EXAM 2 Flashcards
Define Cost Volume Profit (CVP) Analysis
Study of the relationships among 1) r___, co___, and v__ and their effect on 2) ___
-because managers are concerned about the 3) ____ of their decisions on 4) _____
1) revenues, costs, and volume
2) profit
3) impact
4) profit
Assumptions and Limitations of CVP Analysis
Although the CVP model is a very strong tool, the output is dependent upon the 1) as_____ made by 2) co____ an___
-these assumptions include which costs are 3) ____ and ___
1) assumptions
2) cost analysis
3) fixed and variable
What’s the key relation for Cost Volume Profit (CVP) analysis?
Profit Equation
What’s the formula for the profit equation?
Operating Profit = Total Revenues (TR) - Total Costs (TC)
P = TR - TC
Total revenues and total costs are likely to be affected by the 1) _____ in the amount of 2) ____
1) changes
2) output
Cost ______ distinguishes whether costs are fixed or variable
behavior
What’s the full Profit formula?
Profit = (_____ - ________) x ________ - ______
Profit = (Price - Variable costs) x Units of Output - Fixed Costs
P = (P-V)X-F
An important thing for decision making is whether costs are 1) ____ or _____. Were concerned about the 2) _____ behavior
1) fixed or variable
2) cost
Define breakeven point
is the 1) ____ level at which profit equals 2) ___
1) volume
2) zero
Define contribution margin ratio
contribution margin as a percentage of 1) ___
1) sales revenue
What’s the formula for contribution margin ratio ?
_____/ _____ _____
contribution margin / sales
Define Profit Volume Analysis
Version of 1) ____ - v___ –profit analysis using a 2) ___ ____ line
1) cost-volume–profit
2) single product
What’s the formula for target profit in units ?
Target Profit Units = _____ + _____ ____ / ______ per unit
Target Profit Units = Fixed costs + Target Profit / Contribution Margin per unit
What’s the formula for target profit in sales dollars?
Target Profit Sales Dollars = _____ + ______ ____/ _____ margin ___
Target Profit Sales Dollars = Fixed costs + Target Profit/ Contribution Margin Ratio
Break even volume in units =
Fixed costs/Unit contribution Margin
Cost behavior distinguishes whether costs are ____
fixed or variable
The slope of the profit-volume line represents ____
unit contribution margin
SB 3-2
Define Cost structure
Proportion of 1) _____ and ____ costs to 2) ___ ____ of an organization.
1) fixed and variable
2) total costs
Cost structure 1) ___ widely among 2) ____ and among firms within an industry.
An organization’s cost structure has a significant 3) ___ on the sensitivity of its 4) ____ to changes in 5)
____
1) differ
2) industries
3) effect
4) profits
5) volume
Define Operating Leverage
Extent to which an organization’s cost structure is made up of 1) ___. It is calculated as 2) ___ __divided by 3) ___
organizations cost structure has a significant effect on the sensitivity of its profits
1) fixed costs
2) contribution margin
3) operating profit
How is operating leverage calculated?
______ divided by ______
contribution margin divided by operating income
Operating Leverage can vary 1) ____ an industry as well as 2) ____ industries
1) within
2) between
Operating leverage is high in firms with a 2) ____ proportion of 3) ___ costs and 4) ___ proportion of 5) ____ costs and results in a high 6) _____ per ___
The higher the firms fixed costs, the higher the 8) _____ point. (but once the break-even point has been reached, 9) ___ at high rate)
2) high
3) fixed
4) low
5) variable
6) contribution margin per unit
8) break-even
9) profit increases
Companies with 1) _____ ___ costs have the ability to be more 2) ____ to 3) ___ in market 4) ___ than do companies with 5) ____ ____ costs and are better able to 6) ____ times
1) lower fixed
2) flexible
3) changes
4) demands
5) higher fixed
6) survive tough
Define Margin of Safety
The excess of 1) ____ or___ over the 2) ____
this tells managers the margin between current 3) ___ and the 4)____point.
-basically, the margin of safety indicates the risk of losing money that a company faces (that is the amount of sales can fall before the company is in the loss area)
1) projected or actual sales
2) break-even volume
3) sales
4) break-even
What’s the Margin of Safety formula?
