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
Businesses that rely on DL and DM tend to have higher ___.
Variable costs
___ affects how sensitive profits are to changes in sales volume.
Operating leverage
Higher operating leverage can lead to ___ profit.
Higher
Do high or low operating leverage companies tend to feel the negative impacts of declining sales more?
High
___ is the CM per unit divided by the units of constrained resources required to produce one unit of product.
CM per Unit of Constraint
How are target profits found for organizations that pay income taxes?
Step 1 - ___
Step 2 - ___
Step 3 - ___
Step 1 - Determine the desired target profit after taxes
Step 2 - Convert the desired target profit after taxes to the target profit before taxes
Step 3 - Use the target profit before taxes in the appropriate formula to calculate the target profit in units or sales dollars
Target profit before taxes = ___ / (___ - ___)
Target profit after taxes / (1 - tax rate)
Expensing non-manufacturing costs incurred on the income statement as incurred and expensing manufacturing cost incurred on COGS after good are sold is known as ___.
Absorption costing
*CM per Units = ___ - ___
Selling price per unit
- variable cost per unit
Ex. 500 - 300 = $200 per unit
___ is the amount of each sales dollar available to apply towards fixed costs and profits.
CM per unit
F. *CM Ratio = ___ / ___
CM per unit / Sales price per unit
Ex. 200 / 500 = 40%
___ is the percentage of each sales dollar available to apply towards fixed costs and profits.
CM Ratio
___ helps managers find volume of sales necessary to break-even and make important business decision and analyze the relationship among cost, volume, and profit (or loss).
CVP analysis
What are the 5 components of CVP?
- Sales price per unit
- Volume sold
- Variable cost per unit
- Fixed costs
- Operating income
___ is the sales level at which operating income is zero.
Break-even analysis
*What are the three approaches to calculating break-even?
- Income statement app.
- Unit CM short cut
- CM ratio short cut
F. *Income statement approach:
Sales revenue - ___ - ____ = operating income.
Variable expense
- fixed expenses
Ex. 50x - 30x - 10,000 = 0
x = 500 units
F. *Unit CM short cut = ___ + operating income / ___
Fixed expenses
+ operating income (0) / unit contribution margin
Ex. 10,000 + 0 / 20 = 500 units
F. *CM ratio short cut:
Sales dollars to break-even = ___ + operating income / ___
Fixed expenses
+ operating expense (0) / CM ratio
Ex. 10,000 + 0 / .40 = 40%
___ is the relative percentage in which a company sells its products.
Sales mix
*CM ratio short cut:
Units sold to break-even = ___ - ___ / ___
Fixed expenses
- operating income (0) / weighted avg unit CM
*Weighted CM = ___ x sales mix / ___
Product CM x sales mix / total products
Ex. $155 / 10 = $15.50
10,000 + 0 / 15.50 = 645 units to break-even
A ___ provides managers with preparedness for changing business conditions such as pricing pressure from competitors and changes in variable or fixed costs (or both).
Sensitivity analysis
What are the three steps to a sensitivity analysis?
- Calculate new unit CM using new sales price, variable costs or both
- Use new unit CM to compute break-even sales in units or break-even sales to maintain target profit
- Using new break-even numbers, decide if a change should be made
OPM: ___
Other people’s money
___ is how responsive a company’s operating income is to changes in sales volume.
Operating leverage
What are the two types of operating leverage?
Financial leverage - used debt and equity financing to grow (OPM)
Operating leverage - grow by using fixed costs
Operating leverage factor = ___ / ___
CM / operating income
Ex. 11,200 / 9,700 = 1.15 degree of operating leverage
___ is the excess of expected sales over brea-even sales; the amount of sales that the company can absorb before incurring a loss.
Margin of safety
Margin of safety is used to evaluate ___.
Risk
Margin of safety = ___ - ___
Expected sales
- break-even sales
Margin of safety as ratio = MOS / ___
Expected sales (units or sales)
Ex. 10,000 / 50,000 = 20%
quiz: Cinder Block Industries currently produces and sells 20,000 units of product at a selling price of $10. The product has variable costs of $4 per unit and a fixed cost of $50,000. The company currently earns a total contribution margin of
a. $200,000
b. $50,000
c. $70,000
d. $120,000
d. $120,000
200,000 - 80,000 = 120,000 CM
quiz: Clear Springs Bottling Company produces a soft drink that is sold for a dollar. The company pays $400,000 in production costs, of which $260,000 are variable production costs. General, selling and administrative costs amount to $290,000 of which $90,000 are variable costs. Assuming production and sales of 800,000 units, what is the amount of contribution margin per unit?
a. $0.3125
b. $0.5625
c. None of these are correct
d. $0.1375
b. $0.5625
260,000 + 90,000 = 350,000 variable costs
350,000 variable costs / 800,000 units = 0.4375
1 - 0.4375 = 0.5625 CM per unit
quiz: AMC, Inc. produces a product that has a variable cost of $2.50 per unit. The company’s fixed costs are $30,000. The product is sold for $5.00 a unit and the company desires to earn a $20,000 profit. The breakeven in units for AMC is which of the following amounts?
a. 12,000
b. 6,000
c. 4,000
d. 5,000
a. 12,000
300,000 + 0 / (5 - 2.50) = 12,000 units
quiz: CMA, Inc. produces a product that has a variable cost of $2.50 per unit. The company’s fixed costs are $30,000. The product is sold for $5.00 per unit and the company desires to earn a target profit of $20,000. What amount of sales will be necessary to earn the desired profit?
a. $100,000
b. $40,000
c. $60,000
d. $20,000
a. $100,000
30,000 + 20,000 / (5 - 2.5)
20,000 x 5 per unit = $100,000 in sales
quiz: Domino Industries makes a product that sells for $25 per unit. The product has a $5 per unit variable cost and total fixed costs of $18,000. At budgeted sales of 1,000 units, the margin of safety ratio is
a. 80%
b. 10%
c. 20%
d. 90%
b. 10%
___ costing provides managers with the information necessary to prepare a CM income statement, which leads to more effective CVP analysis. By separating variable and fixed costs, managers are able to determine CM ratios, break-even points, target profit points, and perform sensitivity analysis.
Variable costing
___ meets the requirements of GAAP, but is not useful for internal decision making.
Absorption costing
___ costing prevents managers from increasing production solely for the purpose of inflating profit.
Variable costing
All fixed manufacturing overhead costs are expensed as incurred, regardless of ___.
Level of sales
Three rules apply when comparing absorption costing with variable costing:
- ___
- ___
- ___
- When units produced
equals units sold, profit is the same for both costing approaches. - When units produced is greater than units sold,
absorption costing yields the highest profit. - When units produced is less than units sold, variable costing yields the
highest profit.
