ch. 7 -managerial
% change in net income =
% change in sales x degree of operating leverage
differences in expected profit at 2 price levels is due to 3 differences:
1. difference in unit CM 2. difference in sales volume 3. diference in net fixed expenses
break even point in units sold (units u need to sell)
FC/cm per unit
4 assumptions cvp analysis relies on
1. selling price is constant, total revenue is linear 2. costs are linear and can be divided into variable and fixed costs 3. sales mix is constant in multi-product companies 4. in manufacturing companies, inventories levels are equal at beginning and end of year (do not change), number of units sold = number of units produced
cm ratio = (2 formulas)
1. unit cm/unit sales price 2. total cm/total sales revenue
unit sales to attain target profits = (sales volume required) 2 equations
= (fc +target profits)/unit contribution margin =(fixed expenses + target profits)/contribution margin ratio
at breakeven, the ____ = _____
cm = fc
what approach to the income statement is the CVP based on
contribution approach/direct method
net income increases by same amount as ______ increases (for contribution appproach/direct method income statements)
contribution margin
degree of operating leverage (at given given level of sales)=
contribution margin/net income
margin of safety
difference between the budgeted sales revenue and the break-even sales revenue (the excess of sales )
donations result in a reduction in ____ expenses
fixed
breakeven point in sales $$ =
fixed expenses/CM ratio or fixed expenses/unit contribution margin
the __ the proportion of fc in a firm's cost structure, the greater the impact on profit it will be given a % change in sales revenue
greater
the ______ the margin of safety, the better
greater
higher percentage of fixed costs relative to varaible costs means ______ operating leverage, and ___ profit and ____ risk
higher, higher, higher
capital intensive companies have _____ OL ___ fc, _____ vc, ____ cm, ______ increases/decreases in profit, __ safety margin, ____ breakeven point
higher, more, less, high, high, lower, higher
increase in NI (for contribution margin income statements) can be calculated as
increase in sales revenue x CM ratio
increased risk comes with ______
increased profitability
an increase in fixed costs ____ the breakeven point bc
increases, you operate at a loss if you don't at least cover fc
the higher the degrees of operating leverage, the __________ the increase in incom
large
a firm with a low operating leverage will have a ____ breakeven point and a _______ safety margin and vice versa
low, high
labor intensive companies have ____ OL, ___ fc, _____ vc, ____ cm, and ______ increases/decreases in profit, ______safety margin, and _____ breakeven point
lower, less, more, low, lower, higher, lower
margin of safety percentage
margin of safety in dollars/total sale in dollars
operating leverage
measure of how sensitive net income is to a given percentage change in cales, and focuses on the extent to which an org uses fixed costs in cost structure
a higher degree of operating leverage means _____ profit and that comes with _____ risk
more, more
cost structure of an organization is the
relative proportion of its fixed and variable costs
income statement format for traditional approach
sales -cogs =gross margin -selling and administrative expenses =net operating income
income statement format for contribution approach
sales -variable costs =contribution margin -fixed costs =net operating income
the cost volume profit analysis focuses on FC and VC by focusing on _______ as sole revenue/cost driver
sales volume
profit=
sales-vc-fc
having a high degree of operating leverage is good as long as you are _______
selling more, bc if you aren't then you lose more
cost volume profit analysis
summarizes the effects of changes in volume of activity on its revenues costs, and profits
contribution margin
the amount available to contribute to covering fixed expenses after all variable expenses have been covered
sales mix
the relative proportion of each type of product sold
unit cm =
total cm/units sold
contribution margin ratio is the ratio of the contribution margin to
total sales
margin of safety in dollars =
total sales-break even sales
total cm =
total sales-total vc
break even analysis
type of target profit analysis where target profit is 0
for each unit sold above breakeven, the ___ is made for every unit above breakeven
unit cm
sales=
vc+fc+profits
break even point
volume of activity where the org's revenues and expenses are equal (no profit or los)