_____ - _____ = Margin of Safety
Sales - break-even
Define Margin of Safety Percentage
The excess of 1) ____ or ____ over the 2) ____ volume expressed as a 3) ____ of the actual 4) ___
1) projected or actual sales
2) break-even
3) percentage
4) volume
SB 3-3
Taxes affect the analysis by changing the _____
target profit
What’s the formula for before-tax income?
after tax income/ (1-tax rate)
What’s the formula to find target volume in units, when there’s tax rate involved ?
target volume units = f____ _____ + (ta___ ____/(1- ____ ____ )/unit _______ ________
What’s the formula to find target volume in sales dollars when there’s tax rate involved ?
target volume units = fixed costs + (target profit /(1-tax rate)/unit contribution margin
Target Profit Sales Dollars = Fixed Costs + (Target Profit/1 – Tax Rate)/Unit Contribution Margin Ratio
It’s the same but for sales dollars you divided by the contribution margin ratio
Break down Profit
Profit = 1) ______ - _____ (were breaking it down)
= 2) _____ – _____ Costs – ____ Costs
= 3) (____ ____ x ____) – (Unit ____ Costs x _____) – ____ Costs
= 4) _____ x (____ Price – Unit _____ Costs) – ____ Costs
1) Revenues – Cost (were breaking it down)
= 2) Revenues – Variable Costs – Fixed Costs
= 3) (Sales Price x Units) – (Unit Variable Costs x Units) – Fixed Costs
= Units x (Sales Price – Unit Variable Costs) – Fixed Costs
What’s the formula for Unit Contribution Margin (also called contribution margin per unit)
______ + ___ ___ / (___ ____ – Unit _____ _____)
Profit + Fixed Costs / (Sales Price – Unit Variable Costs)
Look at the example of operating leverage in your notes (or took a picture on your phone [highlighted])
What’s the formula for Margin of Safety Percentage?
____ / ____
Margin of Safety / Sales
What’s the formula for Break-even (or break-even in units same thing )
______ /______ per unit (also called unit ______)
fixed costs/contribution margin per unit (also called unit contribution margin)
or
fixed costs/contribution margin ratio
-depending on the situation
SB 4-1
Every decision that a manager makes requires 1) _____ one or more proposed 2) ____ with the 3) ____ ____. (If there is only one alternative and the status quo is 4) u____, there is 5) ___ ___ to make)
The task is to determine how costs in 6) p___and 7) pr____ in general will be 8) a____ if one 9) al____ is chosen 10) a____. This is called 11) ____ an___
1) comparing
2) alternatives
3) status quo
4) unacceptable
5) no decision to make
7) profits
8) affected
9) alternative
10) another
11) differential analysis
Define Differential Analysis
the process of estimating 1) ____ and ___ of 2) ____ actions available to 3) d___ and of 4) c____ these estimates to the 5) st____ ___
1) revenues and costs
2) alternative
3) decision makers
4) comparing
5) status quo
Although decision-makers are usually interested in all differences between alternatives, including financial and nonfinancial ones. We focus on 1) ____ ___ involving 2) ___ and ___
1) financial decisons
2) cost and revenues
Differential analysis is used for both 1)_____ ____ decisions and 2) ____ ____ decisions
1) short-run
2) long-run
Define the short run
the period of time over which capacity will be 1) ___, usually 2) ___ (or __)
1) unchanged
2) 1 year (or less)
One important distinction between short-run and long-run decisions whether the 1) ___ ___ of m___ is a significant factor
Short-run decisions affect 2) ____ for such a 3) ___ period of time that the time value of money is 4) im___ and ___
So, the amount of cash flows is 5) ____ for short-run analysis, but the 6) ___ of the flows is assumed to be 7) ______. If an action affects cash flows over a 8) ___ period of time (usually more than a 9) ___), the time value of money is 10) ___
1) timing value of money
2) cash flow
3) short
4) immaterial and ignored
5) important
6) timing
7) unimportant
8) longer
9) year
10) considered
Define Differential Costs
1) c___ in response to 2) al___ courses of action
with 3) ___ or more 4) ___. Costs that 5) ___ am___ or ___ alternatives
1) change
2) alternative
3) 2
4) alternatives
5) differ among or between
Both 1) ____ and ___ costs may be differential costs.
