Cost-Volume-Profit Analysis

Question 1

Objective for Cost-Volume-Profit Analysis

Answer 1

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

Question 2

Five-Step Decision Making Process

Answer 2

1. Identify problem and uncertainties
2. Obtain Information
3. Make predictions about the future
4. Make decisions by choosing between alternatives, using the CVP analysis
5. Implement the decision, evaluate performance, and learn

Question 3

Contribution Margin

Answer 3

Sales-Variable Cost
Selling Price per Unit - Variable Cost per Unit

Total earnings left to pay fixed expenses

Question 4

Contribution Margin Percentage

Answer 4

Contribution Margin / Sales

Question 5

Operating Income

Answer 5

Sales - Variable Costs - Fixed Costs

Question 6

Breakeven

Answer 6

Sales - Variable Costs - Fixed Costs = 0

Fixed Costs / Contribution Margin per Unit / Sales Price per Unit

Question 7

Breakeven Units

Answer 7

Fixed Costs / Contribution Margin Per Unit

Question 8

Breakeven Revenues

Answer 8

Breakeven Units * Selling Price

Question 9

Target Operating Income

Answer 9

(Fixed Costs + Target Operating Income) / Contribution Margin Per Unit

Target * Sales Price

Question 10

Revenues Needed to Earn Target Operating Income

Answer 10

(Fixed Costs + Target Operating Income) / Contribution Margin %

Question 11

Slope for total cost line

Answer 11

Variable cost per unit

Question 12

Slope for revenue line

Answer 12

Selling Price

Question 13

Net Income

Answer 13

After tax profit

Operating Income * (1-Tax)

Question 14

Margin of Safety

Answer 14

Measures the distance between budgeted sales and breakeven sales

Target (Budgeted) Revenues - Breakeven Revenues

Question 15

Margin of Safety Ratio

Answer 15

Removes the firm’s size from the output to put in a percentage

Margin of Safety / Target Revenues

Question 16

Operating Leverage

Answer 16

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

Question 17

Effects of multiple products on CVP

Answer 17

Use weighted average contribution margin of a product

Assumes a constant mix of different levels of total unit sales

Question 18

Assumptions for CVP

Answer 18

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