Chapter 8 Reading

Question 1

cost-volume-profit (CVP) analysis?

Answer 1

examines the behaviour or total revenues, costs and operating profit as changes occur in the output level selling price, variable/fixed costs

a single revenue driver and a single cost drive are used in this analysis

Question 2

which questions do managers use CVP for?

Answer 2

how will revenues and costs be affected if we sell 1000 more units?

Question 3

CVP = ?

Answer 3

cost-volume-profit

Question 4

revenues = ?

Answer 4

inflows of assets received in exchange for products/services

Question 5

revenue driver = ?

Answer 5

a factor that affects revenues

e.g., units of output sold, selling prices, levels of marketing

Question 6

general case/special case?

Answer 6

general case = considering multiple revenue drivers and multiple cost drivers, looking in long-run

special case = considering one specific revenue driver and cost driver, looking in short-run

Question 7

total costs = ?

Answer 7

variable costs + fixed costs

Question 8

variable costs = ?

Answer 8

costs that vary with respect to units of output

Question 9

operating profit = ?

Answer 9

total revenues - total costs

Question 10

net profit = ?

Answer 10

operating profit + non operating revenue - non operating costs

net profit = operating profit - income taxes

Question 11

usp = ?

Answer 11

unit selling price

Question 12

uvc = ?

Answer 12

unit variable costs

Question 13

ucm = ?

Answer 13

unit contribution margin

unit selling price - unit variable costs

Question 14

fc = ?

Answer 14

fixed costs

Question 15

q = ?

Answer 15

quantity of output units sold/manufactured

Question 16

OP = ?

Answer 16

operating profit

Question 17

TOP = ?

Answer 17

target operating profit

Question 18

what are some of the CVP assumptions?

Answer 18

• total costs can be divided into a fixed component and a variable component
• behaviour of total revenues and total costs is linear in relation to output units
• USP, UVC and FC are constant
• analysis covers a single product or assumes the proportion of different products remains constant
• all revenues and costs can be added and compared without taking into account the time value of money
• changes in levels of revenues/costs arise because of changes in number of products/services produced and sold
• the number of output units is the only revenue and cost driver

Question 19

contribution margin = ?

Answer 19

unit selling price - variable costs per unit

Question 20

breakeven point?

Answer 20

fixed expenses / contribution margin per unit

e.g., £2,000 / £100 per unit = 20 units to break even

Question 21

what is the breakeven point?

Answer 21

the point at which profit = 0

Question 22

what is target profit?

Answer 22

monetary amount beyond breakeven point

target sales = target profit + fixed costs / cost per unit

e.g., £1,500 + 2,000 / 100 = 35 units

Question 23

contribution margin = ?

Answer 23

revenues - variable costs

Question 24

contribution income statement?

Answer 24

groups line itesm by cost behaviour pattern to highlight the contribution margin

e.g., revenue - variable costs = contribution margin - fixed costs = operating profit

Question 25

what are the three methods for calculating the breakeven point?

Answer 25

• equation method
• contribution margin method
• graph method

Question 26

equation method for calculating breakeven point?

Answer 26

revenues - variable costs - fixed costs = operating profit

Question 27

contribution margin method for calculating breakeven point?

Answer 27

algebraic manipulation of the equation method

Question 28

graph method for calculating breakeven point?

Answer 28

plots total costs line and total revenues line

point of intersection is breakeven point

Question 29

target operating profit?

Answer 29

revenues - vc - fc = TOP

Question 30

how to calculate breakeven point in units?

Answer 30

fixed expenses / contribution margin per unit

Question 31

how to calculate breakeven point in £?

Answer 31

breakeven units x selling price per unit

Question 32

how to calculate required sales to hit target profit?

Answer 32

fixed expenses + target profit / contribution margin per unit

Question 33

how is a contribution income statement formatted?

Answer 33

revenue -
variable expenses =
contribution margin -
fixed expenses =
operating income

Question 34

margin of safety = ?

Answer 34

how much room for failure does the business have before it’s in trouble

safety margin = budgeted sales - break even sales

percentage = safety margin / budgeted sales x 100

Question 35

PV graph?

Answer 35

shows the impact on operating profit of changes in output level

profit-volume graph

Question 36

how do you plot a PV graph?

Answer 36

x axis = units
y axis = £

• draw line for fixed costs
• draw line for total revenue
• draw line for total costs

break even point = point where total costs meets total revenue

Question 37

target net profit calculation = ?

Answer 37

revenues - variable costs - fixed costs = target net profit/(1-tax rate)

Question 38

sensitivity analysis?

Answer 38

what-if technique that examines how a result will change if the original predicted data are not achieved

Question 39

operating leverage = ?

Answer 39

describes the effects that fixed costs have on changes in operating profit as changes occur in units sold and contribution margin

Question 40

revenue mix / sales mix ?

Answer 40

relative combination of quantities of quantities of products/services that make up total revenues

Question 41

contribution margin vs gross margin?

Answer 41

contribution margin = revenues - all variable costs

gross margin = revenues - COGS

Question 42

variable-cost percentage?

Answer 42

total variable costs / revenues

Question 43

gross margin percentage?

Answer 43

gross margin / revenues