Ch. 5 - Cost-Volume-Profit Relationships
Total contribution margin:
Fixed expenses + net operating income Becomes profit after fixed expenses are covered
Cost volume profit (CVP)
Focuses on how profits are affected by the following five factors: Selling price, sales volume, unit variable costs, total fixed costs, mix of products sold
At the break-even point:
Total revenue = total cost Net operating income = 0 After reaching the point, net operating income will increase by the contribution margin per unit for each additional unit sold Affected by: Selling price/unit, cost/unit, sales mix
To prepare a CVP graph, lines must be drawn representing:
Total revenue, total expense, total fixed expense
Variable expense ratio:
Variable expense to sales Variable costs/Total revenues
When using incremental analysis, which of the following items are considered when making a decision?
-the change in volume resulting specifically from the decision -the change in cost resulting specifically from the decision -the change in sales dollars resulting specifically from the decision.
Contribution margin format income statement:
1) Sales 2) Variable expenses 3) Contribution margin 4) Fixed expenses 5) Net operating income
Company a has sales of $500 000, variable costs of $350,000 and fixed costs of $150,000. Company A has:
A contribution margin = fixed costs Reached the break-even point
Margin of safety
Amount by which sales can drop before losses are incurred. Higher margin of safety = lower risk of not breaking even and incurring loss but less upside Reduction in sales of $x or x% would result in breakeven
Degree of operating leverage:
Contribution margin / net operating income
Contribution margin ratio (CM)
Contribution margin/Sales
CVP graph:
Horizontal = Sales volume Vertical = $
Contribution margin
Sales - all variable costs Reached when contribution margin = total fixed expenses
The relative proportions in which a company's products are sold is referred to as:
Sales Mix
To simplify CVP calculations, it assumes ________________ to remain constant
Sales price