MA 5 CVP Flashcards
What does CVP analysis allow management to do?
Analyze sales and cost behaviours in order to evaluate profitability and guide decision-making
3 types of CVP analysis
Break even
Target profit
Estimating profit impact when change in variable
Define contribution margin (CM)
Sales price less variable costs
Define contribution margin ratio
Contribution margin in $ / Sales price
Break-even ratio in units and in $
Fixed cost / CM p/unit
Fixed cost / CM ratio
When calculating break-even, do you round-up or down?
Up to nearest unit or multiple of selling price
How do you reduce operating leverage?
Reduce fixed costs or convert to variable costs
Break-even ratio for multiple products in units and dollars
Fixed cost / WACM per unit
Fixed cost / WACM ratio
WACM per unit formula
Total CM / Total units (use % of sales as the CM)
WACM ratio
Total CM/ Total Sales IN DOLLARS
Target profit formula in units and dollars
FC + Target Profit / CM per unit
FC + Target Profit / CM ratio
3 key assumptions when using CVP
Selling price is constant - no promos/discounts/credits etc
Costs are linear and can be neatly divided into fixed and variable - not usually the case but is ignored for CVP
In multiproduct companies sales mix is constant
