Chapter 3

Question 1

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.

Answer 1

Cost-Volume-Profit (CVP) analysis

Question 2

The difference between total revenues and total variable costs.
It indicates why operating income changes as the number of units sold changes.

Answer 2

Contribution Margin

Question 3

A useful tool for calculating contribution margin and operating income.

Answer 3

Contribution margin per unit

Question 4

It groups costs into variable costs and fixed costs to highlight contribution margin

Answer 4

Contribution income statement

Question 5

3 related ways (methods) to think more deeply about and model CVP relationships

Answer 5

1. The equation method
2. The contribution margin method
3. The graph method

Question 6

Most useful when managers want to determine operating income at a few specific sales level .

Answer 6

Equation methods and Contribution margin method

Question 7

Helps managers visualize the relationship between units sold and operating income over a wide range of quantities .

Answer 7

Graph method

Question 8

5 Step Decision Making Process in Planning and Control- Revisited

Answer 8

1. Identify the problem/ uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing between alternatives using cost-volume- profit (CVP) analysis
5. Implement decisions, evaluate performance and learn

Question 9

True/ False?
Changes in production/ sales volume are the sole cause for cost and revenue changes.

Answer 9

True

Question 10

Total cost consist of fixed cost and variable cost.t/f

Answer 10

True

Question 11

Revenue and cost behave can be graphed as a linear function (straight line). T/ F?

Answer 11

True

Question 12

Selling price, variable cost per unit and fixed cost are all known and constant.T/ F?

Answer 12

True

Question 13

Basic CVP Equations

Answer 13

1. Contribution Margin= Total Revenue- Total Variable Costs
2. Contribution Margin/ unit= ( Selling price per unit- VC per unit)
3. Operating Income= contribution margin- fixed costs
4. Contribution Margin Ratio(or Percentage) = Contribution Margin/ Revenue

Question 14

The sum of fixed costs and variable costs.

Answer 14

Total Cost Line

Question 15

Line in Graph Method

Answer 15

1. Total Costs Line
2. Total Revenues Line

Question 16

The number of units sold is the only ________ driver & ________ driver.

Answer 16

Revenue, cost

Question 17

T/ F?
Changes in revenues and cost arise only because of changes in the number of product units sold.

Answer 17

True

Question 18

Any factor that affect cost

Answer 18

Cost Driver

Question 19

A variable such as volume, that casually affects revenues.

Answer 19

Revenue driver

Question 20

The behavior of total revenues and total costs are linear ( they can be presented as straight line). T/ F?

Answer 20

T

Question 21

The quantity of output sold at which total revenue equals total cost- that is, the quantity of output sold is 0 of operating income.

Answer 21

Breakeven Point (BEP)

Question 22

Shows how changes in the quantity of units sold affect operating income.

Answer 22

Profit- Volume (PV) Graph

Question 23

It is operating income plus nonoperating revenues minus non operating cost minus taxes.

Answer 23

Net Income

Question 24

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

Answer 24

True

Question 25

_______ 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)

Answer 25

CVP( Cost- Volume- Profit)

Question 26

A what if technique managers use to examine how an outcome will change if the original predicted data are not achieved.

Answer 26

Sensitivity analysis

Question 27

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.

Answer 27

Margin of Safety

Question 28

An indicator risk
It measures the distance between budgeted sales and breakeven sales

Answer 28

Margin of Safety

Question 29

The possibility that an actual amount will deviate from an expected amount.

Answer 29

Uncertainty

Question 30

The relationship of fixed cost and variable costs to total costs

Answer 30

Cost structure

Question 31

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.

Answer 31

T

Question 32

The __________ across alternative cost structures can be measured as operating leverage.

Answer 32

Risk- return trade- off

Question 33

Describes the effects that fixed costs have on changes in operating income as changes occur in unit sold and contribution margin

Answer 33

Operating leverage

Question 34

T/F? Organizations with a high proportion of fixed costs in their cost structures have high operating leverage.

Answer 34

T

Question 35

In the presence of fixed costs, the degree of operating leverage is different at different levels of sales. T/ F?

Answer 35

T

Question 36

The quantity or proportion of various products or services that constitute a company’s total unit sales.

Answer 36

Sales Mix

Question 37

It measures how much a company can charge for its products over and above the cost of acquiring or producing them.

Answer 37

Gross margin

Question 38

It is the gross margin divided by revenues.

Answer 38

Gross margin percentage

Question 39

An objective that can be quantified, such as maximize income or minimize cots

Answer 39

Choice criterion

Question 40

Describes the likelihood or the probability that each of the mutually exclusive & collectively….

Answer 40

Probability distribution

Question 41

Possible relevant occurrence

Answer 41

Event

Question 42

The weighted average of the outcomes, with the probability of each outcome serving as the weight.

Answer 42

Expected Value

Question 43

When the the outcomes are measured in monetary terms, expected value is often called ________

Answer 43

Expected monetary value