Chapter 5: Cost-Volume-Profit

Question 1

Cost-Volume-Profit Analysis

Answer 1

CVP

Relates a firm’s cost structure to sales volume and profitability.

Question 2

Basic Profit Equation

Answer 2

Profit + Fixed Costs = Units Sold x (Unit sales price - unit variable cost)

P+FC = Q x (SP- VC)

Question 3

Contribution margin

Answer 3

= Sales - variable costs (totals)

Question 4

Unit contribution margin

Answer 4

= unit sales price - unit variable costs

Question 5

Breakeven analysis

Answer 5

Solves for the required quantity to reach a target profit of 0 (breaking even)

Q = FC ÷ Unit Contribution margin

Quantity = fixed costs ÷ (unit sales price - unit variable costs)

Point where costs and revenues are equal

Question 6

Assumptions in CVP analysis

Answer 6

1) only one product is sold
2) if for a manufacturer beginning inventory assumed to be 0
- ergo production = sales
- otherwise have to extend equation for cost flow assumption of inventory
3) analysis confined to a relevant range

Question 7

Target costing

Answer 7

Sets goals for profits and solves for the unit variable cost required to achieve those profits.

Appropriate when SP and Q are predictable (well established, competitive markets)

Question 8

Results of higher fixed costs

Answer 8

Greater “downside” risk. If Q falls below breakeven point company loses money more quickly if higher fixed costs than would if higher variable costs

But lower variable costs = higher unit contribution margin = above breakeven point profits rise more quickly