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A count 122 Exam 1 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Why is CVP useful?

A

predict impact on profits of changes in prices of products, volume or level of activity, unit variable costs, total fixed costs, and the sales mix

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2
Q

Contribution margin definition

A

the amount remaining from sales revenue after variable expenses have been deducted. Covers FC and then towards profit; the amount of sales (net of variable expenses) that contributes toward covering fixed expenses and then profits

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3
Q

Unit contribution margin definition

A

used to predict changes in total contribution margin and in profits (assuming no change in FC) as result of changes in unit sales of product

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4
Q

Contribution Margin Ration (CM ratio) definition

A

ratio of contribution margin to total sales. Shows how the CM is affected by a given dollar change in total sales.

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5
Q

Why is CM ratio easier to work with than unit contribution margin?

A

when a company has multiple products because CM ratio demonated in sales dollars

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6
Q

Applications of CVP concepts

A

used to estimate the impact on profit of changes in selling price, VC per unit, sales volume, and total FC. also estimate effect on profit of a change in parameters

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7
Q

Break-even analysis

A

target profit analysis in which target profit is zero and also where total sales revenue equals total expenses or where total CM=total fixed expenses

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8
Q

Target profit analysis definition

A

estimate level of sales requried to attain specified target profit

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9
Q

Profits

A

Sales- Variable expenses - fixed expressions

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10
Q

Sales

A

Variable expenses + fixed expenses + profits

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11
Q

Unit sales

A

(fixed expenses + profits) / Unit contribution margin

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12
Q

Price x Unit sales

A

Unit vaariable cost x Unit sales + fixed expenses + profits

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13
Q

Sales

A

(Fixed expenses + profits) / Contribution margin ratio= price x unit sales

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14
Q

1-Variable expense ratio

A

Contribution margin ratio

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15
Q

What are the two ways to do break even point using the equation method

A

solve for break even unit sales or solve for break even sales in dollars

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16
Q

What are two ways to find break even using contribution margin ratio

A

solve for break even unit sales or solve for break even sales in dollars

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17
Q

Unit sales to attain target profits

A

(fixed expenses + target profits) / Unit contribution margin

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18
Q

Dollar sales to achieve target profits

A

(fixed expenses + target profits) / Contribution margin ratio

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19
Q

margin of safety definition

A

the excess of budgeted (or actual) sales over the break-even volume of sales. The amount by which sales can drop before losses begin to be incurred

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20
Q

Margin of safety in dollars equation

A

total sales- break even sales

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21
Q

margin of safety percentage

A

margin of safety in dollars / total sales

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22
Q

cost structure definition

A

the relative proportion of fixed and variable costs in an organization

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23
Q

operating leverage

A

a measure of how sensitive net opearting income is to a given percentage change in sales

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24
Q

degree of operating sales=

A

contribution margin / net operating income

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25
Q

degree of operating leverage x percentage change in sales=

A

Percentage change in net operating income

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26
Q

What does the degree of operating leverage tell us

A

the higher degree of operating leverage, the larger increase in net operating income

27
Q

Is the degree of operating leverage constant?

A

No. the degree is infinite at break even point because denominator is zero

28
Q

If companies have same profit, selling price, unit sales and total expenses, what can we infer?

A

company with higher operating leverage will have higher proportion of fixed costs in its cost structure

29
Q

If they do not have same profit, sales, selling price, and total expenses, can we make assumptions about cost structure?

A

No!

30
Q

sales mix definition

A

relative proportions in which a company’s products are sold. if change, overall contribution margin ratio will change

31
Q

Overall CM ratio=

A

Total contribution margin / Total sales

32
Q

CVP analysis assumption about sales mix (for firm with one product)

A

assume sales mix will not change. under constant sales mix assumption, break even lvl of sales dollars computed using overall CM ratio

33
Q

CVP analysis assumption about sales mix (for firm with one product)

A

break-even sales = fixed expenses / overall CM ratio….Sales to achieve target profits = (fixed expenses + target profits) / Overall CM ratio

34
Q

Assumptions in CVP Analysis

A

Selling price is constant, costs are linera and can be accurately divided into variable and fixed elements, sales mix is constant in multi-product companies, in manufacturing companies inventories do not change

35
Q

variable expenses

A

unit variable cost x unit sales

36
Q

Unit contribution margin

A

Price-unit variable cost

37
Q

variable expense ratio=

A

1- variable expenses/sales

38
Q

contribution margin=

A

Sales-variable expenses

39
Q

What does the assumption that costs are linear and can be accurately divided into V and F elements mean?

A

implies operating conditions are stable and fixed costs are fixed even when volume changes dramatically

40
Q

basic profit equation

A

(P-V)Q - FC

41
Q

Target profit volume

A

Q=(profit+FC)/(P-V)

42
Q

Target profit revenue

A

PxQ=(profit+FC)/(P-V)/P

43
Q

Breakeven volume

A

Q(BE)=FC/(P-V)

44
Q

Breakeven Revenue

A

PxQ=FC/(P-V)/P

45
Q

After taxes Volume

A

Q=(profit/(1-t) + FC) / (P-V)

46
Q

After taxes revenue

A

PxQ=(profit/(1-t) + FC) / (P-V) / P

47
Q

revenue

A

PxQ

48
Q

Variable cost

A

VC x Q

49
Q

CM

A

Q x (P-VC)

50
Q

Taxable income

A

Tx (Q x (P-VC) - FC)

51
Q

Net Income

A

Q x (P-VC) - FC - T x [Q x (P-VC) -FC )

52
Q

Static Breakeven Taxable income

A

=0

53
Q

Static Breakeven volume

A

Q= FC / (P-VC)

54
Q

Net Income Breakeven volume

A

((profit / (1-T)) + FC ) / (P - VC)

55
Q

CVP is concerned witht he effects on net operating income of

A

selling prices, sales volume, unit variable costs, total fixed costs, the mix of products sold

56
Q

Why is a contribution format income statement useful?

A

it highlights cost behavior

57
Q

When does the unit contribution margin remain constant?

A

As long as the selling price and unit variable cost do not change

58
Q

What happens if the contribution margin does not cover fixed expenses?

A

There is a loss

59
Q

What happens when additional units are sold?

A

fixed expenses are whittled downuntil they have been covered

60
Q

break even point definition

A

the points where total sales equals total expenses and where total contribution margin equals total fixed expenses

61
Q

How much does each additional unit sold increases net operating income by?

A

the amount of the unit contribution margin

62
Q

When does Profit = Q(P-V) - Fixed expense apply?

A

when a company has a single product

63
Q

When does CM ratio = Unit contribution margin / Unit selling price?

A

when a company has only one product

64
Q

Major assumptions of CVP Analysis

A
  1. selling price is constant. The price does not change as volume changes. 2. costs are linear and can be accurately split into fixed and variable elements. the total fixed cost is constant and the variable cost per unti is constant. the sales mix is constant in multi product ocmpanies. in manufacturing companies, inventories do not change. the number of units produced equals the number of units sold.

A count 122 Exam 1 (6 decks)

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