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)