chapter 6 book: cost volume profit

Question 1

Cost Volume Profit Analysis

Answer 1

the study of effects that changes in costs and volume have on a company’s profits

Question 2

what interrelationships does CVP focus on?

Answer 2

volume or activity level

unit selling prices

variable cost per unit

total fixed costs

sales mix

Question 3

which assumptions underlie each CVP analysis

Answer 3

1. the behavior of both costs and revenues is linear throughout range of activity index
2. all costs can be classified with reasonable accuracy as either variable or fixed
3. changes in activity levels are the only factors that affect costs
4. inventory levels remain constant (all units5. that are produced are sold)
5. when more than one type of product is sold, the sales mix will remain constant

Question 4

what does it mean for the sales mix to remain constant when ore than one type of product is sold?

Answer 4

the percentage of total sales that each product represents will remain the same

Question 5

why does the sale mix complicate the CVP analysis?

Answer 5

because different products will have different cost relationships

Question 6

are all CVP assumptions needed for the analysis to be accurate?

Answer 6

ye boy

Question 7

what is the difference between a normal income statement and a CVP income statement do different?

Answer 7

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

Question 8

contribution margin (CM)

Answer 8

the amount of revenue that remains after variable costs have been deducted

often stated as total amount

often stated on a per-unit basis

Question 9

how to find unit contribution margin?

Answer 9

Unit selling Price - Unit Variable Costs

Question 10

contribution margin ratio

Answer 10

contribution margin per unit
/
unit selling price

Question 11

do the contribution margin and contribution margin ratio increase with an increase in sales?

Answer 11

nah bruv

remain unchanged

Question 12

break even point

Answer 12

level of activity at which total revenues equal total costs

Question 13

break even analysis

Answer 13

finding the break even point

Question 14

when is the break even analysis useful to managers?

Answer 14

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

Question 15

how can you find the break even point?

Answer 15

mathematical equation

contribution margin

CVP graph

Question 16

how is the break even expressed?

Answer 16

sales units or sales dollars

Question 17

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?

Answer 17

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

Question 18

how do you find the break even using the contribution margin?

Answer 18

total fixed costs / contribution margin per unit

this will result in the amount of units

Question 19

how do you find the break even using the contribution margin ratio?

Answer 19

total fixed costs / contribution margin ration

this will result in the break even point in dollars

Question 20

CVP graph

Answer 20

shows both costs and profits

ideal to show the break even point

shows operating income and net loss areas

Question 21

target operating income

Answer 21

alternative to using break even

an income objective for individual product lines

indicates sales a company needs to achieve to attain certain operating income

Question 22

which techniques can you use to find the target operating income?

Answer 22

mathematical equation

contribution margin

CVP graph

Question 23

mathematical equation to find the target operating income

Answer 23

variable costs + fixed costs + target operating income

= required sales

Question 24

contribution margin to find the target operating income

Answer 24

(FC + Target Operating Income) / Contribution margin per unit

= required sales in units

Question 25

contribution margin ratio to find the target operating income

Answer 25

(FC + Target Operating Income) / Contribution margin ratio

= required sales in dollars

Question 26

which techniques can you use to find the target operating income after tax?

Answer 26

mathematical equation

contribution margin

Question 27

mathematical equation to find the target operating income after tax

Answer 27

sales - variable costs = fixed costs + operating income before taxes

Question 28

how to find operating income before taxes?

Answer 28

OI after taxes / (1 - tax rate)

Question 29

contribution margin to find the target operating income after tax

Answer 29

(FC + Target Operating Income before taxes) / Contribution margin per unit

= required sales in units

Question 30

contribution margin ratio to find the target operating income after tax

Answer 30

(FC + Target Operating Income before taxes) / Contribution margin ratio

= required sales in dollars

Question 31

margin of safety

Answer 31

the difference between actual or expected sales and sales at the break even point

measures the cushion management has

Question 32

margin of safety formula?

Answer 32

actual (expected) sales - break even sales

= margin of safety in dollars

Question 33

margin of safety ratio

Answer 33

margin of safety in dollars / actual (expected) sales

= margin of safety ratio

Question 34

the sales mix

Answer 34

the relative proportion in which each product is sold when a company sells more than one product

Question 35

how can companies calculate the break even sales for a mix of two or more products?

Answer 35

using the weighted average unit contribution margin of all the products

Question 36

weighted average unit contribution margin formula for a company not selling that many types of products

Answer 36

(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

Question 37

how to calculate the break even point in units using the weighted average unit contribution margin? (not ratio)

Answer 37

FC / weighted average unit contribution margin

= break even in units

Question 38

how do we calculate the break even for a company that sells thousands of products?

Answer 38

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

Question 39

weighted average unit contribution margin formula for a company thousands of products?

Answer 39

( 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

Question 40

how to calculate the break even point in units using the weighted average contribution margin? (not unit)

Answer 40

FC / weighted average contribution margin ratio

= break even in dollars

Question 41

cost structure

Answer 41

the relative proportion of fixed VS variable costs that a company incurs

Question 42

why is it important to consider a company’s cost structure?

Answer 42

has significant effect on contribution margin ratio, break even point, and margin of safety ratio

Question 43

operating leverage

Answer 43

the extent to which a company’s operating income reacts to a given change in sales

Question 44

company’s that have a higher fixed costs have a higher or lower operating leverage?

Answer 44

higher operating leverage

Question 45

degree of operating leverage

Answer 45

a measure of a company’s earnings volatility

Question 46

how do you calculate the degree of operating leverage?

Answer 46

contribution margin / operating income