Chapter 5 Connect

With regards to interpretation, what are the important areas that appear on a CVP graph?

-break-even point - loss area -profit area

The profit graph is based on the following linear equation:

Profit= Unit CM x Q- Fixed Expenses

Preparing the CVP graph-Step 4

choose some sales volume, and plot the pint representing total sales draw a line through the data point back to the point of origin

Preparing the CVP graph- Step 3

choose some sales volume, and plot the point representing total expenses (fixed and variable) Draw a line through the data point back to where the fixed expenses line intersects the dollar axis

Preparing the CVP graph-Step 2

draw a line parallel to the volume axis to represent total fixed expenses

T/F The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

false

Preparing the CVP graph -Step 1

in a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis

CVP relationships in equation form- using unit contribution margin

it is often useful to express the simple profit equation in terms of the unit contribution margin (Unit CM) -Unit CM= Selling price per unit- variable expenses per unit

The measure of how sensitive net operating income is to a given percentage change in dollar sales is called?

operating leverage

CVP relationships in equation form

profit= (sales- variable expenses)- fixed expenses

Contribution margin ratio (CM Ratio) and the variable expense ratio- step 1

the contribution margin as a percentage of sales is referred to as the contribution margin ratio the ratio is computed as: CM ratio= contribution margin/ sales

Break-Even Analysis

the equation and formula methods can be used to determine the unit sales and dollar sales needed to achieve a target profit of zero

Contribution margin ratio (CM Ratio) and the variable expense ratio- Step 3

the variable expenses as a percentage of sales is referred to as the variable expense ratio Variable expense ratio= variable expenses/ sales

Once the break-even point has been reached, net operating income will increase by the amount of the ______ for each additional unit sold.

unit contribution margin

What is represented on the X axis of a cost-volume-profit (CVP) graph?

unit volume

CVP relationships in equation form- detail breakdown

-Sales: quantity sold (Q) x selling price per unit (P) = sales (QxP) -Variable expenses: quantity sold (Q) x variable expenses per unit (V) = variable expenses (QxV) -Profit= (PxQ-VxQ)- Fixed expenses

Break-even point is the level of sales at which_____

total revenue equals total costs

T/F For a capital intensive, automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales.

true

To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:

- selling price is constant -the price of a product or service will not change as volume changes -costs are linear and can be accurately divided into variable and fixed components -the variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range - in multi-product companies, the mix of products sold remains constant

The contribution approach- part 2

contribution margin is used first to cover fixed expenses -any remaining contribution margin contributed to net operating income

What is usually plotted as a horizontal line on the CVP graph?

fixed expenses

Contribution margin equals?

sales-variable cost

Contribution margin ratio (CM Ratio) and the variable expense ratio-Step 2

the CM ratio can also be calculated by dividing the contribution margin per unit by the selling price per unit CM Ratio= Contribution margin per unit/ selling price per unit

Basics of cost-volume-profit analysis PART 1

the contribution income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume -the emphasis is on cost behavior -contribution margin is the amount remaining from sales revenue after variable expenses have been deducted