chapter 6 book: cost volume profit Flashcards
Cost Volume Profit Analysis
the study of effects that changes in costs and volume have on a company’s profits
what interrelationships does CVP focus on?
volume or activity level
unit selling prices
variable cost per unit
total fixed costs
sales mix
which assumptions underlie each CVP analysis
- the behavior of both costs and revenues is linear throughout range of activity index
- all costs can be classified with reasonable accuracy as either variable or fixed
- changes in activity levels are the only factors that affect costs
- inventory levels remain constant (all units5. that are produced are sold)
- when more than one type of product is sold, the sales mix will remain constant
what does it mean for the sales mix to remain constant when ore than one type of product is sold?
the percentage of total sales that each product represents will remain the same
why does the sale mix complicate the CVP analysis?
because different products will have different cost relationships
are all CVP assumptions needed for the analysis to be accurate?
ye boy
what is the difference between a normal income statement and a CVP income statement do different?
CVP income statement classifies costs as variable or fixed
CVP income statement calculates a contribution margin
normal income statement has none of that shit
the bottom lime is the same for both
contribution margin (CM)
the amount of revenue that remains after variable costs have been deducted
often stated as total amount
often stated on a per-unit basis
how to find unit contribution margin?
Unit selling Price - Unit Variable Costs
contribution margin ratio
contribution margin per unit
/
unit selling price
do the contribution margin and contribution margin ratio increase with an increase in sales?
nah bruv
remain unchanged
break even point
level of activity at which total revenues equal total costs
break even analysis
finding the break even point
when is the break even analysis useful to managers?
when they try to introduce new product lines
when they want to change sales price on established products
when they want to enter new market areas
how can you find the break even point?
mathematical equation
contribution margin
CVP graph
how is the break even expressed?
sales units or sales dollars
what is the mathematical equation to find the break even quantity and price if only the price per unit, VC per unit, and fixed costs are given?
P * Q - VC + Q = Total FC + OI (operating Income)
then to find the total break even sales, you multiply the given quantity by selling price
how do you find the break even using the contribution margin?
total fixed costs / contribution margin per unit
this will result in the amount of units
how do you find the break even using the contribution margin ratio?
total fixed costs / contribution margin ration
this will result in the break even point in dollars
CVP graph
shows both costs and profits
ideal to show the break even point
shows operating income and net loss areas
target operating income
alternative to using break even
an income objective for individual product lines
indicates sales a company needs to achieve to attain certain operating income
which techniques can you use to find the target operating income?
mathematical equation
contribution margin
CVP graph
mathematical equation to find the target operating income
variable costs + fixed costs + target operating income
= required sales
contribution margin to find the target operating income
(FC + Target Operating Income) / Contribution margin per unit
= required sales in units
contribution margin ratio to find the target operating income
(FC + Target Operating Income) / Contribution margin ratio
= required sales in dollars
which techniques can you use to find the target operating income after tax?
mathematical equation
contribution margin
mathematical equation to find the target operating income after tax
sales - variable costs = fixed costs + operating income before taxes
how to find operating income before taxes?
OI after taxes / (1 - tax rate)
contribution margin to find the target operating income after tax
(FC + Target Operating Income before taxes) / Contribution margin per unit
= required sales in units
contribution margin ratio to find the target operating income after tax
(FC + Target Operating Income before taxes) / Contribution margin ratio
= required sales in dollars
margin of safety
the difference between actual or expected sales and sales at the break even point
measures the cushion management has
margin of safety formula?
actual (expected) sales - break even sales
= margin of safety in dollars
margin of safety ratio
margin of safety in dollars / actual (expected) sales
= margin of safety ratio
the sales mix
the relative proportion in which each product is sold when a company sells more than one product
how can companies calculate the break even sales for a mix of two or more products?
using the weighted average unit contribution margin of all the products
weighted average unit contribution margin formula for a company not selling that many types of products
(unit contribution margin product 1)*(sales mix percentage product 1)
+ (unit contribution margin product 2)*(sales mix percentage product 2)
= weighted average unit contribution margin
how to calculate the break even point in units using the weighted average unit contribution margin? (not ratio)
FC / weighted average unit contribution margin
= break even in units
how do we calculate the break even for a company that sells thousands of products?
we calculate it it terms of sales dollars instead of units
the same, but instead of units, its dollars that we have to check for proportion
weighted average unit contribution margin formula for a company thousands of products?
( contribution margin ratio product 1)*(sales mix percentage product 1)
+ (contribution margin ratio product 2)*(sales mix percentage product 2)
= weighted average contribution margin ratio
how to calculate the break even point in units using the weighted average contribution margin? (not unit)
FC / weighted average contribution margin ratio
= break even in dollars
cost structure
the relative proportion of fixed VS variable costs that a company incurs
why is it important to consider a company’s cost structure?
has significant effect on contribution margin ratio, break even point, and margin of safety ratio
operating leverage
the extent to which a company’s operating income reacts to a given change in sales
company’s that have a higher fixed costs have a higher or lower operating leverage?
higher operating leverage
degree of operating leverage
a measure of a company’s earnings volatility
how do you calculate the degree of operating leverage?
contribution margin / operating income
