Class 5

To calculate the sales dollars or units needed to achieve a target profit, the break-even contribution margin formulas can be modified by

- adding the target profit to fixed expenses before dividing by the contribution margin ratio - adding the target profit to fixed expenses before dividing by the unit contribution margin

CVP analysis is used to determine the effects of

- cost changes on profits - selling price changes on profits - activity changes on revenues - activity changes on costs

The break-even point can

- direct management's attention to potential problems - provide management information related to profitability and capacity

When companies are subject to income tax, the CVP target profit calculation

- must include the effect of income taxes - requires a second calculation to determine how much more before tax income is needed to meet the target profit

A profit-volume graph

- shows profit or loss as the vertical distance between the horizontal axis and profit line - crosses the horizontal axis at the breakeven point

After tax net income

- the amount of income remaining after after subtracting the firm's income tax expense - is calculated by before tax net income times (1-tax rate) - is calculated by before tax net income minus the tax rate times before tax net income

True or false: Before tax net income is less than after tax income

False

True or false: A CVP graph can show fixed expenses graphed above or below variable expenses

True

True or false: The profit equation approach to break-even calculates the break-even point in units of sales

True

When a company has no profit or loss, this is called the __________ point

break even

The intersection of the total cost line and total revenue line in a CVP graph is the

break even point

The volume of activity where the company's revenues and expenses are equal is the

break-even point

Break-even point in units x selling price per unit will calculate

break-even sales

The break-even point in sales dollars may be calculated as

break-even units x sales price per unit

The break-even point in sales dollars may be calculated as:

break-even units x sales price per unit

Cost-volume-profit analysis can be extended to determine the effect on profit of other changes, such as

changes in income tax rates

Sales revenue minus variable expenses is called

contribution margin

Prior to beginning CVP analysis, an organization's _________ should be analyzed

cost behavior

Break-even in units is calculated as:

fixed expenses/unit contribution margin

On the CVP graph, the fixed-expense line is

parallel to the horizontal axis

The contribution margin ratio is also called the contribution-margin

percentage

The area between the total revenue and total cost lines, but above their intersection is called the

profit area

A net income goal set by management is called a

target profit

In a traditional CVP graph, the total revenue line intercepts the vertical axis at

the origin

Fixed expenses divided by unit contribution margin is the formula for break-even in

units

Contribution margin is sales minus

variable expenses

Break-even point is

where revenues equal expenses

The break-even point is the level of sales needed to earn a target profit of

zero