Chapter 6: Cost-Volume-Profit Relationships

In Account Analysis,

an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves

A company with a high ratio of fixed costs:

is more likely to experience greater profits when sales are up than a company with mostly variable costs is more likely to experience a loss when sales are down than a company with mostly variable costs

Margin Safety is...

the amount by which sales can drop before losses are incurred

Profit Formula

(P x Q - V x Q) - Fixed Expenses

Profit

(Sales - Variable Expenses) - Fixed Expenses

Unit sales to attain target profit

(Target Profit + Fixed Expenses) / Unit CM

The Contribution Margin is used ____ to cover the fixed expenses, and then whatever remains goes towards ____

First, profits

Total Expense

Fixed Expense + Variable Expense

Unit sales to break even

Fixed Expenses / Unit CM

Contribution Margin also can be found by adding...

Fixed Expenses and Net Operating Income

the rise-over-run formula for the slope of a straight line is the basis of ____.

High-Low Method

Variable Expense

Product x Product Price

Break-even and target profit analysis Formula

Profit = Unit CM x Q - Fixed Expense

The contribution margin as a percentage of sales is referred to as the contribution margin or CM ____

Ratio

Single Product Profit Formula

(Selling Price per Unit x Quantity sold - Variable Expenses per unit x Quantity Sold) - Fixed Expenses

Variable Cost = Slope of the line = Rise / Run

(Y2-Y1)/(X2-X1)

CVP analysis allows companies to easily identify the change in profit due to changes in:

1. Selling Prices 2. Sales Volume 3. Unit Variable Costs 4. Total Foxed Costs 5. Mix of Products sold.

What does a CVP graph do?

A CVP graph highlights CVP relationships over wide ranges of activity

The Margin of Safety is the excess of the ____ sales dollars over ____ sales dollars.

Budgeted (or actual), break-even

Change in contribution margin

CM ratio x change in sales

Degree of Operating Leverage

Contribution Margin / Net Operating Income

Total Contribution margin/ total sales

Contribution Margin Ratio

An increase in sales will increase net operating income by a multiple of that increase in sales. The multiple is known as the ______.

Degree of operating leverage

The Y-axis (Vertical Axis) pf a CVP graph represents?

Dollars

When a company produces and sells multiple products ____.

Each product most likely has a unique contribution margin The sales mix will most likely change the break-even point Each product most likely has different costs

Change (Increase or Decrease) in total Contribution Margin:

Expected Total Contribution Margin - Present Total Contribution Margin

True or False: Account analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer's evaluation.

False

True or False: The margin if safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False

True or False: Cost Structure refers to the relative portion of product and period costs in an organization.

False,

Change (Increase or decrease) in Net Operating Income

Increase in total Contribution margin - Change in Fixed Expenses

Contribution Margin

Sales - Variable Expenses

The term used for the relative proportion in which a company's products are sold is ____.

Sales Mix

The Income Statement includes?

Sales, Variable Expense, Contribution Margin, Fixed Expenses, and Net Operating Income/Net Operating Loss

Income Statement

Sales-Variable Expense, Contribution Margin - Fixed Expenses = Net Operating Income/Net Operating Loss

What does the CM Ratio show?

The CM Ratio shows how the contribution margin will e affected by a change in sales volume

Contribution Margin is also...

The amount available to cover fixed expenses and then provide profits for the period.

Contribution Margin is...

The amount remaining from sales revenues after all variable expenses have been deducted.

Sales Mix

The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

Margin of Safety in dollars

Total budgeted (or actual) sales - Break-even sales

True or False: Without knowing the future, it is not obvious which cost structure is better: a structure with higher fixed costs and lower variable costs or a structure with lower fixed costs and higher variable costs

True

The X-axis (Horizontal Axis) of a CVP graph represents?

Unit Volume

Contribution Margin Ratio ( on a per unit basis)

Unit contribution margin/ unit selling price

The Contribution Margin equals sales minus all ______ expenses

Variable

The engineering approach to cost analysis involves...

a detailed analysis of what cost behavior should be, based on industrial engineer's evaluation of the production methods to be used, the materials specifications, labor requirements, equipment usage, production efficiency, power consumption and so on.

Cost behavior is considered linear whenever:

a straight line approximates the relationship between cost and activity

Net Operating Income Formula

contribution margin - fixed expenses

estimating the fixed and variable components of a mixed cost using the ____ approach involves a detailed analysis of what cost behavior should be.

engineering

Under account analysis, building lease cost would be classified as...

fixed cost

The term "cost structure" refers to the relative proportion of ____ and ____ costs in an organization

fixed, variable

If a change in CM ratio each dollar increases or decreases then total contribution...

increases or decreases depending if each dollar increases or decreases.

It makes sense to perform a high-low or regression analysis if a scattergraph plot reveals ____ ____ behavior.

linear cost

The relative proportion in which a company's products are sold is referred to as...

sales mix

The break-even point calculation is affected by:

sales mix, selling price per unit, costs per unit

Unit CM

selling price per unit - variable expenses per unit

The higher the margin of safety,

the lower the risk of not breaking even and incurring a loss

Cost Structure refers to...

the relative proportion of fixed and variable costs in an organization

In order to prepare a CVP graph, lines must be drawn representing total revenue,...

total expense, and fixed expense

When using the high-low method, the slope of the line equals the ____ cost per unit of activity.

variable

Under account analysis, Direct materials would be classified as...

variable cost