Unit 5: Cost-Volume-Profit (CVP) Analysis Flashcards
What is Cost-Volume-Profit Analysis trying to determine?
How much does our profit (or loss) vary depending on our level of sales?
Ramona helped organize a charity banquet and raffle.
The raffle prize was a brand new car costing $18,000.
The caterer charged $40 per person for the banquet.
The charity sold tickets to the banquet for $250/each.
How many people had to attend the banquet in order for the charity to break even?
Fixed cost = $18,000
Contribution Margin per Person = $250/person - $40/person = $210
$18,000 / $210 per person = 86 people to break even
Define mixed cost.
A cost that includes both a fixed portion and a variable portion.
ex. rent in a retail mall when the rental agreement requires the tenant to pay a base amount plus a percentage of sales.
What kind of cost is property taxes on a factory building?
a) Fixed cost
b) Opportunity cost
c) Variable cost
d) Mixed cost
a) Fixed cost
The property taxes may change each year, but that does not mean that they are variable. A variable cost is one that varies with the level of activity. Factory property taxes vary from year to year, but this variability is not caused by how many units are produced in the factory. Thus, with respect to level of activity, this cost is fixed.
What is the relationship between a fixed cost and the number of units sold?
Fixed cost per unit decreases as the number of units sold increases.
Define contribution margin.
What is left over from sales after paying variable costs to go towards paying fixed costs.
What the business owner gets to “keep.”
Sales - Variable Costs = Contribution Margin
What is the CVP Equation?
a) CVP Equation based on cost
b) CVP Equation based on units
c) CVP Equation based on VC Ratio
a) Sales Revenue - Variable Costs - Fixed Costs = Profit
b) (Sales Price x Units) - (Variable Cost x Units) - Fixed Costs = Profit
c) Sales Revenue - (Variable Cost Ratio x Sales Revenue) - Fixed Costs = Profit
When looking at a CVP Graph, what does the slope (rise/run) of the total revenue line represent?
Price per unit
When looking at a CVP Graph, what does the slope (rise/run) of the total cost line represent?
Variable cost per unit
When looking at a Profit Graph, what does the slope (rise/run) of the total profit line represent?
Contribution Margin per unit
How do you tell the difference between a CVP and Profit graph?
For a CVP graph, the sales revenue line always starts at zero (center axis).
On a Profit graph, the total profit line will start at a loss (starting on the Y-axis).
In a CVP graph, what is represented by the vertical-axis intercept of the total cost line?
Total fixed cost
Define sales mix.
The relative proportion of total sales dollars (or total units sold) that is represented by each of a company’s products.
The percentage of variable costs and contribution margin should always equal what?
100% of sales revenue
Define Margin of Safety.
Current Sales - Break-even Sales = Margin of Safety
The amount of sales units or sales dollars above the break-even point. It indicates the relationship between the current sales level and breakeven.
ex. Frankman Company sells one product - backpacks. The break-even point is 2,000 backpacks or $300,000. Frankman’s expected sales for the year is 5,000 backpacks or $750,000. Frankman has a margin of safety of 3,000 backpacks. Even if sales don’t reach the expected 5,000, Frankman won’t experience a loss unless sales drop more than 3,000 below expectation.
