C. Section Flashcards
(32 cards)
Contribution Margin formula
= sales per unit/variable cost per unit
What is marginal cost
Is the cost of the next unit produced. It is calculated by taking the change in costs between two levels of output ( volume)
Variable expenses formula
= (1-cm) ( sales amount)
Variable cost per unit formula
= DM/unit + DL /unit + VO/unit + variable selling costs/ unit
How does total cost remain for fixed cost
The total cost for fixed costs remain constant within the relevant range of activity while the unit costs increases or decreases within change in activity.
Breakeven analysis
- Linearity - the cost and revenue functions are linear over the relevant range.
- Certainty - the parameters, prices, unit variable costs and fixed costs are presumed to be constants over the relevant range.
- A single product or defined product mix
- Production = sales
What is weighted average contribution margin
Is the sum of ( unit contribution margin * relative weight) for each product.
CVP analysis
- raising or lowering existing prices
- introducing a new product or services
- setting prices for new products and sevies
- expanding product and service markets
- deciding whether to replace an existing piece of equipment
- deciding whether to make or buy product or services
What is minimum accepted price=
Variable cost +. Opportunity costs
What is perfectly inelastic demand mean?
- demand will not change due to change in price
- necessary items such as insulin have perfectly inelastic demand
What is relatively elastic
People buy less at higher pries but the percent change in quantity demanded is greater than the percent change in price.
- when the change in the amount people buy is greater than the change in price, either higher or lower; a price change will cause an even larger change in quantity demanded.
What is perfectly elasticity
That a small decrease in price will result in a substantially increased demand or a small increase in price will result in demand falling to zero.
What is Quantity function deployment (QFD)
Is a structured method in which customer requirements for a product or service are transferred into appropriate technical requirements at each stage of development and production.
- the process is often referred to as “listening to the voice of the customer”
What is price inelastic
When a product is prices inelastic and prices are increased will result in increased product revenue and operating profits.
- when the demand for a product is price inelastic, a change in price will not affect the demand for the product.
What is target pricing.
Is generally used in a competitive environment to enable businesses to manage operations profitability.
- represents the maximum allowable price that can be charged for the product or service.
- is an estimate of the amount that potential customer would be willing to pay based on their value perceptions.
What happens in a long-run profit maximizing equilibrium in a perfectly competitive market
- price equals marginal cost
- price equals avg. total cost
- marginal costs equal marginal revenue.
- economic profit is zero
What is cost-plus pricing
= unit cost * ( 1 + markup % on unit cost) = selling price
Inelastic demand curve
Lowering prices causes a decrease in total revenue. Even if the lower prices results in greater demand, the revenue lost because of the decreased price will be more that offset the revenue gained from the increase in quantity demand.
What is traditional pricing
- based on the idea that price equals cost plus profit margin.
Cost-based pricing is appropriate for?
Relatively unique products.
Elastic
A decrease in price will increase total revenue. Price elasticity of demand is the percent change in quantity demanded for a give percent change in price.
Price elasticity > 1 means that the percent change in quantity demanded is will exceed the percent change in price.
- a decrease in price will increase revenue.
What affects the demand of elasticity
Elasticity of demand for a product is a measure of the change in demand for the product given change in price.
- change in consumer income.
- change in prices of substitute or complementary products
- elasticity of demand increases with the number of substitute available.
What is opportunity costs
Is the cash flow foregone or sacrificed by choosing one option over the best alternative.
- it is the cost of pursuing one alternative as opposed to another.
What is differential revenue-
Is the difference in revenue between any two alternatives. The change in revenue may be in amount or timing.
