Chapter 7 Flashcards
What is CVP?
COS- VOLUME PROFIT understand the interrelationship among cost, volume and profit in an organization
First Element of CVP?
prices of products
Second Element of CVP?
volume or level of activity
Third Element of CVP?
per unit variable costs
Fourth Element of CVP?
total fixed costs
Fifth Element of CVP?
mix of products sold
What is the contribution income statement?
It is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume. The emphasis is on cost behaviour.
What is CM?
Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted. IT CAN BE PRESENTED IN A PER UNIT BASIS.
What is the Contribution approach?
We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit
What does CVP graph have?
In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis.
Total Expenses
3 Lines that are on the CVP graph?
Total Sales, Total Expenses and Fixed Expenses
Break-Even Point graphically?
Point when Total Sales and Total Expense intersects
What is the CM ratio?
Total CM/ Total Sales
What is CM ratio in terms of ratio?
Unit CM/ Unit Selling Price
2 Ways that Break-Even Analysis can be approached?
Equation Method and Contribution Margin Method
Break Even formula?
Sales = Variable expenses + Fixed expenses + Profits(Q)
Break-even point in units sold (CM)
Fixed Expenses/ CM per unit
Break-even point in total sales dollars (CM)
Fixed expenses/ CM ratio
Unit Sales to attain the target profit?
(Fixed Expenses + Target profit)/ CM per unit
What is the The Margin of Safety?
The margin of safety is the excess of budgeted (or actual) sales over the break‐even volume of sales
The Margin of Safety formula
Total sales – Break-even sales
What is a cost structure?
Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization’s cost structure
Advantage of high fixed cost structure?
Is that income will be higher in good years compared to companies with lower proportion of fixed costs.
Disadvantage of High fixed cost structure?
is that income will be lower in bad years compared to companies with lower proportion of fixed costs.
