Ch 19 - CVP

Question 1

What is CVP

Answer 1

Cost-Volume-Profit

Question 2

The three types of cost

Answer 2

• Variable cost
• Fixed cost
• Mixed cost

Question 3

Steps to the High-Low Method (and what does it do?)

Answer 3

The High-Low Method separates mixed costs into their variable and fixed components

1. Calculate the Variable Cost Per Unit:

Variable Cost Per Unit = Change in total cost ÷ Change in Volume of Activity

2. Calculate the Total Fixed Cost:

Total Fixed Cost = Total Mixed Cost - Total Variable Cost

3. Equation to show the behavior of the mixed cost:

Total Mixed Cost = (Variable cost per unit • number of units ) + Total Fixed Cost

Question 4

Relevant Range

Answer 4

The range of volume where total fixed costs remain constant and the variable cost per unit remains constant. Outside the range, those costs change.

Question 5

Break Even Point, what are the three approaches?

Answer 5

Break Even Point:

• Income Statement Approach
• Contribution Margin Approach, breakeven in units
• Contribution Margin Ratio, breakeven in sales dollars

Question 6

Define: Contribution Margin

Answer 6

Contribution Margin = Product Revenue - Product Variable Costs

It is called the contribution margin because the excess of sales revenue over variable costs contributes to covering fixed costs and then to providing operating income.

Question 7

Define: Contribution Margin Ratio

Answer 7

contribution margin as a percentage of total sales

Contribution Margin Ratio = Contribution Margin Per Unit / Sales Revenue Per Unit

Question 8

Compute Breakeven using “Contribution Margin Approach”

Answer 8

Breakeven in units = Fixed cost / Contribution margin per unit

Question 9

Compute Breakeven using “Contribution Margin Ratio”

Answer 9

Breakeven in $ = Fixed Cost / Contribution Margin Ratio

Question 10

“Desired Profit Sales Level” equation

Answer 10

Desired Profit Sales Level = (Fixed Cost + Desired Profit) / Contribution Margin Per Unit Round up.

Question 11

Define: Variable Cost

Answer 11

Variable Cost = Sales - Contribution Margin Contribution Margin = Unit count * contribution margin per product

Question 12

Contribution Margin Income Statement

Answer 12

Question 13

Margin of Safety is …

Answer 13

The margin of safety is the excess of expected sales over breakeven sales. The margin of safety is therefore the “cushion” or drop in sales that the company can absorb without incuring an operating loss.

Expected sales – Breakeven sales = Margin of safety in units

Question 14

Define “Break even point”

Answer 14

The Break Even Point is the point at which revenue and expenses balance such that operating income is $0