COST-VOLUME-PROFIT ANALYSIS Flashcards
is the study of the effects of changes in costs and volume on a company’s profits.
Cost-volume-profit (CVP) analysis
is important in profit planning. It is useful in setting selling prices, determining product mix, and maximizing use of production facilities
CVP analysis
considers the interrelationships among the following components:
✓ Volume or level of activity
✓ Unit selling prices
✓ Variable cost per unit
✓ Total fixed costs
✓ Sales mix
CVP analysis
is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio.
Contribution margin
the company will realize no income but will suffer no loss.
break-even point
is useful to management when it decides whether to introduce new product lines, change sales prices on established products, or enter new market areas.
break-even point
In the profit area of the CVP graph, the distance between the sales line and the total cost line at any point equals net income. A company can find required sales by analyzing the differences between the two lines until the desired net income is found.
Graphic presentation
- The difference between actual sales and break-even sales.
- It indicates the maximum amount by which sales could decline without incurring a loss.
Margin of Safety
is the amount of revenue remaining after deducting variable costs and is stated as both a total amount and on a per unit basis.
Contribution margin
is the relative proportion in which each product the impact of changes on any variables. For example, changes in prices, variable costs, and fixed costs on expected profits.
Sales mix
is computed by dividing fixed costs by the weighted-average contribution margin ratio.
break-even point in peso
is computed by adding the products of Division A’s contribution margin ratio X its percentage of sales and Division B’s contribution margin ratio X its percentage of sales
weighted-average contribution margin ratio
provides a measure of a company’s earnings volatility and can be used to compare companies. Degree of operating leverage is computed by dividing total contribution margin by net income.
degree of operating leverage (DOL
Cost-volume-profit analysis can be used to study the effect of
a. Changes in selling prices on a company’s profitability
b. Changes in fixed and variable costs on a company’s profitability
c. Changes in product sales mix on a company’s profitability
d. All of the above
d. All of the above
CVP analysis requires costs to be categorized as
a. Either fixed or variable
b. Fixed, mixed, or variable
c. Product or period
d. Standard or actual
a. Either fixed or variable
Which of the following is not a major assumption underlying CVP analysis?
a. All costs incurred by a firm can be separated into their fixed and variable components
b. The product selling price per unit is constant at all volume levels
c. Operating efficiency and employee productivity are constant at all volume levels
d. For multi-product situations, the sales mix can vary at all volume levels
d. For multi-product situations, the sales mix can vary at all volume levels
Contribution margin can be defined as
a. The amount of sales revenue necessary to cover variable expenses
b. Sales revenue minus fixed expenses
c. The amount of sales revenue necessary to cover fixed and variable expenses
d. Sales revenue minus variable expenses
d. Sales revenue minus variable expenses
After the level of volume exceeds the break-even point
a. The contribution margin ratio increases
b. The total contribution margin exceeds the total fixed costs
c. Total fixed costs per unit will remain constant
d. The total contribution margin will turn from negative to positive
b. The total contribution margin exceeds the total fixed costs
At the break-even point
a. Sales would be equal to contribution margin
b. Contribution margin would be equal to fixed expenses
c. Contribution margin would be equal to net operating income
d. Sales would be equal to fixed expenses
b. Contribution margin would be equal to fixed expenses
The break-even point would be increased by
a. A decrease in total fixed expenses
b. A decrease in the ratio of variable expenses to sales
c. An increase in the contribution margin ratio
d. None of these
d. None of these
Which of the following strategies could be used to reduce the break-even point?
Fixed expenses
Contribution margin
a.
Increase
Increase
b.
Decrease
Decrease
c.
Decrease
Increase
d.
Increase
Decrease
c.