Variable costs are differential when a decision involves possible changes in 2) ___
1) variable and fixed costs
2) volume
Define Sunk Costs
incurred in the 1) ___ that 2) __ be changed by 3) ___/___ decisions (regardless of the decision)
sunk cost are 4) __ relevant for making 5) __
1) past
2) cannot
3) present/future
4) not
5) decisions
Sunk costs can’t be differential because they will be the 1) ____ for all decisions
EX.
2) _____ and ___ already purchased, for which there are no markets for used oor preowned goods
1) same
2) material and equipment
Sunk cost shows up as some type of 1) ___
also deals with 2) ___
1) depreciation
2) time
Operating profit under the status quo and the alternative is called 0) ____ ____
-the difference between them is called differential format
Advantages of Total Format
-all the 1) _____ is 2) av___so it’s 3) ____ to derive the differential format if desired
-provides information to 4) ____ about the total 5) ____ required if one alternative is chosen
Advantage of Differential Format
-highlights differences between 6) ____
0) total format
1) information
2) available
3) easy
4) managers
5) resource
6) alternatives
Define Full Cost (also called full 1) ___ cost)
Def: the sum of all manufacturing costs and selling a unit/product (both fixed and variable costs)
describes a product’s costs that includes
-the 2) ____ costs of 3) p____ and ____g the product
-a share of the organization’s 4) ___ costs
Sometimes decision-makers use these full costs 5) ____ thinking that they are 6) ____ costs and fall victim to the 7) ful____ ___
1) product
2) variable
3) producing and selling
4) fixed
5) mistakenly
6) variable
7) full-cost fallacy
All costs must be covered in the 1) ____ or the company fails
1) long run
Differential Analysis and Pricing Decisions
Variable cost must 1) __ be covered (in 2) ___ and __)
-Fixed Costs must be covered in the 3)__ (4) ______ have to be covered in the 5) ____)
-but for incremental (meaning change) in fixed costs should be covered in the 6) ___
1) always
2) short and long run
3) long run
4) doesn’t
5) short run
6) short run
Short Run V Long Run Pricing Decisions
Short run pricing decision – 1) __ than a 2) ___ | pricing a 3) __ tim___ s ____ o____
Long run pricing decision – 4) ___ than a 5) __ | pricing a 6) ___ ____
1) less
2) year
3) one time special order
4) longer
5) year
6) new product
Short run decisions include
- pricing for 1) ___ only spe___ o ___ with no 2) ___ term implications
- adjusting product 3) __ and 4) ___ in a competitive market
1) one time only special order
2) long
3) mix
4) volume
-an order that will not affect other sales is usually ______ occurrence
short run
Long-run decisions include
pricing a main product in a large market in which there’s considerable leeway to set prices. Managers often use a time longer than a 1) ___
1) year
Define Special Order
an order that will 1) __ affect other 2) __ and usually a 3) ___ occurrence
-if special order is positive then 4) __ it, if it’s negative 5) ___ accept
1) not
2) sales
3) short run
4) accept
5) don’t
Most companies rely on full cost information reports when setting prices. Full cost is the total cost to produce and sell a unit
Using full costs for pricing decisions can be justified in 3 circumstances
1. When a firm enters into a long term contractual relationship to supply a product, most costs depend on the production decisions under the long term contract
- Many contracts for developing and producing customized products and those entered into with governmental agencies specify prices as full costs plus a markup. Prices set in regulated industries such as electric utilities also are based on full costs.
- Firms initially can set prices based on full costs and then make short-term adjustments to reflect market conditions. Accordingly, they adjust the prices of the product downward to acquire additional business. Conversely, when demand for their products is high, firms recgonize the greater likelihood that the existing capacity of resources is inadequate to satisfy all demand.
Long Run V Short Run Pricing
When used in pricing decisions, the differential costs required to sell/and or produce a product provide a floor.
