Chapter 6: CVP

Question 1

what is CVP analysis

Answer 1

how do changes in cost and volume impact profit

Question 2

basic cvp equation

Answer 2

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

Question 3

what is the break even point

Answer 3

total revenues = total expenses

level of activity where profit = 0

total contribution margin = total fc

Question 4

contribution margin

Answer 4

sales revenues - vc

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

Question 5

total contirbution margin = total fc

Answer 5

sales revenues - vc = fc

Question 6

waht does the contirbution margin incomes statement look like?

Answer 6

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

• total fc
  = breakeven

Question 7

what is the profit if you sell above the breakeven

Answer 7

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

Question 8

how to calculate break even sales in dollars

Answer 8

break even units * unit ssale price

Question 9

y= f+ vx visual

Answer 9

total cost = fc + vc(units)

Question 10

how to calculate before tax income

Answer 10

after tax income / (1-t)

t= tax rate

Question 11

multi product company, what is sales mix?

Answer 11

relative amount of each product sold

Question 12

b/e in dollars methods (multi product company)

Answer 12

FC/weighted average

overall CM ratio

Question 13

how to calc contribution margin ratio

weighted

Answer 13

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

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

Question 14

how to calc contribution margin ratio

overall average

Answer 14

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

Question 15

operating leverage

Answer 15

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.

Question 16

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

Question 17

measurements of operating leverage

Answer 17

3 types

Question 18

1st emasure of operating leverage

Answer 18

degree of operating leverage/OLF

OLF = CM/oeprating income

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

Question 19

2nd measure of oeprating leverage

Answer 19

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

Question 20

3rd measure of operating leverage

Answer 20

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

Question 21

margin of safety

Answer 21

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)

Question 22

B/E point assumptions

Answer 22

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

Question 23

what are 5 elements in a cost volume profit analysis

Answer 23

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

Question 24

cvp income statement

Answer 24

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

Question 25

contribution margin per unit

Answer 25

unit sales - unit vc

Question 26

Sales- vc= contribiution margin contribution margin - fc = operating income

Question 27

contribution margin ratio

Answer 27

contribution margin per unit/ unit selling price

Question 28

how can break even analysis be calculated

Answer 28

1. from a math equation 2. contribution margin 3. CVP graph sales units or sales dollars, round up!

Question 29

breakeven analysis in math

Answer 29

SQ = V x Q + TFC Sales * quantity volume * quantity total fixed cost how to solve for breakeven? solve for Q

Question 30

break even analysis contribution margin method

Answer 30

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

Question 31

break even point graphic

Answer 31

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

Question 32

pros and cons of break even point graphic

Answer 32

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

Question 33

look at break even graphic

Question 34

what is target operating income?

Answer 34

basically companies need to have sales ovre breake ven

Question 35

formual for sales and units to get toi

Answer 35

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

Question 36

operating income is always pre tax

Answer 36

net income is always after tax

Question 37

Formula for sales to achieve target OI after tax

Answer 37

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)

Question 38

margin of safety

Answer 38

Difference between actual or expected sales and sales at the break-even point (how much sales can reduce and still achieve break even)

Question 39

margin of safety dollars or ratio

Answer 39

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

Question 40

how to calc break even sales in sales mix?

Answer 40

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 .

Question 41

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

Question 42

what is cost sturcture

Answer 42

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

Question 43

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

Answer 43

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