Chapter 3 Flashcards
Managers use this to study the behavior of and relationship among these elements as changes occurs in the number of units sold, the selling price, the variable cost per unit or the fixed costs of a product.
Cost-Volume-Profit (CVP) analysis
The difference between total revenues and total variable costs.
It indicates why operating income changes as the number of units sold changes.
Contribution Margin
A useful tool for calculating contribution margin and operating income.
Contribution margin per unit
It groups costs into variable costs and fixed costs to highlight contribution margin
Contribution income statement
3 related ways (methods) to think more deeply about and model CVP relationships
- The equation method
- The contribution margin method
- The graph method
Most useful when managers want to determine operating income at a few specific sales level .
Equation methods and Contribution margin method
Helps managers visualize the relationship between units sold and operating income over a wide range of quantities .
Graph method
5 Step Decision Making Process in Planning and Control- Revisited
- Identify the problem/ uncertainties
- Obtain information
- Make predictions about the future
- Make decisions by choosing between alternatives using cost-volume- profit (CVP) analysis
- Implement decisions, evaluate performance and learn
True/ False?
Changes in production/ sales volume are the sole cause for cost and revenue changes.
True
Total cost consist of fixed cost and variable cost.t/f
True
Revenue and cost behave can be graphed as a linear function (straight line). T/ F?
True
Selling price, variable cost per unit and fixed cost are all known and constant.T/ F?
True
Basic CVP Equations
- Contribution Margin= Total Revenue- Total Variable Costs
- Contribution Margin/ unit= ( Selling price per unit- VC per unit)
- Operating Income= contribution margin- fixed costs
- Contribution Margin Ratio(or Percentage) = Contribution Margin/ Revenue
The sum of fixed costs and variable costs.
Total Cost Line
Line in Graph Method
- Total Costs Line
- Total Revenues Line
The number of units sold is the only ________ driver & ________ driver.
Revenue, cost
T/ F?
Changes in revenues and cost arise only because of changes in the number of product units sold.
True
Any factor that affect cost
Cost Driver
A variable such as volume, that casually affects revenues.
Revenue driver
The behavior of total revenues and total costs are linear ( they can be presented as straight line). T/ F?
T
The quantity of output sold at which total revenue equals total cost- that is, the quantity of output sold is 0 of operating income.
Breakeven Point (BEP)
Shows how changes in the quantity of units sold affect operating income.
Profit- Volume (PV) Graph
It is operating income plus nonoperating revenues minus non operating cost minus taxes.
Net Income
Managers use electronic spreadsheets to systematically and effeciently conduct CVP- based sensitivity analysis to test how sensitive their conclusions are to different assumptions. True/ False
True
_______ provides structure to answer a variety of “what if” scenarios;
What happens to profit if:
Selling price change
Volume changes
Cost structure changes( VC/ unit changes& FC change)
CVP( Cost- Volume- Profit)
A what if technique managers use to examine how an outcome will change if the original predicted data are not achieved.
Sensitivity analysis
An important aspect of sensitivity analysis.
It answers what if if budgeted revenues are above the breakeven point, how far can they fall before the breakeven point is reached.
How far can they fall before the company will begin to lose money.
Margin of Safety
An indicator risk
It measures the distance between budgeted sales and breakeven sales
Margin of Safety
The possibility that an actual amount will deviate from an expected amount.
Uncertainty
The relationship of fixed cost and variable costs to total costs
Cost structure
T/F? We can use the CVP- based sensitivity analysis to highlight the risk and returns as fixed costs are substituted for VC in a company’s cost structure.
T
The __________ across alternative cost structures can be measured as operating leverage.
Risk- return trade- off
Describes the effects that fixed costs have on changes in operating income as changes occur in unit sold and contribution margin
Operating leverage
T/F? Organizations with a high proportion of fixed costs in their cost structures have high operating leverage.
T
In the presence of fixed costs, the degree of operating leverage is different at different levels of sales. T/ F?
T
The quantity or proportion of various products or services that constitute a company’s total unit sales.
Sales Mix
It measures how much a company can charge for its products over and above the cost of acquiring or producing them.
Gross margin
It is the gross margin divided by revenues.
Gross margin percentage
An objective that can be quantified, such as maximize income or minimize cots
Choice criterion
Describes the likelihood or the probability that each of the mutually exclusive & collectively….
Probability distribution
Possible relevant occurrence
Event
The weighted average of the outcomes, with the probability of each outcome serving as the weight.
Expected Value
When the the outcomes are measured in monetary terms, expected value is often called ________
Expected monetary value
