Chapter 3

Question 1

Cost Volume Profit Analysis

Answer 1

examines total revenue, total costs and operating income [NET INCOME] as change occurs in the output level, selling price, variable costs per unit, or fixed costs [REVENUE, COSTS OR BOTH]

Question 2

Breakeven Point

Answer 2

total revenue – total business function = 0

• Operating income is 0
• Operating income = revenue – VC – FC
o To find breakeven point you can rearrange the formula
• Revenue = VC + FC

Question 3

Revenue

Answer 3

total quantity sold x price per unit

Question 4

Variable cost

Answer 4

units produced x cost per unit

Question 5

Total costs

Answer 5

VC + FC

Question 6

Contribution Margin

Answer 6

Revenue – total variable costs

Question 7

Contribution Margin per unit

Answer 7

selling price – variable cost

Question 8

CVP models

Answer 8

1. Equation method
2. Contribution margin method
3. Graph method

Question 9

Equation method

Answer 9

Operating income = revenues – variables costs – fixed costs

Question 10

Contribution margin method

Answer 10

• rearrange the formula

Operating income = contribution margin per unit – fixed costs

Question 11

BEP formula

Answer 11

BEP = total fixed costs / contribution margin per unit

• Rearrange above formula for BEP

Question 12

Contribution margin percentage

Answer 12

• Also called contribution margin ratio
• Demonstrates how many pennies per $1.00 of revenue contribute towards paying for fixed costs

Contribution margin percentage = contribution margin per unit / unit selling price

OR

Contribution margin percentage = total contribution margin / total revenue

Question 13

Calculate BEP if sales price isn’t given

Answer 13

BE revenue = fixed costs / contribution margin %

Question 14

Gross Margin

Answer 14

Gross Margin = Revenue – COGS or COS

• Gross margin is a measure of competitiveness

Question 15

Gross margin percentage

Answer 15

Gross margin percentage = gross margin / total revenue

Question 16

Operating margin percentage

Answer 16

Operating margin percentage = operating income / revenue

Question 17

Net income percentage

Answer 17

Net income percentage = net income / revenue

Question 18

Target Net Income and Income Taxes

Answer 18

Operating income = Net income / 1 –tax rate

Question 19

Margin of safety

Answer 19

amount at which either expected or actual revenue exceeds breakeven revenue
• Answers what are the consequences if revenues decrease below budget , and how far they can fall before BEP is reached

Margin of safety = budgeted revenue – breakeven revenue

Question 20

Margin of safety percentage

Answer 20

Margin of safety percentage = margin of safety in dollars / budgeted or actual revenue
• The answer is how much the revenue would have to decrease to reach BE revenue

Question 21

Sensitivity analysis

Answer 21

uses percentage changes to understand what changes cause the largest effect on profit
• Simple approach to recognizing risk

Question 22

Risk tolerance

Answer 22

risk of loss measured in percent that a person or team is willing to take
• Lower the percentage, the lower the tolerance for risk

Question 23

Operating leverage

Answer 23

describes different effects FC have on OI as changes occur in the quantity available or sold (therefore the unit or total contribution margin)

Question 24

Degree of operating leverage

Answer 24

Degree of operating leverage = contribution margin / operating income

Question 25

Capital intensive companies

Answer 25

companies with a high percentage of fixed costs in their cost structure

Question 26

Expected value

Answer 26

sum of risk weighted averages of each outcomes

Question 27

Risk neutral

Answer 27

decision maker will feel as much pain at losing a dollar as joy at gaining a dollar

Question 28

Breakeven sales volume in bundles

Answer 28

Breakeven sales volume in bundles = fixed costs / contribution margin per bundle

Question 29

Revenue driver

Answer 29

any factor that affects revenue