Accounting 2 - Cost-Volume-Profit Analysis (5.5) Flashcards
What does the “Law of Demand” state?
It states that as selling prices rise, demand - or sales volume - will decrease, but as selling prices decrease, demand will increase. At the same time, as the volume of sales increases, so too will some costs.
What is a Cost-Volume-Profit Analysis?
An analysis tool that allows a business to determine a selling price or volume of sales that will let them achieve a specific profit goal.
What is a break-even point?
The level of sales where total revenue equals total expenses and the business makes neither a profit nor a loss.
What two costs to does a CVP use?
Fixed and Variable.
What is a variable cost?
They are costs that vary directly with the level of activity or the volume of sales.
What is an example of a variable cost?
The cost of ingredients on a pizza, or the cost of the parts used in making a product would be considered to be variable costs because if not goods are sold, no costs are incurred.
What is fixed cost?
They are costs that do no vary with the level of activity.
What are common examples of fixed cost?
Rent, Insurance and Salaries, which are based on a period of time rather than a number of sales.
Can fixed cost change?
Yes, they are only independent of the volume of sales. However, they are normally fixed within certain parameters such as: Time and Range of Activity.
What is the parameter of time?
A cost is usually only fixed for a specified period of time and when this period of time expires the cost may change. Once the change happens if will become fixed again.
What is the parameter of Range of Activity?
A cost is usually only fixed for a specified amount of activity, and if the volume of sales increase beyond a certain point then the cost may change.
What is a good example for both?
Rent, as rent is normally fixed for contractual period but when the time is up, the rent price can change and become fixed again. If a business is selling 100 shirts and wants to increase to 200 shirts, they will have to upgrade to a bigger premise, this will change the cost.
What is the cost-volume-profit formula?
Quantity to be sold= (Total Fixed costs + Profit) / (Selling price per unit - Variable cost per unit)
What does the cost-volume-profit formula show/calculate?
It calculates how many products need to be sold in order to break even
What is the sales revenue formula?
Sales Revenue = Selling Price * Quantity to be sold
Examples
=$25 * 40 Birdhouse
= $1000
