Chapter 6: CVP Flashcards
The profit equation shows that profit equals ___.
Total sales revenue
- total variable costs
- total fixed costs
___ is the relationship among costs, volume, and profit.
CVP
___ are costs that vary in total with changes in volume of activity.
Variable costs
___ are costs that are fixed and do not change in total with changes in volume of activity.
Fixed costs
F. ___ is the number of units or total sales measured in dollars that must be sold to achieve zero profit.
Break-even point
F. ___ is found by setting profit to zero using the profit equation, fill in the appropriate information, and solving.
Break-even point
How does finding the target profit in units help companies?
Tells company how many units must be sold to achieve a certain profit
How do companies find the break-even point if they cannot easily measure sales in units?
Measured in total sales dollars
F. Contribution margin per unit is the amount each unit sold contributes to ___ and ___.
Covering fixed costs
Increasing profit
___ is the CM as a percentage of sales which measure the amount each sales dollar contributes to covering fixed costs and increasing profits.
CM ratio
On a CVP graph, ___ is on the x axis and ___ is on the y axis.
X - dollar amounts for revenues, costs and profits
Y - volume of activity for a period, measured as units produced and sold
There are three lines on a CVP graph: ___, ___, and ___.
Total revenue
Total cost
Profit
___ shows total revenue based on the number of units produced and sold on a CVP graph.
Total revenue line
___ shows total costs based on the number of units produced and sold on a CVP graph.
Total cost line
___ shows profit or loss based on the number of units produced and sold on a CVP graph; it is the different between total revenue and total cost lines.
Profit line
The ___ is the amount by which sales can fall before the company incurs a loss.
Margin of safety
Margin of Safety = ___ - ___
Projected sales - Break-even sales (in units or sales)
___ is the proportion of one product’s sales to total sales.
Sales mix
For multiple-product companies, solving for break-even point includes a ___ CM per unit.
Weighted average
Target profit in units sets the operating income to ___.
The target profit the company would like to achieve, not zero
For companies who would find it difficult to measure a unit of product, what approach would they take to find break-even point?
Sales dollars
How would a company find the CM ratio for all departments?
Total CM / Total sales
What are the assumptions required to perform break-even and target profit calculations with multiple products or services?
- Costs can be separated into fixed and variable components
- CM ration remains constant for each product, segment, or department
- Sales mix remains constant with changes in total sales
Benefits of obtaining more accurate data from CVP models must ___.
Outweigh the cost of developing such a model
___ shows how a CVP model will alter profit with changes in any of it’s variables.
Sensitivity analysis
___ is the term used to describe the proportion of fixed and variable costs to total costs.
Cost structure
Companies with a relatively high proportion of fixed costs have high ___.
Operating leverage
