CVP analysis

Question 1

what is CVP analysis

Answer 1

a tool for understanding the interaction of revenues with fixed and variable costs

Question 2

assumptions of CVP

Answer 2

-cost and revenue relationships are predictable and linear. these relationships are true over the relevant range of activity and specified time span
-unit selling prices do not change
-inventory levels do not change; production equals sales
-total variable costs change proportionally with volume, but unit variable costs do not change
-fixed costs remain constant over the relevant range of volume, but fixed costs vary indirectly with volume
-the relevant range of volume may vary based on the time frame being considered
-the revenue (sales) mix does not change
-the time value of money is ignored

Question 3

indifference point

Answer 3

the point at which management is indifferent to the choice between two options

Question 4

example of an indifference point

Answer 4

Question 5

target income taking into account tax rates

Answer 5

fixed costs + [target net income / (1.0 - tax rate)] / UCM

Question 6

targeted operating income

Answer 6

sales - variable costs - fixed costs

Question 7

multi-product breakeven point

Answer 7

total fixed costs / weighted-average UCM