Chapter 20 Managerial accounting
Companies can use a contribution margin per unit approach to compute required sales in terms of sales in units as follows: follows≻ (Fixed costs + Target profit) / Contribution margin per unit = Required sales in units A variation of this target profit calculation is the
A variation of this target profit calculation is the breakeven point calculation. The breakeven point is the sales level at which the company does not earn a profit or a loss, but has an operating income of zero. It is the point at which total revenues equal total costs. Thus, when computing the breakeven point in sales, we use the same formula as above, but always set the "Target profit" amount to be $0.
2. How is cost-volume-profit (CVP) analysis used?
Break even point is a variation of target profit where profit equals $0.
3. How is cost-volume-profit (CVP) analysis used?
CVP graphs are used to make quick estimates of profit levels at various volumes of sales.
What are some other ways CVP analysis can be used? Sales mix
Calculate the break even point with multiple products: Step 1: Calculate the weighted-average contribution margin per unit. Step 2: Calculate the break even point in units for the "package" of products. Step 3: Calculate the break even point in units for each product. Multiply the "package" break even point in units by each product's proportion of the sales mix.
What are some other ways CVP analysis can be used? Operating leverage
Effects that fixed costs have on changes in operating income when sales volume changes. • Degree of operating leverage = Contribution margin / Operating income.
1. How is cost-volume-profit (CVP) analysis used?
Target profit can be calculated using three approaches:
What is contribution margin, and how is it used to compute operating income?
The contribution margin income statement separates costs by behavior—fixed and variable—and highlights contribution margin.
What are some other ways CVP analysis can be used? Margin of safety
The excess of expected sales over break even sales. Margin of safety Operating leverage Sales mix
fourth How is CVP analysis used for sensitivity analysis?Decreases in variable costs increase contribution margin
and decrease the-break even point.
Cost-volume-profit (CVP) analysis is a planning tool that looks
at the relationship among costs and volume and how they affect profits (or losses).can be used to estimate the amount of sales needed to achieve a target profit
Classifying costs as either variable or fixed is referred to as cost behavior because
changes in volume can have an effect on how the costs behave. That is, the total cost either changes (variable costs) or remains constant (fixed costs).
How changes in volume affect costs variable costs
costs fluctuates with changes in volumes. but cost per unit stays the same ( when volume increases = cost increases)
second How is CVP analysis used for sensitivity analysis?Decreases in sales prices
decrease contribution margin and increase the break-even point.
third How is CVP analysis used for sensitivity analysis?Increases in variable costs
decrease contribution margin and increase the break-even point.
How changes in volume affect costs Mixed costs
has both fixed and variable components
sixth How is CVP analysis used for sensitivity analysis? Decreases in fixed costs
have no effect on contribution margin and decrease the break-even point.
fifth How is CVP analysis used for sensitivity analysis? Increases in fixed costs
have no effect on contribution margin and increase the break-even point.
First How is CVP analysis used for sensitivity analysis? Increases in sales prices
increase contribution margin and decrease the break even point.
Using CVP analysis to plan profits
is a planning tool that looks at the relationship among costs and volume and how they affect profits (or losses). can be used to estimate the amount of sales needed to achieve a target profit.
what is contribution margin and how is it used to compute operating income? Cost-Volume-Profit (CVP) Analysis
is the difference between net sales revenue and variable costs. it is called contribution margin because that contributes to covering the fixed costs and then to providing operating income. Net Sales- variable costs
Contribution margin
is the difference between net sales revenue and variable costs.a
Relevant Range
is the volume where total fixed costs remain constant and variable cost per unit remains constants. to estimate costs , managers need to know the relevant range because of the following =total fixed costs can differ from one relevant change to another the variable costs per unit differ in various relevant ranges
Cost-Volume-Profit (CVP) sensitivity analysis managers often want to predict how changes in sales prices , cost volumes affect their profit . managers can use its relationships to conduct sensitivity to conduct sensitivity analysis
it estimates the affect of changes in its business environment changes in sales pric changes in variable cost changes in fixed cost
Target profit is the operating income that
results when sales revenue minus variable and fixed costs equals management's profit goal.
high low method
separates mixed costs into fixed and variable costs predicts future costs at various activity levels
What are some other ways CVP analysis can be used? In dollars:
shows how much sales revenue can decrease before break the firm might now break even Margin of safety in units × Sales price per unit.
What are some other ways CVP analysis can be used? Margin of safety in units
shows how much the number of units sold can decrease before the firm might not break even Expected sales in units − Break even sales in units.
What are some other ways CVP analysis can be used? As a ratio
shows percentage that sales revenue can decrease before the firm might not break even Margin of safety in units / Expected sales in units.
Calculating operating income using contribution margin Contribution margin per unit is
the difference between net sales revenue per unit and variable costs per unit. It is called contribution margin per unit because it is the amount per unit that contributes to covering the fixed costs and providing operating income. follows≻ Net sales revenue per unit - Variable costs per unit = Unit contribution margin
what other ways CPV analysis can be used ? Using CVP to find margin of safety
to calculate margin of safety , operating leveraged multiproduct breakeven points . the excess of expected sales over breakeven sales , the amount of sales can decrease before the company incurs and operating loss.
How changes in volume affect costs fixed costs
total cost remains the same , but the fixed cost per unit is inversely proportional to changes in volume ( cost remains constant) volume increase - costs per unit increases volume decreases- cost per unit increases
Target profit is the operating income that results
when sales revenue minus variable and fixed costs equals management's profit goal.
We will look at three methods of estimating sales required to make a target profit:
• Equation approach • Contribution margin approach • Contribution margin ratio approach
what are the approaches we calculate Target profit can be calculated using three approaches:
•Equation approach • Contribution margin approach • Contribution margin ratio approach