Chapter 3 Flashcards
Cost-Volume-Profit Analysis
What is cost-volume-profit analysis?
CVP is a model which analyzes the behaviour of net income in response to changes in total revenue, total costs, or both.
True or False: When we determine the breakeven point (BEP), we factor in the function costs across the whole supply chain.
True
When we determine the breakeven point (BEP), we include all business function costs in the value chain, not just production costs.
What is Breakeven Point, and what is the formula?
BEP is the point at which total revenue minus total business function costs is $0.
BEP = Total revenue - total business function costs
True or False: CVP analysis does not rely on assumptions to identity relevant information.
False
The CVP model depends on understanding the effects of cost behaviour on profit, and identifies only the relevant relationships. They have a list of assumptions to help identify relevant information required to complete a CVP analysis.
What is the Breakeven equation?
Unit sales price x Q = (unit variable costs x Q) + fixed costs
You are selling products at a trade show. A booth costs $1000 for the entire day. Your product’s variable cost is $120 per unit and you decide to sell the product at $200. What is your contribution margin if you sell 35 units?
$2,800
Revenue = 35 * 200 = $7000
Total VC = 25 * 120 = $4200
CM = $2800
What is the equation for Contribution Margin?
Contribution Margin = Revenue - Total Variable Costs
The three models to help understand and think more critically about a CVP analysis.
The equation method
The contribution margin method
The graph method
If a Manager wanted to visualize their CVP analysis, which method(s) should they use?
Graph Method
Which method(s) should a manager use if they want to understand the relationship between operating income and select levels of sales?
The Equation and Contribution Margin Methods
What is the Contribution Margin percentage formula?
CM % = contribution margin per unit / selling price per unit
What is the purpose of a sensitivity analysis?
Managers use this analysis to know how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes.
What is Margin of Safety?
The amount at which either expected or actual revenue exceeds breakeven revenue.
What is the equation for Margin of Safety? Including both units and percentage.
Margin of Safety = budgeted revenue - breakeven revenue
In units = budgeted sales in units - breakeven sales in units
Percentage = margin of safety in dollars / budgeted (or actual) revenue
What is Operating Leverage and what is the formula for degrees of operating leverage?
Describes the effects that fixed costs may have on changes in operating income.
degrees of operating leverage = contribution margin / operating income
