Cours 2 Flashcards
What is the cost-Volume-Profit (CVP) Analysis?
- It is a critical factor in management decisions and profit planning.
- It considers the interrelationships among the five components of CVP analysis.
- It is analyzing the effects of changes in costs and volume on a company’s profits.
What are the 5 components of CVP analysis?
- Volume or level of activity (quantity)
- Unit selling price
- Unit variable costs
- Total fixed costs
- Sales mix
What are the assumptions regarding the CVP analysis?
- Cost and revenue behavior is assumed to be linear throughout the relevant range of the activity index.
- All costs can be classified as either variable or fixed with reasonable accuracy.
- Changes in activity are the only factors that affect costs.
- Inventory levels remain constant - all units produced are sold in the period in which they are produced.
- When more than one type of product is sold, the sales mix will remain constant.
The CVP allows us to analyze the effect of operating income on what aspect?
- A change in cost structure
- A change in activity level
- A change in the product mix, if analyzing multiple products.
What is the contribution margin?
It is the excess of selling price overall variable costs.
How do you calculate the unit contribution margin?
Per-unit selling price - Per-unit variable cost
How do you calculate the total contribution margin?
Per-unit CM * Sales volume
What is the formula for contribution Margin as a percentage of the selling price?
Per-unit CM / Per-unit selling price
or
Total CM / Total sales
What is the break-even point?
- It is the activity level at which revenues are equal to costs.
- It is the point of zero profit (neither income nor loss).
- It is the activity level at which the company starts making products.
- It can be calculated in units or in dollar sales.
What is the margin of safety?
It is the difference between the actual or expected activity level and sales at the break-even point.
What is the potential income?
- It represents the maximum operating income that the company can hope for if it operates at full capacity.
- It measures the maximum profit attainable.
- It helps quantify the maximum net income possible (in the ideal case).
What is the indifference point?
It represents the activity level at which two options with different cost structures result in the same operating income.
Give examples of qualitative arguments to complement the CVP analysis.
- Are there any risks/issues associated with your decision?
- What might be the reaction of students if you choose a new room?
- Could you consider alternatives to increase income?
What is the sales mix?
- It is important because different products have substantially different contribution margins.
- Companies often sell more than one product.
- Critical decision: what mix of products to sell?
What does the weighted average CM take into account?
It takes into account the relative importance of each of the products.
Draw a graph of the CVP analysis.
