Lecture 3: CVP Analysis & Workshop 2 Flashcards
(15 cards)
What is break-even?
This is the sales volume at which all costs are covered and profit = 0
How do you calculate profit?
Profit = (Price - Variable Cost) * Q - Fixed Costs
How do you calculate the break-even point in units?
Fixed Costs / (Price - VC)
What is the contribution margin per unit?
The difference between price and variable costs per unit. This difference is to be used to cover all fixed costs and make a profit
How do you calculate the break-even point in $ revenue?
Fixed Costs / ((Price-VC)/Price)
This is the contribution margin ratio
What is a cost-volume-profit analysis?
How do changes in cost and volume affect profitability?
What is a contribution margin?
difference between selling price per unit and variable costs. It represents the portion of sales revenues that contributes to the coverage of fixed costs
How can the break-even point formula be used as a profit planning tool?
Set profit to desired profit instead of 0 and then formula to: Q = (FC + Profit) / (P – VC)
How do you calculate after-tax profit?
Net profit = Operating Profit * (1-Tax rate)
How do you perform a CVP analysis when there are multiple products involved?
When talking about multiple products, use average contribution margins for bundles of products
How do you calculate operating profit?
Operating profit = Net profit / (1-Tax rate)
How do you calculate operating income?
Sales Quantity * (Price - Unit Variable Cost) - Fixed Costs
Name 4 possible use cases of a CVP Analysis?
- How much firm’s need to sell to make profits
- What increases in sales is needed to make up a decrease in sales price to maintain same profit levels
- Sensitivity analysis and risk assessment (Margin of Safety)
- Decisions about production processes (degree of operating leverage)
What are low and high operating leverage?
Low operating leverage means low fixed costs compared to variable costs
High operating leverage means high fixed costs compared to variable costs
Name 2 ways to calculate the degree of operating leverage?
- CM / Operating income
- (Sales - Variable costs) / Operating income