In the short run, differential costs may be very 1) __
In the long run, however differential costs are much 2) _____ than in the short run. These costs must be 3)_____
1) low
2) higher
3) covered
Define Product Life Cycle
Time from initial 1) ______ and _____ to the time that 2) ____ to the 3) ____ ends. This is can take up several 4) ___
1) research and development
2) support
3) customer
4) years
Define Target Price
1) ____ price for a 2) _____/_____ that potential 3) c_____ will be 4) ____ to pay
1) estimated
2) product/service
3) customers
4) willing
Define Target Cost
estimated 1) l____ cost of product/service whose sale enables the company to 2) ach___ ____ ____
1) long-run
2) achieve target profit
Define Predatory Pricing
practice of setting price 1) ___ with the intent to drive 2) ___ out of 3) ___
-managers must set the price 4) _____ costs and intend 5) ____ competitors
-so, with little competition left in the market, the company has set predatory prices is able to act like a 6) ____ and then 7) ____ prices
Predatory pricing is
-1) ___ in the US
- has to be 2) __ term
1) below cost
2) competitors
3) business
4) below
5) harm
6) monopolist
7) raise
___________
1) illegal
2) short
Define Dumping
1) ___ a product to another 2) __ at a price 3) __ domestic price
1) exporting
2) country
3) below
Define Price Discrimination
the practice of selling 1) ___ to different 2) __ at different 3) ___
-it requires 4) _____ seg____
-price discrimination benefits companies because it enable them to 5) ___ products to customers who might 6) ___ otherwise purchase them (ex. an airline who has empty seats would rather sell them at a discount then not at all)
certain types of price discrimination are 7) ___
1) identical goods
2) customers
3) prices
4) market segmentation
5) sell
6) not
7) illegal (ex. involving race, religion)
Define Peak-Load Pricing
the practice of setting 1) __ hi___ when the quantity 2) __ for the product approaches 3) ___
-price 4) ___
1) prices highest
2) demanded
3) capacity
4) gauging
Define Pricing fixing
0) a_____ among businesses to set 1) ___ at a particular 2) __
-the idea is to “fix” prices at a level higher than equilibrium
Price fixing is a particular 3) ___ and ___ problem because it’s not universally illegal (in developing countries it’s not illegal)
0) agreement
1) prices
2) level
3) legal and ethical (basically it’s illegal in the US but in outside the country it depends )
Use differential analysis to make ___ decisions
production
SB 4-2
Define make or buy decision
Decision concerning whether to make needed goods 1) _____ or ____ them from 2) ____ sources.
1) internally/purchase
2) outside
The make or buy decison is often part of a company’s 1) ___ strategy.
Ultimately, the make or buy decision is a question of which firm in the value chain can produce the product or service at the 2) ____ co___
1) long-run
2) lowest cost
We usually think of product choices as short run decisions because we have adopted the definition that in the short run, capacity is fixed.
But it in the long run it can be changed, in the long run, the constraints on available capacity can be overcome by capacity addition but in the short run capacity is limited
Define product choice
decision on what 1) ____ or _____ to o____ (p____ ___)
-which one gets made 2) ____ ? due to 3) co___
1) products or services to offer (product mix)
2) first
3) constraints
Define Constraint
activities, resources, or policies that 1)____ or b_____ the att___ of an objective.
1) limit or bound the attainment
Defined Contribution Margin per scarce resource
contribution margin per unit of a particular input with 1) _____ av____
1) limited availability
Define Add or Drop
decision to add/drop a 1) ____ line/___ business unit
1) product line/close
When considering closing a unit you have to think about the ___
nonfinancial impacts
Opportunity costs…
- are 1) __ routinely 2) __ with other accounting costs because they are 3) __ the result of 4) __ transactions
When a benefit is forgone, it’s 4.1) _____ possible to determine whether the opportunity cost estimate is 4.2) ___
-they’re hard to 5) e___/s___ to considerable uncertainty but that doesn’t mean they should be 6) __
-they represent a 7) __ part of the cost of an 8) ___
Opportunity costs can represent a 9) ___ part of the 10 ) ____ of an alternative
1) not
2) reported
3) not
4) completed
4.1) not
4.2) realistic
5) estimated/subject
6) ignored
7) substantial
8) alternative
9) substantial
10) cost
Define the theory of contracts
Focuses on 1) __ and __ management when faced with 2) ___
how can they deal with 3)____
1) revenue and cost
2) bottlenecks
3) constraints
Define bottlenecks
operation where the work required 1) __ p____
it’s a 2) ___
1) limits production
2) constraining resource
The theory of constraints focuses on 3 factors
- The 1)__ of throughout 2)__
- Minimizing 3) ___
- Minimizing other 4)__ ___
1) rate
2) contribution
3) investments
4) operating costs
