Ch 3 Flashcards
Contribution margin
Contribution margin = total revenues - total variable costs
= (contribution margin per unit) X (# of units sold)
= (contribution margin %) X (revenues)
Cost-volume-profit (CVP) analysis
Studies behavior and relationship among these
Elements as changes occur in units sold, selling price,
Variable cost per unit or fixed costs of product
Contribution margin per unit
Contribution margin per unit = selling price - variable cost per unit
Contribution income statement
Income statement that groups costs into variable costs
And fixed costs to highlight contribution
Contribution Margin Percentage AKA Contribution Margin Ratio
Contribution margin percentage =
contribution margin per unit/selling price
Operating income calculation
Operating income = revenues - variable costs - fixed costs
Calculating revenue and variable cost
Revenue = selling price X quantity sold
Variable costs = variable cost per unit X quantity of units sold
CVP Graph method
Represent total cost and total revenues graphically
CVP graph total cost line?
Total costs line is the sum of fixed costs and variable costs
Target operating income?
Target operating income =
(contribution margin per unit X quantity units sold) - fixed costs
PV graph shows?
Shows how changes in quantity of units sold affect
operating income
Net income
Operating income + non operating revenues ( such
as interest revenue) - non operating cost (such as
interest cost) - income taxes = net income
Net income = operating income - income taxes
Target net income equation
Target net income =
target operating income - (target operating income X tax rate)
Equation: quantity of units required to be sold
Quantity of units required to be sold =
Fixed costs+ target operating income/contribution margin per unit
Break even number of units
Break even number of units = fixed costs/(CM per unit)
Break even revenues
Break even revenues = fixed costs/contribution margin %
How do managers use CVP analysis?
They use it to project future operating income for
Implementing a strategy
Sensitivity analysis?
What if technique that managers use to examine how
an outcome will change if the original predicted data
Are not achieved or underlying assumption changes
Margin of safety (another aspect of sensitivity analysis) equation?
Margin of safety = budgeted revenues - break even revenues
Margin of safety in units
Margin of safety in units = budgeted sales (units) - break even sales (units)
Margin of safety percentage?
Margin of safety in dollars/ budgeted (or actual revenues)
= margin of safety percentage
What does a margin of safety of 30% mean?
Means revenues can decrease by 30% to reach
Break even revenues
Uncertainty
Possibility that actual amount will deviate from
Expected amount
Operating leverage
Describes effects that fixed costs have on changes in
operating income as changes occur in units sold and CM
Degree of operating leverage equation
Degree of operating leverage = CM/operating income
Sales mix
Quantities or proportions of various products or services
That constitutes total unit sales of a company
Gross margin, equation, what it measures?
Gross margin = revenues - cost of goods sold
Measures how much a company can charge for its
Products over and above the cost of acquiring and
producing them
What does contribution margin indicate?
Indicates how much of a company’s revenues are
Available to cover fixed costs
Gross margin %
Gross margin% = gross margin/revenues
