Ch.3 Flashcards
CVP analysis
To study the behavior of and relationship among these elements as changes occur in the # of units sold, the selling price, the variable cost per unit or the fixed costs of a product
Contribution margin % is a handy way to calculate
CM for different $ amount of revenues
CM % is a useful tool for calculating a change in
Revenues changes contribution margin
The shorter the time horizon, the higher the % of
Total costs considered fixed
BEP
Is the quantity of output sold at which total revenues equal total costs- that is the quantity of output sold that results in $0 of operating income
A profit volume graph shows what
How changes in quantity of units sold affect operating income
Managers can use CVP analysis to evaluate how operating income of their companies will be effected if the
Outcomes they predict are not achieved
What is sensitivity analysis
Is a what if technique managers use to examine how an outcome will change if the original predict data are not adhesives or if an underlying assumption changes
Managers Dina sensitivity analysis to test
How sensitive their conclusions are to different assumptions
A low margin of safety means
That it increases the risk of loss
When the margin of safety is low, what must be changed to make sure that margin of safety isn’t low?
Need to lower break even point by reducing fixed costs or increasing CM
Sensitivity analysis is a simple approach to recognize what
Uncertainty which is the possibility that the actual amount will deviate from expected amount
Operating leverage
Describes the effects that fixed costs have on changes in operating income As changes occur in units sold and contribution margin
When do you have high operating leverage?
Is when they have high proportion of fixed costs
Small increases in sales leads to large increase in
Operating income
Small decreases in sales result in relatively large decreases in
Operating income
How are companies reducing their fixed costs and variable costs?
By moving their manufacturing facilities from US to lower cost countries
Sales mix
Is the quantities (or proportion) of various products (or services) that constitute a company’s total unit sales
