Week 2 (Cost-Volume-Profit) Flashcards
-one of the most powerful tools that managers have at their disposal.
-it helps mangers understand the relationship among cost, volume, and profit by focusing on interactions among the following elements:
1. prices of products
2. volume or level of activity
3. per unit variable costs
4. total fixed costs
what is this ?
cost-volume-profit (CVP) analysis
What are the 4 basic elements of a cost-volume-profit analysis ?
- break even calculations
- target profit analysis
- margin of safety
- operating leverage
represents the amount of revenue that is available to:
1. pay (cover) fixed costs
2. contribute toward a profit
what is this ?
contribution margin
is the point where:
-no profit is earned (or loss incurred)
-sales = variable costs + fixed costs
what is this ?
break even point
at break even point, net income = ?
0
is a measure of firm riskiness. it measures the amount sales can fall before losses occur
what is this ?
margin of safety
the higher the margin of safety, the higher or lower risk of reporting losses ?
lower
if a company’s sales were to increase by 10%, would that translate to a 10% increase in net income ?
No. net income will increase by more than 10 % when sales increase 10%
is a measure of how sensitive net income is to percentage changes in sales
what is this ?
operating leverage
-a measure, at a given level of sales, of how a percentage change in sales volume will impact net income.
-tells us the percentage change in net income for every 1% change in sales
what is this ?
degree of operating leverage
the relative combination of products being sold by a firm
what is this ?
sales mix
allows us to convert a multiple product problem into a single product CVP format
what is this ?
package contribution margin per unit
