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