Week 10 - Lecture 10 Flashcards
(31 cards)
What is the behavior of fixed costs in relation to activity level?
Remains constant regardless of activity level.
Fixed costs decrease per unit as volume increases, spreading over more units.
How do variable costs behave in relation to activity?
Changes in direct proportion to activity.
Variable costs remain constant per unit.
What is a mixed cost?
Contains both fixed and variable elements.
Example: a $600 advertising fee + $500 per airing.
Define ‘Relevant Range’ in cost behavior.
Activity band over which cost assumptions hold; beyond this, fixed costs may change or variable rates differ.
What is the purpose of Cost-Volume-Profit (CVP) Analysis?
To perform ‘what-if’ forecasting for various financial scenarios.
What formula is used to calculate Contribution Margin (CM) per unit?
Selling Price per unit − Variable Cost per unit.
How is Total Contribution Margin calculated?
Total Revenue − Total Variable Costs.
What does each dollar of Contribution Margin contribute to?
First to fixed costs, then to profit.
How do you calculate break-even units?
Total Fixed Costs ÷ CM per unit.
What is the formula for break-even revenue?
Break-even units × Selling Price per unit.
In the candle stall example, how many units must be sold to break even?
2 candles.
What are the fixed costs in the Tennis Coaching example?
$600 (Bus) + $1,200 (Coach) = $1,800.
Calculate the Contribution Margin per player in the Tennis Coaching example.
$30.
How many players must participate to break even in the Tennis Coaching example?
30 players.
What is the formula for units needed for a target profit?
(Fixed Costs + Desired Profit) ÷ CM per unit.
What is Margin of Safety (MoS) in units?
Actual/Forecast units – Break-even units.
What does a high Operating Leverage indicate?
Higher fixed costs and lower variable costs increase profit sensitivity (risk).
List the assumptions of CVP analysis.
- Cost behavior is linear within relevant range.
- Costs can be classified as fixed or variable.
- Selling price, variable cost per unit, and total fixed costs are constant.
What are the uses of break-even data?
- Evaluate feasibility of new products/services.
- Set sales targets & profitability goals.
- Guide pricing or cost-reduction strategies.
- Resource allocation & production planning.
Define Relevant Costs.
Costs/income that differ among alternatives.
What is an Opportunity Cost?
Benefit foregone by choosing one option over the next best.
What are Avoidable Costs?
Costs that can be eliminated if an option is chosen.
Give an example of a Short-Term Non-Routine Decision.
Replace vs. upgrade equipment.
What is a Costing System?
Captures & reports resources used by cost objects.
