Test 4 Flashcards
(42 cards)
What does a Cost-Volume Profit (CVP) Analysis study?
the relations among revenues, costs, and volumes and their effect on profit to help managers make a decision
What is the Profit Equation?
Operating Profit = Total Revenues (RV) - Total Costs (TC)
TRUE/FALSE: Both Total Revenues and Total Costs are likely to be affected by changes in output.
TRUE
What is the formula for profit?
(P - V) * X - F
When Units go up, profit goes ____________ and when Units go down, profit goes __________.
Up
Down
How do you get to the Contribution Margin? What about the Unit Contribution Margin?
Sales - Variable Costs = Cont. Margin
Price Per Unit - Var. Cost Per Unit = Cont. Margin
What does a CVP analysis help to answer?
- What volume is required to break even (earning zero profit)?
- What volume is required to achieve a target profit?
What is CVP used for?
- Computing break-even point
- Determining optimal sales volume
- Determining optimal pricing policies
What is the formula for finding the UNIT break-even point?
Fixed Costs / Contribution Margin per unit
Cont. Margin per unit = (P - V)
What is the formula for finding the SALES DOLLARS break-even point?
Fixed Costs / Contribution Margin Ratio
Cont. Margin Ratio = ((P - V)/P)
What is the formula for finding the UNIT target point?
(Fixed Costs + Target Profit) / Contribution Margin per unit
Cont. Margin per unit = (P - V)
What is the formula for finding the SALES DOLLARS target point?
(Fixed Costs + Target Profit) / Contribution Margin Ratio
Cont. Margin Ratio = ((P - V)/P)
What does Operating Leverage describe?
the extent to which an organization’s cost structure is made up of fixed costs
What does Operating Leverage measure?
the sensitivity of a firm’s profit to changes in volume
What are some characteristics of HIGH Operating Leverage firms?
-Have high proportion of fixed costs and low proportion of variable costs
-Have high contribution margin
-Have high break-even point
-Once the break-even point is reached, profit increases at a high rate
-A small change in market demand will result in larger swings in profit (positive or negative)
What are some characteristics of LOW Operating Leverage firms?
-Have low proporation of fixed costs and high proportion of variable costs
- Have low contribution margin
-Have a low break-even point
-Once the break-even point is reached, profit increases at a low rate
- A small change in market demand will result in small swings in profit
- More flexible and better at withstanding economic downturns
What is a Fixed Product Mix?
when managers define a package or bundle of products and then compute the break-even or target volume for a package
What is the Weighted-Average Contribution Margin?
assumes a constant product mix
this method calculates a weighted average contribution margin per unit of all of the products considered
In looking at Multi-Product Analysis with Fixed Product Mix and Weighted-Average Contribution Margin, both methods _____________.
Give the same results!
What is Differential Analysis?
the process of comparing revenues and costs of one or more alternative actions and comparing these estimates to the status quo
For which decisions are Differential Analysis applicable?
Both SHORT and LONG-run Decisions
What is the Short-Run?
period of time which capacity will be unchanged (fixed), usually one year
What are Differential Costs?
costs that DIFFER among ONE OR MORE alternatives
*THESE CHANGE IN RESPONSE TO ALTERNATIVE COURSES OF ACTION!
Can Differential Costs be both Variable and Fixed Costs?
YES!
