18 terms

Cost-Volume-Profit Analysis

Chapter 3 Learning Objectives: +Determine the break-even point in number of unit and total sales dollars +Determine the number of units that must be sold, and the amount of revenue required, to earn a targeted profit +Prepare a profit-volume graph and a cost-volume-profit graph, and explain the meaning of each. +Apply cost-volume-profit analysis in a multiple-product setting. +Explain the impact of risk, uncertainty, and changing variables on cost-volume-profit analysis.
break-even point
The break-even point is the point where total revenue equals total cost (i.e., the point of zero profit).
The break-even point is the level of sales at which contribution margin just covers fixed costs and consequently operating income is equal to zero
common fixed expense
are the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated.
contribution margin
is the difference between sales and variable expense. It is the amount of sales revenue left over after all the variable expenses are covered that can be used to contribute to fixed expense and operating income.
contribution margin income statement
(Total variable cost)(variable selling and administrative cost, prime cost, overhead)
=Total contribution margin
(Fixed cost)
=Operating income
contribution margin ratio
contribution margin per unit/price
CVP analysis
method that estimates how changes in the following three factors affect a company's profit:Costs (both variable and fixed),Sales volume, Price
Cost structure
a company's mix of fixed cost in relative to variable cost
CVP graph
The cost-volume-profit graph depicts the relationships among cost, volume, and profits (operating income).
Degree of operating leverage
can be measured for a given level of sales by taking the ratio of contribution margin to operating income or:
Contribution margin ÷ Operating income
Direct fixed expense
are those fixed costs that can be traced to each segment and would be avoided if the segment did not exist.
Indifference point
the quantity at which the two system: automated and manual produce the same operating income
Margin of safety
The margin of safety is the units sold or the revenue earned above the break-even volume.
Operating leverage
is use of fixed costs to extract higher percentage changes in profits as sales activity changes.
Profit- volume graph
A profit-volume graph visually portrays the relationship between profits (operating income) and units sold.
Function: income= (price-variable expense)*units-fixed expense
Sales Mix
is the relative combination of products being sold by a firm.
Break-even packages= total fixed cost/packages contribution margin ratio
Sensitivity analysis
a what-if technique company uses to analyze impact of changes in underlying assumption on an answer
Variable cost ratio
variable cost/price
CVP Analysis Assumption
1.linear revenue and cost functions remain constant over the relevant range
2.selling prices and costs are known with certainty
3. All units produced are sold, no inventories
4. Sales mix are known for certainty for multiple product break-even setting