales volume

If 2 companies have the same total revenue and total expenses but different proportions of fixed and variable costs, then a company with a higher proportion of fixed costs will have higher operating leverage.

When sales are growing, companies with higher operating leverage will see profits grow faster than those with lower operating leverage.

If sales drop, companies with higher operating leverage will experience a sharper drop in profits because fixed costs remain constant in the face of declining sales.

Question 15

Break-Even point

Answer 15

is the level of sales at which profit is zero

To calculate the break even point (in unit sales and dollar sales) managers can use the equation method or the formula method

Question 16

Break-Even Analysis

Answer 16

The equation and formula methods can be used to determine the unit sales and dollar sales needed to achieve a target profit of zero.

Can use equation method or formula method

Question 17

Break-Even Analysis: Equation Method

Answer 17

The equation method relies on the basic profit equation introduced earlier in the chapter. We’ll use the contribution margin form of this equation to perform the break-even calculations.

Profit = Unit CM × Sales – Fixed expenses

Question 18

Break-Even Analysis: Formula Method

Answer 18

The formula method is a shortcut version of the equation method. It centers on the idea discussed earlier in the chapter that each unit sold provides a certain amount of contribution margin that goes toward covering fixed expenses.

Question 19

The Margin of Safety in Dollars

Answer 19

The margin of safety is the excess of budgeted or actual sales dollars over the break-even volume of sales dollars.

Equals total budgeted (or actual) sales minus break even sales.

It is the amount by which sales can drop before losses are incurred.

The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

The margin of safety in dollars = Total sales - Break-even sales

Question 20

Target Profit Analysis

Answer 20

In target profit analysis, we estimate what sales volume is needed to achieve a specific target profit.

similar to break-even analysis

How many units must be sold to attain a target profit?

Estimate level of unit sales and dollar sales needed to achieve target profit

Question 21

We can compute the number of units that must be sold to attain a target profit using either:

Answer 21

Equation method
Formula method

Question 22

Target profit analysis in terms of dollar sales

Answer 22

To compute the dollar sales needed to attain good profit

To convert the formula for sales dollars required to attain a target profit to sales dollars required to break-even, set the target profit to $ 0

Question 23

Target profit analysis in terms of dollar sales

Three methods for calculating the dollar sales needed to break even:

Answer 23

First, solve for unit sales needed to attain the target profit using the equation method or formula method and then multiply the result by selling price.

Second, We can use the equation to compute the dollar sales needed to attain target profit

Third, we can use the formula method to compute the dollar sales needed to attain the target profit

Question 24

CVP Analysis

Answer 24

Expanding our Focus to Four Profit Levers

Question 25

Incremental Analysis

Answer 25

Includes only costs and revenues that will change if proposal is implemented

Question 26

Structuring Sales Commissions

Answer 26

Companies generally compensate salespeople by paying them either a commission based on sales or a salary plus a sales commission.

Commissions based on sales dollars can lead to lower profits in a company.

Question 27

Sales Mix

Answer 27

Sales mix is the relative proportion in which a company’s products are sold.

The goal is to achieve a combination or mix that yields the greatest profits

If high-margin rather than low-margin products make up a relatively large proportion of total sales. Profit will be greater

Changes in the sales mix can cause perplexing variations in a company’s profits

Different products have different selling prices, cost structures, and contribution margins.

When a company sells more than one product, break-even analysis becomes more complex as the following example illustrates.

Question 28

Sales Mix: High-margin to low-margin

Answer 28

can cause total profits to decrease even though total sales may increase.

Question 29

Sales Mix: Low-margin to High-margin

Answer 29

can cause reverse-total profits to increase even though total sales decrease.

Question 30

Sales Mix and Break-Even Analysis

Answer 30

When a company sells more than one product, each of these products will have different selling price, costs, and contribution margins

The break-even point depends on the mix in which the products are sold.

In preparing a break-even analysis, an assumption must be made concerning the sales mix.

However if the sales mix is expected to change, then this must be explicitly considered in any CVP computations.

Question 31

Cost volume profit (CVP) graph

Answer 31

Highlights the relationships among sales, cost, and profit over a wide range of unit sales

In a CVP graph, units sales are depicted on the horizontal (X) and dollars on the vertical (Y) axis