Chapter 20 Managerial accounting

Companies can use a contribution margin per unit approach to compute required sales in terms of sales in units as​ follows: follows≻ ​(Fixed costs​ + Target​ profit) / Contribution margin per unit​ = Required sales in units A variation of this target profit calculation is the

A variation of this target profit calculation is the breakeven point calculation. The breakeven point is the sales level at which the company does not earn a profit or a​ loss, but has an operating income of zero. It is the point at which total revenues equal total costs.​ Thus, when computing the breakeven point in​ sales, we use the same formula as​ above, but always set the​ "Target profit" amount to be​ $0.

2. How is cost-volume-profit (CVP) analysis used?

Break even point is a variation of target profit where profit equals $0.

3. How is cost-volume-profit (CVP) analysis used?

CVP graphs are used to make quick estimates of profit levels at various volumes of sales.

What are some other ways CVP analysis can be used? Sales mix

Calculate the break even point with multiple products: Step 1: Calculate the weighted-average contribution margin per unit. Step 2: Calculate the break even point in units for the "package" of products. Step 3: Calculate the break even point in units for each product. Multiply the "package" break even point in units by each product's proportion of the sales mix.

What are some other ways CVP analysis can be used? Operating leverage

Effects that fixed costs have on changes in operating income when sales volume changes. • Degree of operating leverage = Contribution margin / Operating income.

1. How is cost-volume-profit (CVP) analysis used?

Target profit can be calculated using three approaches:

What is contribution margin, and how is it used to compute operating income?

The contribution margin income statement separates costs by behavior—fixed and variable—and highlights contribution margin.

What are some other ways CVP analysis can be used? Margin of safety

The excess of expected sales over break even sales. Margin of safety Operating leverage Sales mix

fourth How is CVP analysis used for sensitivity analysis?Decreases in variable costs increase contribution margin

and decrease the-break even point.

Cost-volume-profit (CVP) analysis is a planning tool that looks

at the relationship among costs and volume and how they affect profits​ (or losses).can be used to estimate the amount of sales needed to achieve a target profit

Classifying costs as either variable or fixed is referred to as cost behavior because

changes in volume can have an effect on how the costs behave. That​ is, the total cost either changes​ (variable costs) or remains constant​ (fixed costs).

How changes in volume affect costs variable costs

costs fluctuates with changes in volumes. but cost per unit stays the same ( when volume increases = cost increases)

second How is CVP analysis used for sensitivity analysis?Decreases in sales prices

decrease contribution margin and increase the break-even point.

third How is CVP analysis used for sensitivity analysis?Increases in variable costs

decrease contribution margin and increase the break-even point.

How changes in volume affect costs Mixed costs

has both fixed and variable components

sixth How is CVP analysis used for sensitivity analysis? Decreases in fixed costs

have no effect on contribution margin and decrease the break-even point.

fifth How is CVP analysis used for sensitivity analysis? Increases in fixed costs

have no effect on contribution margin and increase the break-even point.

First How is CVP analysis used for sensitivity analysis? Increases in sales prices

increase contribution margin and decrease the break even point.

Using CVP analysis to plan profits

is a planning tool that looks at the relationship among costs and volume and how they affect profits​ (or losses). can be used to estimate the amount of sales needed to achieve a target profit.

what is contribution margin and how is it used to compute operating income? Cost-Volume-Profit (CVP) Analysis

is the difference between net sales revenue and variable costs. it is called contribution margin because that contributes to covering the fixed costs and then to providing operating income. Net Sales- variable costs

Contribution margin

is the difference between net sales revenue and variable costs.a

Relevant Range

is the volume where total fixed costs remain constant and variable cost per unit remains constants. to estimate costs , managers need to know the relevant range because of the following =total fixed costs can differ from one relevant change to another the variable costs per unit differ in various relevant ranges

Cost-Volume-Profit (CVP) sensitivity analysis managers often want to predict how changes in sales prices , cost volumes affect their profit . managers can use its relationships to conduct sensitivity to conduct sensitivity analysis

it estimates the affect of changes in its business environment changes in sales pric changes in variable cost changes in fixed cost

Target profit is the operating income that

results when sales revenue minus variable and fixed costs equals​ management's profit goal.

high low method

separates mixed costs into fixed and variable costs predicts future costs at various activity levels

What are some other ways CVP analysis can be used? In dollars:

shows how much sales revenue can decrease before break the firm might now break even Margin of safety in units × Sales price per unit.

What are some other ways CVP analysis can be used? Margin of safety in units

shows how much the number of units sold can decrease before the firm might not break even Expected sales in units − Break even sales in units.

What are some other ways CVP analysis can be used? As a ratio

shows percentage that sales revenue can decrease before the firm might not break even Margin of safety in units / Expected sales in units.

Calculating operating income using contribution margin Contribution margin per unit is

the difference between net sales revenue per unit and variable costs per unit. It is called contribution margin per unit because it is the amount per unit that contributes to covering the fixed costs and providing operating income. follows≻ Net sales revenue per unit​ - Variable costs per unit​ = Unit contribution margin

what other ways CPV analysis can be used ? Using CVP to find margin of safety

to calculate margin of safety , operating leveraged multiproduct breakeven points . the excess of expected sales over breakeven sales , the amount of sales can decrease before the company incurs and operating loss.

How changes in volume affect costs fixed costs

total cost remains the same , but the fixed cost per unit is inversely proportional to changes in volume ( cost remains constant) volume increase - costs per unit increases volume decreases- cost per unit increases

Target profit is the operating income that results

when sales revenue minus variable and fixed costs equals management's profit goal.

We will look at three methods of estimating sales required to make a target profit:

• Equation approach • Contribution margin approach • Contribution margin ratio approach

what are the approaches we calculate Target profit can be calculated using three approaches:

•Equation approach • Contribution margin approach • Contribution margin ratio approach