Chapter 3 Flashcards
what is Cost-Volume-Profit (CVP) Analysis?
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
What things does CVP analysis is used for by managers:
-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
what is Break-Even Analysis?
a process to determine the break-even sales where total costs equal total revenues
On a graph the break-even point is?
where the total-revenues line and total costs line intersect
Break even point mathematically is where:
- operating income is zero
or - total revenues and total costs are equal
The revenue driver is:
any factor whose change cause a change in total revenue revenue of the related product sold
Name 2. revenue drivers:
- Volume Sold
2. Change in Selling Price
BASIC CVP assumptions (6):
- Changes in the levels of revenues and costs are due to changes in the number of units sold
- Number of units sold is the only cost and revenue driver
- Total costs can be divided into variable and fixed costs
- Toal revenues and cost are linear within the relevant range
- Unit selling price, unit variable and fixed costs are known and constant
- Single product or multiple products with constant sales mix as total units sold charge
The contribution margin is:
the excess of total revenues over total variable costs
what does the contribution margin contribute too:
to recovering fixed costs and after these are fully recovered to OI
Equation Contributing margin per unit:
UCM=USP-UVC
Contribution Margin Ration
CMR= UCM/USP
What are the3 methods of break even analysis?
- Graph Method
- Equation Method
- Contribution Margin
The Equation Method:
OI=Revenues-Variable Costs- Fixed Costs
Equation Method Contribution Margin Ratio:
Q=FC/ (USP-UVC) Q
or Q= FC / (UCM)
what is the margin of safety?
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
What is the Operating Income:
OI is revenues earned from operations less operating costs this includes COGS
Target Net Income is:
Operating Income + non-operating revenues -
non-operating costs + income tax
Impact of Income tax on the OI equation:
TNI= OI - (OI x Tax Rate)
=OI x (1- Tax Rate)
TNI with tax rearranged to find the OI:
OI=TNI / (1- tax Rate)
