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