chapter 5

Discipline: Accounting

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 3-4)

Paper Format: APA

Pages: 1 Words: 275


Cost-volume-profit (CVP) analysis focuses on how profits are affected by the following five factors:
1. Selling prices
2. Sales volume
3. Unit variable costs
4. Total fixed costs
5. Mix of products sold

the contribution income statement helps judge the impact on profits of changes in what 3 things
selling price cost volume

the cm is the amount available to cover _______ _______ and the provide ___ for the period. 
fixed expenses profit

break-even point
the level of sales at which profit is 0

once the break even point is reached, what is true about tent operating income?
it will increase by the amount of the unit contribution margin for each additional unit sold 

Contribution format income statement equation
Profit=(Sales - Variable expense) - Fixed expense

unit CM formula
selling price per unit - variable expenses per unit 

Cost-Volume-Profit Graph
A graph showing the relationship between costs, volume, and profits.
highlights CVP relationships over wide ranges of activity

3 steps to prepare C-V-P graph 
1) draw horizontal line at fixed cost 2) choose some sales volume and plot the point for total expense at that volume- then draw line back to where the fixed expenses intersect y axis 3) choose some level of activity and plot the point representing total sales dollars at that activity level

equation for a profit graph
profit= unit CM X Q - fixed expenses 

CM ratio formula
CM ratio= contribution margin/ sales 

cm ratio for one unit
unit cm/ unit selling price 

equation to express the effect of a change in sales on the CM
change in cm= cm ratio X change in sales 
equation showing relationship between profit and cm ratio
profit= cm ratio X sales     - fixed expenses 

variable expense ratio
variable expenses/ sales
can also do per unit

Incremental analysis
Consider only the revenue, cost, and volume that will change if a new program is implemented

Target Profit Analysis
Estimating what sales volume is needed to achieve a specific target profit.

basic profit equation (can be used to find the sales volume required to attain a target profit) 
profit= unit cm x q   - fixed expenses 

formula fo target profit analysis (gives units to sell) 
unit sales to attain target profit= TP + FE / unit CM 

formula for target profit analysis (gives sales dollars)
sales dollars to attain target profit= TP+FE/ CM ratio 

Margin of safety

The excess of budgeted (or actual) dollar sales over the break-even dollar sales

the amount by which sales can drop BEFORE losses are incurred

margin of safety in dollars (formula)
mos in $= total budgeted (or actual) sales - break even sales 

margin of safety percentage (formula)
mos %= MOS in $/ total budgeted (or actual) sales in $

cost structure refers to the relative proportion or what? 
fixed and variable costs in an orgnaization 

commission based on sales dollars can lead to what?
lower profits 

what can commissions be based on to maximize a company's profit? 
contribution margins 

4 assumptions we make in CVP analysis 
1) selling price is constant 2) costs are linear and can be accurately divided into variable/fixed elements 3) sales mix is constant 4) inventories do not change