Week 3 Flashcards
(48 cards)
What does Cost Volume Profit Analysis examine?
What happens when we change the inputs such as price, quantity, cost structure, etc.
What is the contribution margin (CM) formula?
CM = Sales – Variable Expenses
What is the contribution margin ratio?
CM Ratio = Total CM / Total Sales
What are the basic assumptions of Cost-Volume-Profit (CVP) analysis?
- Selling price is constant
- Costs are linear and can be accurately divided into variable and fixed elements
- Variable costs per unit are constant
- Fixed costs are constant in total over the entire relevant range
- In multiproduct companies, the sales mix is constant
- In manufacturing companies, inventories do not change
What is the break-even point?
The sales volume at which total revenue equals total costs, resulting in zero profit.
How do you calculate the degree of operating leverage?
Degree of operating leverage = Contribution Margin / Net Operating Income
What is the significance of the margin of safety?
It measures how much sales can drop before the company reaches its break-even point.
What does a contribution income statement emphasize?
It emphasizes cost behavior and the impact on profits of changes in selling price, cost, or volume.
How can changes in variable costs affect contribution margin?
Changes in variable costs can directly impact the contribution margin per unit.
Fill in the blank: The contribution margin is calculated as Sales minus _______.
Variable Expenses
True or False: The contribution margin ratio can be used to predict the impact of sales changes on contribution margin.
True
What happens to net operating income when selling one additional unit at a contribution margin of $200?
Net operating income increases by $200.
What is the formula to compute changes in contribution margin dollars?
Change in CM dollars = CM Ratio x Change in sales
What is the impact on net income if total contribution margin required to break even is $80,000?
The company must generate $80,000 in total CM to break even.
What is the effect of selling price changes on contribution margin?
Changes in selling price directly affect the contribution margin.
What occurs when fixed costs increase?
Net operating income may decrease unless sales increase sufficiently.
Fill in the blank: A $50,000 increase in sales revenue results in a _______ increase in CM if the CM ratio is 40%.
$20,000 increase
In a CVP graph, what is represented on the horizontal (X) axis?
Unit volume
What is the contribution margin per unit if sales are $500 and variable expenses are $200?
$300
What happens to net operating income if sales increase from 500 to 575 units with a commission structure?
Net operating income increased by $12,375.
What is the profit impact of increasing the advertising budget if sales increase by $20,000?
Net operating income may decrease depending on increased fixed costs.
Fill in the blank: To compute the break-even point in units, use the formula: Fixed Expenses / _______.
Contribution Margin per unit
What happens when the selling price is cut by $20 per unit?
Net operating income decreases unless offset by an increase in sales volume.
What is the effect of a higher quality of raw materials on variable costs?
It increases variable costs per unit.
