Chapter 21: Cost Volume Profit Analysis

Question 1

What are the first steps in planning?

Answer 1

To predict the volume of activity, the costs to be incurred, sales to be made, and profit to be received.

Question 2

What is cost-volume-profit?

Answer 2

Helps managers predict how changes in costs and sales levels affect income.

Question 3

How is CVP computed?

Answer 3

By computing the sales level at which a company neither earns an income nor incurs a loss, called the break-even point. or sometimes called break-even analysis.

Question 4

What kind of questions do CVP analysis answer?

Answer 4

What sales volume is needed to earn a target income?

Question 5

Does a fixed cost remain unchanged in amount when the volume of activity varies from period to period within relevant range?

Answer 5

Yes.

Question 6

What is a variable cost?

Answer 6

Changes in proportion to changes in volume of activity. The variable cost per unit remains constant but the total amount of variable cost changes with the level of production. They include direct labor (if employees are paid per unit), sales commissions, shipping costs, and some overhead costs.

Question 7

What is a mixed cost?

Answer 7

Includes both fixed and variable cost components.

Question 8

Describe mixed costs in CVP analysis?

Answer 8

Mixed costs are often separated into fixed and variable components. The fixed component is added to other fixed costs, and the variable component is added to other variables costs.

Question 9

What are scatter diagrams?

Answer 9

Display past cost and unit data in graphical form. Units are plotted on the horizontal axis and cost is plotted on the vertical axis. Each individual point on a scatter diagram reflects the cost and number of units for a prior period.

Question 10

What is the high-low method?

Answer 10

Estimates the cost equation by graphically connecting the two cost amounts at the highest and lowest unit volumes.

Question 11

How is the variable cost per unit determined?

Answer 11

As the change in cost divided by the change in units and uses the data from the high and low unit volumes. This results in a slope, or variable cost per unit.

Question 12

How is fixed cost estimated?

Answer 12

By using knowledge that total cost equals fixed cost plus variable cost per unit x number of units.

Fixed Cost + (Variable cost x Units)

Question 13

How are estimates from scatter diagrams seen?

Answer 13

Based on a visual fit of the cost line and are subject to interpretation.

Question 14

How are estimates from the high-low method seen?

Answer 14

Use only two sets of values corresponding to the lowest and highest unit volumes.

Question 15

How are estimates from least regression seen?

Answer 15

Use a statistical technique and all available data points.

Question 16

What is contribution margin per unit?

Answer 16

The amount by which a product’s unit selling price exceeds its total variable cost per unit. This excess amount contributes to covering fixed costs and generating profits on a per unit basis.

Sales price per unit - total variable cost per unit.

Question 17

What is contribution margin ratio?

Answer 17

The percent of a unit’s selling price that exceeds total unit variable cost, is also useful for business decisions. It can be interpreted as the percent of each sales dollar that remains after deducting the total unit variable cost.

Contribution margin per unit/sales price per unit

Question 18

What is the break-even point?

Answer 18

The sales level at which a company neither earns a profit nor incurs a loss. It is applicable to nearly all organizations, activities, and events. Whether sales will at least cover total costs.

Question 19

How can the break-even point be expressed?

Answer 19

In either units or dollars of sales.

Question 20

What is the formula for break-even point in units?

Answer 20

Fixed costs/contribution margin per unit

Question 21

What is the formula for break-even point in dollars?

Answer 21

Fixed costs/contribution margin ratio

Question 22

What is a contribution margin income statement?

Answer 22

It differs from a conventional income statement, by separately classifying costs and expenses as variable or fixed. Also, it reports contribution margins (sales - variable costs). The contribution margin income statement format is used in this chapter’s assignment materials because of its usefulness in CVP analysis.

Question 23

What is margin of safety?

Answer 23

The excess of expected sales over the break-even sales level. The amount that sales can drop before the company incurs a loss. It can be expressed in units, dollars, or even as a percent of the predicted level of sales.

Question 24

What is the formula for margin of safety?

Answer 24

Expected sales - break-even dales/expected sales

Question 25

What is an important question that managers ask?

Answer 25

“What is the predicted income from a predicted level of sales?” To answer this, we look at four variables in CVP analysis. We use these relations to compute expected income from predicted sales and cost levels.

Question 26

How is after-tax determined?

Answer 26

Management must apply the proper tax rate.

Question 27

What is formula for dollar sales at target after-tax income?

Answer 27

Fixed costs + Target pretax income/Contribution margin ratio

Question 28

What is the formula for unit sales at target after-tax income?

Answer 28

Fixed costs + Target pretax income/Contribution margin per unit

Question 29

Does a fixed cost per unit decrease when volumes increases?

Answer 29

Yes.

Question 30

Example of a fixed cost?

Answer 30

Production supervisor’s salary

Question 31

Example of a mixed cost?

Answer 31

Sales rep’s pay which includes salary plus commission.

Question 32

Example of a variable cost?

Answer 32

Production line work’s pay, which is an hourly wage.

Question 33

When using the high-low method, the slope of the estimated line of cost behavior represents?

Answer 33

The variable cost per unit.

Question 34

When preparing a scatter diagram, the estimated line of cost behavior crosses the vertical axis at the?

Answer 34

Amount of fixed costs.

Question 35

Scatter characteristics?

Answer 35

Based on visual fit.

Question 36

High-low method characteristic?

Answer 36

Uses only two sets of values and less precise because it uses the extreme points.

Question 37

Least-squares regression characteristics?

Answer 37

Uses a statistical technique and all data points. Most precise method.