Chapter 15 - CVP Analysis Flashcards
Break-Even Point
The point where total revenue equals total cost (the point of zero profit).
Cost-Volume-Profit (CVP) Analysis
Estimates how changes in costs (both variable and fixed), sale volume, and price affect a company’s profit. Concerned with the economics of break even analysis in the short run. It is assumed that all units produced are sold.
Contribution Margin
The difference between sales and variable expense. It is the amount of sales revenue left over after all the variable expenses are covered that can be used to contribute to fixed expense and operating income. It can be calculated in total or per unit.
Contribution Margin Income Statement
The income statement format that is based on the separation of costs into fixed an variable components.
Operating Income equation
Operating Income = Sales - Total Variable Expenses - Total Fixed Expenses
OR
Operating Income = (Price x Number of Units Sold) - (Variable Cost Per Unit x Number of Units Sold) - Total Fixed Cost
Break-even Units =
Total Fixed Cost / Price - Variable Cost Per Unit
Variable Cost Ratio
The proportion of each sales dollar that must be used to cover variable costs.
Contribution Margin Ratio
The proportion of each sales dollar available to cover fixed costs and provide for profit.
Break-even Sales =
Total Fixed Expenses / Contribution Margin Ratio
Number of Units To Earn Target Income =
Total Fixed Cost + Target Income / Price - Variable Cost Per Unit
Sales Dollars To Earn Target Income =
Fixed Cost + Target Income / Contribution Margin Ratio
Profit-Volume Graph
Visually portrays the relationship between profits (operating income) and units sold.
Cost-Volume-Profit Graph
Depicts the relationships among cost, volume, and profits (operating income) by plotting the total revenue line and the total cost line on a graph.
Assumptions of CVP analysis
- There are identifiable linear revenue and linear cost functions that remain constant over the relevant range.
- Selling prices and costs are known with certainty.
- Units produced are sold - there are no finished goods in inventories.
- Sales mix is known with certainty for multiple-product break-even settings.
In multiple-product analysis what is direct fixed expenses vs common fixed expenses
Direct fixed expenses are those fixed costs that can be traced to each segment and would be avoided if the segment didn’t exist. Common fixed expenses are not traceable to the segments an would exist even if a segment was eliminated.
