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ACCT323 > Chapter 6: CVP > Flashcards

Chapter 6: CVP Flashcards

1
Q

what is CVP analysis

A

how do changes in cost and volume impact profit

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2
Q

basic cvp equation

A

unit sales price (x)-unit vc- total fc = profit

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3
Q

what is the break even point

A

total revenues = total expenses

level of activity where profit = 0

total contribution margin = total fc

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4
Q

contribution margin

A

sales revenues - vc

Represents the amount earned to cover fixed costs and
contribute to operating income

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5
Q

total contirbution margin = total fc

A

sales revenues - vc = fc

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6
Q

waht does the contirbution margin incomes statement look like?

A

revenue (unit price * unit sold)
- total vc
= total contribution margin

  • total fc
    = breakeven
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7
Q

what is the profit if you sell above the breakeven

A

of units sold above break even * (unit Contribution margin)

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8
Q

how to calculate break even sales in dollars

A

break even units * unit ssale price

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9
Q

y= f+ vx visual

A

total cost = fc + vc(units)

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10
Q

how to calculate before tax income

A

after tax income / (1-t)

t= tax rate

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11
Q

multi product company, what is sales mix?

A

relative amount of each product sold

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12
Q

b/e in dollars methods (multi product company)

A

FC/weighted average

overall CM ratio

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13
Q

how to calc contribution margin ratio

weighted

A

total contribution margin of all products sold/total revenue of all products sold

(CM ratio * sales mix %) + (CM ratio * sales mix %)

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14
Q

how to calc contribution margin ratio

overall average

A

SALES DOLLARS OF PRODUCT/TOTAL SALES DOLLARS OF ALL PRODUCTS SOLD

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15
Q

operating leverage

A

How sensitive the operating income is to a given change
in sales revenue

Sensitivity is a result of the relative portion of FC to VC

The higher the FC relative to the VC, the greater the impact on income
given a change in sales revenue.

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16
Q

The higher the FC relative to the VC, the greater the impact on income
given a change in sales revenue.q

A
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17
Q

measurements of operating leverage

A

3 types

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18
Q

1st emasure of operating leverage

A

degree of operating leverage/OLF

OLF = CM/oeprating income

%changes in sales * OLF = %changes in operating income

19
Q

2nd measure of oeprating leverage

A

2) Unit change in sales*unit CM=$ change in income (not in textbook)

20
Q

3rd measure of operating leverage

A

3) $ change in sales*CM ratio= $ change in income

21
Q

margin of safety

A

this is the cushion

Planned dollar sales-B/E dollar sales

Or

Planned unit sales-B/E unit sales

(Or as a percentage of sales dollars)

22
Q

B/E point assumptions

A

All costs may be classified in variable and fixed categories

The behavior of revenues and expenses is accurately portrayed
and is linear over the relevant range

Changes in activity are the only factors that affect costs. Efficiency
and productivity will be unchanged

Sales mix will remain constant

The difference in inventory level at the beginning and at the endperiod is insignificant. All units that are produced are sold

23
Q

what are 5 elements in a cost volume profit analysis

A
  1. volume or level of activtiy
  2. unit selling price
  3. unit variable costs
  4. total fixed costs
  5. sales mix
24
Q

cvp income statement

A

produced for internal uses! all costs are fixed and variable!

25
Q

contribution margin per unit

A

unit sales - unit vc

26
Q

Sales- vc= contribiution margin

contribution margin - fc = operating income

A
27
Q

contribution margin ratio

A

contribution margin per unit/ unit selling price

28
Q

how can break even analysis be calculated

A
  1. from a math equation
  2. contribution margin
  3. CVP graph

sales units or sales dollars, round up!

29
Q

breakeven analysis in math

A

SQ = V x Q + TFC

Sales * quantity

volume * quantity

total fixed cost

how to solve for breakeven? solve for Q

30
Q

break even analysis contribution margin method

A

at breakeven: cm must equal to tal fixed cost, you can either use units or cm ratio

  1. break even units = total fixed cost/ per unit CM
  2. break even sales = total fixed costs/ CM ratio
31
Q

break even point graphic

A

Plot the total sales/revenue line starting at the zero activity
level

Plot the total fixed cost with a horizontal line

Plot the total cost line (starts at the fixed cost line at zeroactivity)

Determine the break-even point from the intersection of the total cost line and the total revenue line

32
Q

pros and cons of break even point graphic

A

pros:
- Provides a visual depiction of break-even and profit/loss areas over a range of activity
- Profit/loss values are easy to read over a range of activity
- Relatively easy to construct

cons:
- Actual break-even point not always easy to plot or see
- Does not depict how costs change with changes in activity
- Can only be used with a single product or a single product mix

33
Q

look at break even graphic

A
34
Q

what is target operating income?

A

basically companies need to have sales ovre breake ven

35
Q

formual for sales and units to get toi

A

sales in units = (total fc + target oi)/ (per unit cm)

sales in dollars = (total fc + target oi)/ (cm ratio)

36
Q

operating income is always pre tax

A

net income is always after tax

37
Q

Formula for sales to achieve target OI after tax

A

sales in units = (total fc) + (target NI/(1-tax rate))/ (per unit cm)

sales in dollars = (total fc) + (target NI/(1-tax rate))/ (cm ratio)

38
Q

margin of safety

A

Difference between actual or expected sales and sales
at the break-even point

(how much sales can reduce and still achieve break even)

39
Q

margin of safety dollars or ratio

A

dollars= actual or expected sales - breakeven sales

ratio = margin of safety in dollars/actual or expected sales

40
Q

how to calc break even sales in sales mix?

A
  1. calc weighted average contribution:
    (unit cm)(sales %) + (unit cm)(sales %)= weighted cm
  2. calc break even point in units (fixed cost/weighted avg cm)
  3. calc mix of each product:
    breakeven units * sales %
  4. check: Proof : CM – Fixed Costs
    5
    .
41
Q

At any level of units sold, operating income will be
greater if more high contribution margin units are sold
than low contribution margin units

A
42
Q

what is cost sturcture

A

Cost structure refers to the relative proportion of fixed versus
variable costs that a company incurs

43
Q

The degree of operating leverage (DOL) provides a
measure of a company’s earnings volatility and can be
used to compare companies.
* The greater the DOL value the greater the risk
o Indicates high investment in fixed costs given the current
activity level
* For each percentage change in volume, DOL provides an
estimate for the corresponding change in Operating
Income (OI) or EBIT (Earnings before Interest and Taxes)
* Calculated as: CM ÷ OI or CM ÷ EBIT

A

slide 64

44
Q
A

ACCT323 (8 decks)

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