Lecture 10: Cost Volume Profit Analysis Flashcards
Cost volume profit analysis
Allows us to weigh up the different factors of pricing and develop a suitable price that results in a good balance between all factors
Relevant range
The level of activity in which the relationship between revenues and expenses are expected to be constant - an increase in expenses should be coupled with an increase in revenue
Fixed costs
Costs that remain constant despite changes in the level of activity inside the relevant age
Variable costs
Costs that change in direct proportion to changes in the level of activity inside the relevant range
Mixed costs
Costs that contain a fixed proportion and a variable portion
Contribution margin
total sales revenue - total variable costs
Contribution margin per unit
= Selling price per unit - variable cost per unit
Contribution margin ratio
= Contribution margin per unit/selling price per unit
*it the the portion of revenue that will go towards covering fixed costs
Break-even point of sales revenue
Level of revenue needed to be earned to meet fixed costs
= fixed costs / contribution margin ratio
Sales volume (units) to earn desired profit
The extra profit that the business needs to earn in order to satisfy shareholder returns
= (Fixed costs + desired profit)/(contribution margin per unit)
Sales mix ratio
= Volume of sales for each product / total volume
WACM and WACM per unit
WACM is calculated by multiplying the CMU for a product by the sales mix ratio and the WACM per unit is the addition of all these seperate WACM’s.
Break even volume of units
= fixed costs / WACM per unit
Volume per item
= break even volume of units x sales mix ratio
Margin of safety
Level that the expected sales could fall and still allow the business to cover its costs - measure of operational risk (percentage)
= (expected sales volume - break even volume) / expected volume of sales
