Test 4 Flashcards
What does a Cost-Volume Profit (CVP) Analysis study?
the relations among revenues, costs, and volumes and their effect on profit to help managers make a decision
What is the Profit Equation?
Operating Profit = Total Revenues (RV) - Total Costs (TC)
TRUE/FALSE: Both Total Revenues and Total Costs are likely to be affected by changes in output.
TRUE
What is the formula for profit?
(P - V) * X - F
When Units go up, profit goes ____________ and when Units go down, profit goes __________.
Up
Down
How do you get to the Contribution Margin? What about the Unit Contribution Margin?
Sales - Variable Costs = Cont. Margin
Price Per Unit - Var. Cost Per Unit = Cont. Margin
What does a CVP analysis help to answer?
- What volume is required to break even (earning zero profit)?
- What volume is required to achieve a target profit?
What is CVP used for?
- Computing break-even point
- Determining optimal sales volume
- Determining optimal pricing policies
What is the formula for finding the UNIT break-even point?
Fixed Costs / Contribution Margin per unit
Cont. Margin per unit = (P - V)
What is the formula for finding the SALES DOLLARS break-even point?
Fixed Costs / Contribution Margin Ratio
Cont. Margin Ratio = ((P - V)/P)
What is the formula for finding the UNIT target point?
(Fixed Costs + Target Profit) / Contribution Margin per unit
Cont. Margin per unit = (P - V)
What is the formula for finding the SALES DOLLARS target point?
(Fixed Costs + Target Profit) / Contribution Margin Ratio
Cont. Margin Ratio = ((P - V)/P)
What does Operating Leverage describe?
the extent to which an organization’s cost structure is made up of fixed costs
What does Operating Leverage measure?
the sensitivity of a firm’s profit to changes in volume
What are some characteristics of HIGH Operating Leverage firms?
-Have high proportion of fixed costs and low proportion of variable costs
-Have high contribution margin
-Have high break-even point
-Once the break-even point is reached, profit increases at a high rate
-A small change in market demand will result in larger swings in profit (positive or negative)
What are some characteristics of LOW Operating Leverage firms?
-Have low proporation of fixed costs and high proportion of variable costs
- Have low contribution margin
-Have a low break-even point
-Once the break-even point is reached, profit increases at a low rate
- A small change in market demand will result in small swings in profit
- More flexible and better at withstanding economic downturns
What is a Fixed Product Mix?
when managers define a package or bundle of products and then compute the break-even or target volume for a package
What is the Weighted-Average Contribution Margin?
assumes a constant product mix
this method calculates a weighted average contribution margin per unit of all of the products considered
In looking at Multi-Product Analysis with Fixed Product Mix and Weighted-Average Contribution Margin, both methods _____________.
Give the same results!
What is Differential Analysis?
the process of comparing revenues and costs of one or more alternative actions and comparing these estimates to the status quo
For which decisions are Differential Analysis applicable?
Both SHORT and LONG-run Decisions
What is the Short-Run?
period of time which capacity will be unchanged (fixed), usually one year
What are Differential Costs?
costs that DIFFER among ONE OR MORE alternatives
*THESE CHANGE IN RESPONSE TO ALTERNATIVE COURSES OF ACTION!
Can Differential Costs be both Variable and Fixed Costs?
YES!
What are Sunk Costs?
costs incurred in the PAST that CANNOT be changed by present or future decisions
What is the Full (product) Cost?
the sum of the FIXED and VARIABLE manufacturing costs to sell a unit
What does the Full Cost include?
- variable costs of producing and selling the product
- a share of the organization’s fixed costs
What is a Special Order?
an order that will not affect other sales and is usually a short-run occurrence
What costs do decision-makers focus on when deciding whether or not to accept a special order?
Differential Costs
NOT FULL COSTS!
When is a Special Order usually accepted?
When idle capacity is adequate for the job
What does a Product Life Cycle cover?
the time from initial R&D to the time at which support to the customer ends
What does Life-Cycle Costing (or cradle-to-grave costing) track costs from?
from the START to FINISH for each product
What is the formula for Target Price?
Desired Profit Margin - Target Costs
What is Predatory Pricing?
the practice of setting a selling price below cost with the intent to harm competition by driving out competitors out of the marketing or by creating a barrier to entry for new competitors
What is Dumping?
occurs when a company exports its product to consumers in another country at an export price below its domestic price
What is Price Discrimination?
the practice of selling identical goods or services to different customers at different prices
What is Peak-Load Pricing?
the practice of setting prices highest when the quantity demanded for the product approaches the physical capacity to produce it (and lower at other times)
e.g., airline tickets
What is Price Fixing?
represents the agreement among business competitors to set prices at a particular level
e.g., OPEC
TRUE/FALSE: Make-or-Buy Decisions are SENSITIVE to volume.
TRUE
What must be considered in Make vs Buy Decisions?
the relevant costs include the variable manufacturing costs that can be SAVED
the fixed overhead that may be ELIMINATED
and the purchase price of the parts under consideration
What happens if a product line is DROPPED?
Direct Fixed costs to a division will GO AWAY with the disposal of the division
Allocated Fixed costs will NOT be eliminated if the division is closed
TRUE/FALSE: Financial statements prepared in accordance with GAAP do routinely provide differential cost information.
FALSE - they do NOT routinely provide differential cost information
