Cost-Volume-Profit Analysis Flashcards
Objective for Cost-Volume-Profit Analysis
To see how profits will change as the units sold of a product or service changes
Understanding the relationship among the selling price, variable costs, and fixed costs
Five-Step Decision Making Process
- Identify problem and uncertainties
- Obtain Information
- Make predictions about the future
- Make decisions by choosing between alternatives, using the CVP analysis
- Implement the decision, evaluate performance, and learn
Contribution Margin
Sales-Variable Cost
Selling Price per Unit - Variable Cost per Unit
Total earnings left to pay fixed expenses
Contribution Margin Percentage
Contribution Margin / Sales
Operating Income
Sales - Variable Costs - Fixed Costs
Breakeven
Sales - Variable Costs - Fixed Costs = 0
Fixed Costs / Contribution Margin per Unit / Sales Price per Unit
Breakeven Units
Fixed Costs / Contribution Margin Per Unit
Breakeven Revenues
Breakeven Units * Selling Price
Target Operating Income
(Fixed Costs + Target Operating Income) / Contribution Margin Per Unit
Target * Sales Price
Revenues Needed to Earn Target Operating Income
(Fixed Costs + Target Operating Income) / Contribution Margin %
Slope for total cost line
Variable cost per unit
Slope for revenue line
Selling Price
Net Income
After tax profit
Operating Income * (1-Tax)
Margin of Safety
Measures the distance between budgeted sales and breakeven sales
Target (Budgeted) Revenues - Breakeven Revenues
Margin of Safety Ratio
Removes the firm’s size from the output to put in a percentage
Margin of Safety / Target Revenues
Operating Leverage
Describes the degree to which to which fixed costs exist in a company’s cost structure
How sensitive your company is to fixed costs
Contribution Margin / Operating Income
Effects of multiple products on CVP
Use weighted average contribution margin of a product
Assumes a constant mix of different levels of total unit sales
Assumptions for CVP
Number of units sold is the only revenue and cost driver
Total costs consist of fixed and variable costs
Revenue and costs behave and can be graphed as a linear function
Selling price, variable cost per unit, and fixed costs are ll known and constant
Single product (unless weights are known)
Time value of money is ignored
