Ch 7 Cost Volume Profit Analysis

How does a multiproduct firm calculate the number of units needed to breakeven or achieve a target profit?

3 steps. 1. Find the weighted avg CM per unit, 2. Apply the breakeven or target profit formula using the weighted avg CM per unit, 3. Split the answer apart into separate products using the assumed sales mix

What's the indifference point formula?

opy (under option 1) = opy (under option 2). SR minus VC minus FC = SR minus VC minus FC

What is the breakeven/target profit formula utilizing weighted avg CM per unit for units?

units = opy + FC / WACM per unit

How would you get weighted avg CM per unit?

Find the unit CM for each of the products then multiply them by their sales mix. Then add all the total costs together and divide by the total amount of sales mix to get the weighted avg CM per unit.

What is CM% useful for?

Useful for firms that have a lot of different products because each product probably has a different CM per unit.

What is the VC% formula?

VC/SR or unit VC/SP

What is the formula for breakeven/target profit in units?

# of units = opy + FC / unit CM

If you add CM% and VC% together, you'll get ____

100%

What does VC% tell us?

Amount of each sales dollar that's gonna cover variable cost

If fixed costs decrease, then

Breakeven decreases (can think of in units formula way)

If variable costs decrease, then

Breakeven decreases (can think of in units formula way)

If fixed costs increase, then

Breakeven increases (can think of in units formula way)

If variable costs increase, then

Breakeven increases (can think of in units formula way)

How do managers analyze cost and revenue structure decisions?

By calculating the "indifference point" .. the point at which a company is "indifferent" (wouldn't care) between two alternatives because its operating income would be the same either way.

What is the definition of the contribution margin (CM)? What does it tell us?

CM is the difference between Sales Revenue and Variable Costs. It tells us the amount available to cover fixed costs and the amount available to then generate operating income.

Does CM per unit or GP per unit provide management with a quick means of predicting operating income?

CM per unit

What's another way to express a company's contribution margin?

CM%

What's the formula for CM%?

CM/SR or unit CM/SP

Where can a CM income statement be used? Why do managers like them?

Can be used for decision making and planning. Managers like them because it readily gives them information about cost behavior

How would you get the indifference point?

First calculate the CM per unit under each cost structure, find the breakeven point In units for option #1 and option #2, calculate the indifferent point (you would put the number of units for CM as x and you would have CM and fixed costs for the cost structures. Just solve for x to see how many units they would be indifferent at), what range of sales will they prefer (for above the indifference point, choose the one that has a higher fixed costs and for below the indifference point, choose the one that has a lower fixed costs

CVP analysis is great because it helps us address what?

Helps us address "what if" questions, such as "What if variable costs or fixed costs change?" or "What if we change the sales price?"

How is a traditional income statement organized?

It's organized by cost function (period and product costs) not behavior (variable, fixed, or mixed costs)

What does breakeven mean?

Level of sales needed just to cover our costs. It's the point where operating income is 0.

What is sales mix?

Relative proportion of products you sell

To breakeven for multiproducts, would you round up or down?

Round up

What is the contribution margin income statement equation?

Sales revenue (sales price x # units) minus variable costs (unit VC x # units) gives us contribution margin (unit CM x # units). Then subtract fixed costs from CM which gives us operating income.

What is the formula for breakeven/target profit in sales revenue?

Sales revenue = opy + FC / CM%

What are the 3 things to make more profit?

Sales volume, costs, sales price

What does CM% tell us?

The amount from each sales dollar that's gonna cover fixed costs and generate operating income.

CVP analysis is often used for predicting the level of sales needed to either ____ or each a ____ ____

breakeven; target profit