ACC 212- CHAPTER 6

Cost-volume-profit (CVP) analysis

relationship between: volume and mix of units sold, prices, variable costs, fixed costs, and profit

cost-volume-profit graph (CVP graph)

representation of the relationship between total revenue, total costs, volume, and profit.

contribution margin=

sales revenue - variable costs

Production volume is equal to sales volume assumption

some costs vary with production while others vary with sales volume Holding inventory constant also eliminates any differences in profit

Linear cost and revenue functions assumptions

straight line to approximate the relationship between total cost and sales volume & total revenue and sales volume.

The term cost structure refers to how a company uses __________ costs versus ___________ costs in its operations.

variable, fixed

Constant product mix assumption

assume that the relative proportion of units sold/sales revenue generated by each product or service line remains constant For companies that sell multiple products and services

weighted-average unit contribution margin

average unit contribution margin of multiple products weighted according to the percentage of units sold

The amount each unit sold contributes towards fixed costs and profit is the unit _____________ _____________

contribution margin

How much contribution margin is generated per dollar of sales revenue is the...

contribution margin ratio

Decisions about whether to use fixed or variable costs to run the business affect a company's

operating leverage

The contribution margin ratio tells us how much contribution margin is generated as a...

percentage of sales revenue

Sniffles, Inc. produces facial tissues. The company's contribution margin ratio is 77%. Fixed expenses are $240,400. To achieve a target profit of $930,000, Sniffles' sales rounded to the nearest dollar must be ______.

$1,520,000 Sales = ($240,400 + $930,000)/0.77= $1,520,000

Seth's Speakers had actual sales of $1,630,000. If break-even sales equals $935,000, Seth's margin of safety in dollars is ______.

$695,000 $1,630,000 - $935,000 = $695,000

target units=

(total fixed costs + target profit) / unit contribution margin

Jump-It Corporation has a margin of safety of $272,000. The company sold 100,000 units this year. If the company sells each unit for $17, the margin of safety percentage is ______.

16% Margin of safety = $272,000/(100,000 × $17) = 16%

Run Like the Wind sells ceiling fans. Target profit for the year is $470,000. If each fan's contribution margin is $32 and fixed costs total $222,640, the number of fans that must be sold to meet the company's goal is ______.

21,645 Sales volume = ($470,000 + $222,640)/$32 = 21,645 fans

Given fixed costs of $30,000, variable costs of $2.00 per unit, and a contribution margin of $5.00 unit, ___________units have to be sold in order to break even.

6000 30000/$5

Given total fixed costs of $35,000 and a contribution margin ratio of 40%, ___________ of revenue must be earned to break even.

87500 =35000/0.40

Larson's Ltd. sells its product for $12.00 per unit. The contribution margin per unit is $8.00 and fixed costs are $75,000. Larson has to sell to ______ units to break even.

9,375 $75,000/$8.00 = 9,375 units

Profit Equation Method

=total sales revenue - total variable costs - total fixed costs

Degree of operating leverage=

Contribution Margin / Net Operating Income

contribution margin ratio=

Contribution Margin / Sales revenue

break-even units=

Total Fixed Cost / Unit Contribution Margin

break-even sales=

Total Fixed Expenses / Contribution Margin Ratio

margin of safety=

actual/budgeted sales - break even point

Target profit analysis purpose

allows managers to determine the # of units/total sales revenue needed to earn a target profit

break-even analysis goal

determine the level of sales (units or $) needed to break even, or earn zero profit

All costs can be classified as either fixed or variable assumption

determine the total fixed cost and variable cost per unit assume step costs will remain fixed within the relevant range.

Decisions about the use of debt versus equity affect a company's

financial leverage

contribution margin is meant to cover...

fixed costs & profit

Setting two profit equations so that they yield the same profit allows managers to calculate the...

indifference point

Cost structure

how a company uses variable costs versus fixed costs to perform its operations

CVP framework allows managers to evaluate...

how changing one or more variables will impact profitability, while holding everything else constant.

Unit Contribution Margin tells us...

how much each unit sold contributes toward fixed costs and profit

CVP analysis can help answer the question of...

how net income can be increased

Only volume affects total cost and total revenue assumption

ignore other factors that can affect costs and revenue