EXAM 2 Flashcards by Estefany Hernandez

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

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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

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What’s the key relation for Cost Volume Profit (CVP) analysis?

Profit Equation

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What’s the formula for the profit equation?

Operating Profit = Total Revenues (TR) - Total Costs (TC)

P = TR - TC

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Total revenues and total costs are likely to be affected by the 1) _____ in the amount of 2) ____

1) changes
2) output

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Cost ______ distinguishes whether costs are fixed or variable

behavior

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What’s the full Profit formula?

Profit = (_____ - ________) x ________ - ______

Profit = (Price - Variable costs) x Units of Output - Fixed Costs

P = (P-V)X-F

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An important thing for decision making is whether costs are 1) ____ or _____. Were concerned about the 2) _____ behavior

1) fixed or variable
2) cost

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Define breakeven point

is the 1) ____ level at which profit equals 2) ___

1) volume
2) zero

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Define contribution margin ratio

contribution margin as a percentage of 1) ___

1) sales revenue

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What’s the formula for contribution margin ratio ?

_____/ _____ _____

contribution margin / sales

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Define Profit Volume Analysis

Version of 1) ____ - v___ –profit analysis using a 2) ___ ____ line

1) cost-volume–profit
2) single product

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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

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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

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Break even volume in units =

Fixed costs/Unit contribution Margin

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Cost behavior distinguishes whether costs are ____

fixed or variable

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The slope of the profit-volume line represents ____

unit contribution margin

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SB 3-2

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Define Cost structure

Proportion of 1) _____ and ____ costs to 2) ___ ____ of an organization.

1) fixed and variable
2) total costs

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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

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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

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How is operating leverage calculated?

______ divided by ______

contribution margin divided by operating income

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Operating Leverage can vary 1) ____ an industry as well as 2) ____ industries

1) within
2) between

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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

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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 2. 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. 3. 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 1. The 1)__ of throughout 2)__ 2. Minimizing 3) ___ 3. Minimizing other 4)__ ___

1) rate 2) contribution 3) investments 4) operating costs