Ch 5 Flashcards
What are the 5 factors of CVP analysis?
1) Selling prices
2) Sales volume
3) Unit variable costs
4) Total fixed costs
5) Mix of products sold
How do you calculate the contribution margin?
Sales revenue - variable expenses
What is the break-even point?
The level of sales at which profit is zero
How can the contribution format income statement be expressed as an equation?
profit = (sales - variable expenses) - fixed expenses
What does a CVP graph do?
Highlights relationships over wide ranges of activity
Explain how the total revenue line, total expense, and fixed expense line look.
Total revenue - steep line located above the expense line (if it is profitable)
Total expense - slightly less steep line located below revenue line
Fixed expense - straight line located beneath all lines
Where is the break-even point on a CVP graph?
The intersection of the total revenue and total expense lines
How do you compute the CM ratio?
= contribution margin / sales
How can you compute the relationship between profit and the CM ratio?
profit = CM ratio x sales - fixed
How do you compute the variable expense ratio?
= variable expenses / sales
What is incremental analysis?
When you consider only the revenue, cost, and volume that will change if the new program is implemented
What do you do in target profit analysis?
We estimate what sales volume is needed to achieve a specific target profit
Using the formula method, how can you compute unit sales to attain the target profit?
(target profit + fixed expenses) / Unit CM
Using the formula method, how can you compute dollar sales to attain the target profit?
(target profit + fixed expenses) / Unit CM
How do you compute the unit sales to break-even?
fixed expenses / unit CM