Decrease
Increase
According to CVP analysis, a company could never incur a loss that exceeded its total
a. Variable costs
b. Fixed costs
c. Costs
d. Contribution margin
c. Costs
Introducing income taxes into cost-volume-profit analysis
a. Raises the break-even point
b. Lowers the break-even point
c. Increases unit sales needed to earn a particular target profit
d. Decreases the contribution margin percentage
c. Increases unit sales needed to earn a particular target profit
If the sales mix shifts toward higher contribution margin products, the break-even point
a. Decreases
b. Increases
c. Remains constant
d. It is impossible to tell without more information
a. Decreases
The break-even point is that level of activity where:
a. Total revenue equals total cost
b. Total contribution margin equals the sum of variable cost-plus fixed cost
c. Sales revenue equals total variable cost
d. Profit is greater than zero
a. Total revenue equals total cost
A company that desires to lower its break-even point should strive to
a. Decrease selling prices
b. Reduce variable costs
c. Increase fixed costs
d. Sell more units
b. Reduce variable costs
If a firm’s net income does not change as its volume changes, the firm(‘s)
a. Must be in the service industry
b. Must have no fixed costs
c. Sales price must equal zero
d. Sales price must equal its variable costs
d. Sales price must equal its variable costs
The contribution margin ratio always increases when the
a. Variable costs as a percentage of net sales increase
b. Variable costs as a percentage of net sales decrease
c. Break-even point increases
d. Break-even point decreases
b. Variable costs as a percentage of net sales decrease
A company’s break-even point in pesos of revenue may be affected by equal percentage increase in both selling price and variable cost per unit. The equal percentage changes in selling price and variable cost per unit will cause the break-even point in pesos to
a. Decrease by less than the percentage increase in selling price
b. Decrease by more than the percentage increase in the selling price
c. Increase by the percentage change in variable cost per unit
d. Remain unchanged
d. Remain unchanged
In a multiple-product firm, the product that has the highest contribution margin per unit will
a. Generate more profit for each P1 of sales than the other products
b. Have the highest contribution margin ratio
c. Generate the most profit for each unit sold
d. Have the lowest variable costs per unit
c. Generate the most profit for each unit sold
The margin of safety would be negative if a company(‘s)
a. Was presently operating at a volume that is below the break-even point
b. Present fixed costs were less than its contribution margin
c. Variable costs exceeded its fixed costs
d. Degree of operating leverage is greater than 100
a. Was presently operating at a volume that is below the break-even point
The margin of safety is a key concept of CVP analysis. The margin of safety is the
a. Contribution margin rate
b. Difference between budgeted contribution margin and actual contribution margin
c. Difference between budgeted contribution margin and break-even contribution margin
d. Difference between budgeted sales and break-even sales
d. Difference between budgeted sales and break-even sales
If a company is operating at the break-even point
a. Its contribution margin will be equal to its variable expenses
b. Its margin of safety will be equal to zero
c. Its fixed expenses will be equal to its variable expenses
d. Its selling price will be equal to its variable expense per unit
b. Its margin of safety will be equal to zero
If the degree of operating leverage is 4, then a 1% change in quantity sold should result in a 4% change in
a. Unit contribution margin
b. Revenue
c. Variable expense
d. Net operating income
d. Net operating income
Which of the following is the correct calculation for the degree of operating leverage?
a. Net operating income divided by total expenses
b. Net operating income divided by total contribution margin
c. Total contribution margin divided by net operating income
d. Variable expense divided by total contribution margin
c. Total contribution margin divided by net operating income
All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.
FALSE -
In CVP analysis, sales and production are assumed to be equal.
TRUE
All other things the same, the margin of safety in pesos at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses.
TRUE
A company’s break-even point is the level where total revenues equal total costs.
TRUE
After the break-even point is reached, each peso of contribution margin is a peso of after-tax profit.
FALSE - BEFORE TAX
When using CVP analysis to determine sales level for a desired amount of profit, the profit is treated as an additional cost to be covered.
TRUE
When computing profit on an after-tax basis, it is necessary to divide the pretax profit by the effective tax rate.
FALSE - (ONE MINUS THE EFFECTIVE TAX RATE)
The margin of safety is an effective measure of risk for a company.
TRUE
The margin of safety is computed by dividing 1 by the degree of operating leverage.
TRUE
There is an inverse relationship between degree of operating leverage and the margin of safety.
TRUE
