CMA Part 2 - CVP Analysis

Breakeven point formula:

$0 = Sales - VC - FC

If A and B account for 60% and 40% of total revenues, respectively, and variable costs are 60% and 85%, respectively, the breakeven point in dollars of revenue, given fixed costs of $150,000, is:

$500,000 S = $150,000 + .60(.60S) + .85(.40S)

DOL (percentage change) is calculated as:

% ∆ in Operating Income ÷ % ∆ in CM (or Sales)

When calculating the BEP for a multi product company, the assumptions made when variable costing is used includes:

(1) Sales volume = Production volume (2) Variable costs are constant per unit (3) A given sales (revenue) mix is maintained for all volume changes.

Total VC:

change proportionally with activity level over the relevant range.

Once the BEP has been reached operating income will increase by the:

CM per unit for each additional unit sold.

DOL (dollar amount) is calculated as:

CM ÷ Operating Income (or EBIT)

To calculate the dollar amount of revenues needed to attain a desired income:

CMR [(revenues - variable costs) ÷ revenues] or (UCM ÷ USP) is divided into the sum of fixed costs plus desired profit.

In calculating the breakeven point in dollars with multiple products or services, the result is obtained by:

FC ÷ Weighted-Average CM Ratio

BEP in dollars:

FC ÷ CM Ratio

BEP in units:

FC ÷ UCM

To convert a target net income amount to target operating income amount by:

Net Income ÷ (1 - Tax Rate)

Under a variable costing system, how do you arrive at the contribution margin:

Net Sales - All VC

Under a absorption costing system, how do you arrive at the gross margin:

Net Sales - Var & Fix Production Costs

Mario Co. has sales of $200,000, CM of 20%, and MOS of $80,000. What is Mario Co.'s FC?

Sales - MOS = BEP $200,000 - $80,000 = $120,000 FC = CM at BEP FC = $120,000 • 20% = $24,000.

UCM is the slope of the:

TC curve quantity sold = x axis cost = y axis.

Breakeven point is the level of output at which:

Total revenues equals total costs (or level of output at which operating income equals zero).

UCM:

Unit SP - Unit VC

Mario Co. has FC of $100,000 and BE sales of $800,000. What is its projected profit at $1,200,000 sales?

Variable Costs are 87.5% of sales [($800,000 - $100,000) ÷ $800,000] = 87.5% At sales of $1,200,000: VC = $1,050,000 FC = $100,000. Profit = $50,000.

A firm with a high operating leverage has:

a greater degree of risk because fixed costs must be covered regardless of sales.

Income tax liability does not change the breakeven point because:

at that output level operating income and therefore income tax expense are zero.

The more leveraged a firm is in its operations, the higher its:

breakeven point.

Breakeven point is indirectly related to:

budgeted margin of safety and the contribution margin.

Margin of safety is the excess of:

budgeted revenues over breakeven revenues (operating income)

CVP Analysis allows management to discern the probable effects of:

changes in unit volume, sales price, sales mix, etc.

Costs and revenues vary only with:

changes in unit volume.

Total FC:

constant over the relevant range.

Unit VC:

constant over the relevant range.

Breakeven point is directly related to:

costs

Is it the contribution margin from the sale of one unit to:

cover fixed costs (and possibly a target operating income).

Financial leverage derives from the use of a high level of:

debt in the firm's financing structure; its effects are revealed through charges paid out for interest.

If elasticity > 1:

demand is elastic and a price increase will tend to reduce revenues.

If elasticity < 1:

demand is inelastic and a price increase will tend to raise total revenues.

The concept related to a concern about the effect of a price increase on sales:

elasticity of demand % ∆ in qty demanded ÷ % ∆ in price

Sensitivity analysis permits measurement of the effects of:

errors in certainty equivalents, which are estimated amounts developed by the best means available and assumed for purposes of a given decision model to be certain. model may then be evaluated by changing certain data variables (certainty equivalents) critical to the success of the entity and observing outcomes. this analysis allows quantification of the effects of forecasting or prediction errors and identification of the most critical variables.

Although leverage arises from items on the balance sheet, it is measured by:

examining its effects on the income statement.

Though risky, a firm with high operating leverage is also able to:

expand production rapidly in times of higher product demand.

Variable costing is more useful for determining the effects of the use of:

fixed costs in a firm's cost structure, called leverage.

Breakeven analysis treats the desired income in the same way as:

fixed costs.

Within the limits of a relevant range, all costs are either:

fixed or variable relative to a given cost object.

The least exact method for separating fixed and variable costs is:

high-low method.

Because percentages are involved, the dollar formula positions:

in the numerator and denominator are flipped for the DOL percentage change calculation.

When operating above the BEP, the degree or amount that revenues may decline before losses are incurred is the:

margin of safety.

Operating leverage derives from the use of a high level of:

plant and machinery in the production process; its effects revealed through charges for depreciation, property taxes, etc.

Contribution margin is expressed as either a:

percentage of the selling price (CM Ratio) or a dollar amount.

CVP assumptions include costs and revenues which are deemed to be:

predictable and linear over the relevant range of analysis.

CVP variables include revenue as a function of:

price per unit and quantity produced, fixed costs, variable cost per unit or as a percentage of revenues.

A company with a DOL of 6.0 means the company:

requires $6.00 of CM to generate a single dollar of operating income.

Cost-Volume-Profit Analysis is a means of predicting the relationships among:

revenues, variable costs, and fixed costs at various production levels.

CVP variables include profit per unit as a percentage of:

revenues.

Margin of safety is a measure of:

risk.

The DOL percentage change calculation reveals the:

sensitivity of a post-fixed-cost amount to a given change in a pre-fixed-cost amount.

Volume of output is the:

sole revenue driver and cost driver.

Taxes that do change the breakeven point include:

taxes other than income tax, such as sales tax.

More exact methods for separating fixed and variable costs include:

the least squares method, computer simulation, and matrix algebra.

The more leveraged a firm is in its operations:

the more sensitive operating income is to changes in sales volume.

Sales mix is the composition of:

total revenues in terms of various products or services.

A relevant range exists in which the various relationships are:

true for a given time span.

Breakeven analysis is only meaningful under a:

variable costing system (not GAAP permitted).

Per-Unit FC:

vary indirectly with the activity level.

At the BEP, CM equals:

zero.

What are the effects on variable and fixed costs of a change in activity within the relevant range:

∆ in Total VC no ∆ in VC per unit or in Total FC