Sec C - Decision Analysis

Question 1

Cost / Volume / Profit (CVP) Analysis

Answer 1

OP = S - VC - FC

OP = Operating Profit

S = Sales

VC = Variable Costs

FC = Fixed Costs

OP = PX - VX - FC

P = Sales Price Per Unit

X = Number of Units Sold

Question 2

Break Even Point (BEP)

Answer 2

Break Even Point (BEP) in units:

      Total Fixed Costs ———————————————-  Contribution Margin per Unit

Break Even Point (BEP) in dollars:

      Total Fixed Costs ———————————————-   Contribution Margin Ratio

Question 3

Multiple Product Break-Even Point

Answer 3

Multiple Product Break-Even Point =

     Total Fixed Costs ————————————————— Weighted Average CM per Unit

Question 4

Margin of Safety

Answer 4

Margin of Safety =

Amount that the actual or budgeted and sales can decrease before incurring a loss

Margin of Safety Ratio =

Margin of Safety
—————————
Total Sales

Question 5

Allowable Cost

Answer 5

Allowable Cost =

Difference between the target price and the target profit.

This represents the maximum unit cost the company can sustain while still meeting its profit goal.

Question 6

Target Cost Per Unit

Answer 6

Target Cost Per Unit =

(1 - Profit target rate) x Total sales
———————————————————
Number of units sold

Question 7

Cost Plus Target Rate of Return

Answer 7

Cost Plus Target Rate of Return =

Total Variable Costs 
\+ Total Fixed Costs 
\+ (Target Rate of Return x Return Measure)
———————————————————————
Number of Units Sold

Question 8

Price Elasticity / Midpoint Formula

Answer 8

Price Elasticity / Midpoint Formula =

Ep = | Q2 - Q1 |
| ————— | } average Δ demand
| Q2 + Q1 |

      ———————-

     |      P2 - P1     |
     |    —————-  |   } average Δ price
     |      P2 + P1     |

Ep >1 means product has elastic demand
Ep <1 means inelastic demand, consumers not sensitive to price, demand stays sane regardless