Chapter 3 - Cost-Volume-Profit Analysis

Target Volume in Sales Dollars

= ( F + TP ) / CM %

Target Vol (units)

= (F + [Target Profit/ (1 -tax)]) / unit contribution margin

Target Volume in Units

= (Fixed costs + Target Profit) / Contribution Margin per unit

Operating Leverage

= CM / Operating Profit (measuring how much of the cost structure is fixed costs)

Contribution Margin Ratio (%)

= Contribution Margin per unit (sales - variable costs) / Sales price per unit

Break-Even Volume in Sales

= Fixed Costs / Contribution Margin Ratio

Total Contribution Margin

= Revenue (sales) - Total Variable Costs

Margin of Safety

= Sales Volume - B-E sales volume Tells managers margin between current sales and their break-even point

After-tax Profit

= [( P - V )*X - F] * (1 - tax)

Margin of Safety Percentage

= margin of safety / total sales or Total sales = BE / (1 - MoS%) (i.e. sells 55 trips and b-e is 48 trips then it's 13%. -> 55-48 = 7 -> 7/55 = 13%

Unit Contribution Margin

= sales price per unit - variable cost per unit

BE in sales dollars

=fixed costs / weighted-average cm % To get there: weighted average cm / weighted average revenue = weighted avg cm %

Break-Even per Unit Equation

BE = F / Contribution Margin (P - V)

Pros and cons of low operating leverage

Pro: More flexible if market shifts Con: lower cont. margin so the more they sell the profit doesn't rise as big as high op. lev.

Profit Equation (per unit)

Profit = (Price - Variable Costs)*# of Units - Fixed Costs or Profit = (P-V)X - F

Profit Equation

Profit = Total Revenue - Total Cost

CVP graph

Slope dotted line = TR or price/unit Total Cost line is un-dotted line B-E point is where TR and TC lines intersect

T/F: Operating leverage is high in firms with high proportion of fixed costs and low proportion of variable costs?

True. It has a high CM/unit. The higher the fixed costs the higher the BE point.

PV graph

Uses single profit line Slope of line = unit cont. marg. Intercept = loss at zero volume (which equals fixed costs) Vertical axis shows the amount of operating profit or loss

Limitations of CVP Analysis

are due to the assumptions that the cost analyst makes; they are not due to the method of CVP analysis

When compared to the Cost-Volume-Profit graph, the ______ lines are collapsed on the Profit-Volume graph.

cost & revenue

The intercept of the profit-volume line equals the loss at zero volume, which equals

fixed costs

fixed product mix

multiply each contribution margin by its designated ratio then add them together Then do a BE = F/CM

Cost Structure

proportion of fixed & variable costs to total costs

Weighted-Average Contribution Margin

same as fixed product mix except use ratio as decimals instead of whole #s (.25 vs 25) Then do a BE = F/CM

Cost-Volume-Profit (CVP) Analysis

study of the relations among revenues, costs, and volume and their effect on profit

Lesson from CVP

tool that the manager can use to help make decisions

Profit-Volume Analysis

version of CVP analysis using a single profit line

Break-Even Point

volume level where profit equals zero