Chapter 3

Question 1

what is Cost-Volume-Profit (CVP) Analysis?

Answer 1

a planning tool
for management
analyses the relationship between:
-COST (variable and fixed)
-VOLUME (units)
-PROFIT (the combined impact of cost and volume on profit

Question 2

What things does CVP analysis is used for by managers:

Answer 2

-Break-even: what sales volume is required to break even
-DESIRED PROFIT: what sales volume is necessary in order to earn a desired profit
-IMPACT ON PROFIT: - –change of:
=selling price
= variable and fixed cost
=output

Question 3

what is Break-Even Analysis?

Answer 3

a process to determine the break-even sales where total costs equal total revenues

Question 4

On a graph the break-even point is?

Answer 4

where the total-revenues line and total costs line intersect

Question 5

Break even point mathematically is where:

Answer 5

1. operating income is zero
   or
2. total revenues and total costs are equal

Question 6

The revenue driver is:

Answer 6

any factor whose change cause a change in total revenue revenue of the related product sold

Question 7

Name 2. revenue drivers:

Answer 7

1. Volume Sold

2. Change in Selling Price

Question 8

BASIC CVP assumptions (6):

Answer 8

1. Changes in the levels of revenues and costs are due to changes in the number of units sold
2. Number of units sold is the only cost and revenue driver
3. Total costs can be divided into variable and fixed costs
4. Toal revenues and cost are linear within the relevant range
5. Unit selling price, unit variable and fixed costs are known and constant
6. Single product or multiple products with constant sales mix as total units sold charge

Question 9

The contribution margin is:

Answer 9

the excess of total revenues over total variable costs

Question 10

what does the contribution margin contribute too:

Answer 10

to recovering fixed costs and after these are fully recovered to OI

Question 11

Equation Contributing margin per unit:

Answer 11

UCM=USP-UVC

Question 12

Contribution Margin Ration

Answer 12

CMR= UCM/USP

Question 13

What are the3 methods of break even analysis?

Answer 13

1. Graph Method
2. Equation Method
3. Contribution Margin

Question 14

The Equation Method:

Answer 14

OI=Revenues-Variable Costs- Fixed Costs

Question 15

Equation Method Contribution Margin Ratio:

Answer 15

Q=FC/ (USP-UVC) Q

or Q= FC / (UCM)

Question 16

what is the margin of safety?

Answer 16

the measure of difference between the budgeted and the the break even sales
or
this is the amount that sales can drop before the company starts making a loss

Question 17

What is the Operating Income:

Answer 17

OI is revenues earned from operations less operating costs this includes COGS

Question 18

Target Net Income is:

Answer 18

Operating Income + non-operating revenues -

non-operating costs + income tax

Question 19

Impact of Income tax on the OI equation:

Answer 19

TNI= OI - (OI x Tax Rate)

=OI x (1- Tax Rate)

Question 20

TNI with tax rearranged to find the OI:

Answer 20

OI=TNI / (1- tax Rate)