What is COST-VOLUME-PROFIT (CVP) ANALYSIS?
estimates how changes in costs (both variable and fixed), sales volume, and price affect a company's profit. CVP is a powerful tool for planning and decision making. In fact, CVP is one of the most versatile and widely applicable tools used by managerial
What is BREAK-EVEN POINT?
Companies use CVP analysis to reach important benchmarks, such as their break even point. The break-even point is the point where total revenue equals total cost (i.e., the point of zero profit). New companies typically experience losses (negative operati
What does CVP analysis also address?
1. the number of units that must be sold to break even. 2. the impact of a given reduction in fixed costs on the break-even point. 3. the impact of a increase in price on profit.
What is the CONTRIBUTION MARIN INCOME STATEMENT?
The income statement format that is based on the separation of costs into fixed and variable components is called the contribution margin income statement.
What is the CONTRIBUTION MARGIN?
the difference between sales and variable expense. It is the amount of sales revenue left over after all the variable expenses are covered that can be used to contribute to fixed expense and operating income.
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If the contribution margin income statement is recast as an equation, it becomes more useful for solving CVP problems. The operating income equation is: (Operating Income=Sales-Total Variable Expenses-Total Fixed Expenses)
What is the VARIABLE COST RATIO?
the proportion of each sales dollar that must be used to cover variable costs.
What is the CONTRIBUTION MARGIN RATIO?
the proportion of each sales dollar available to cover fixed costs and provide for profit.
What is a PROFIT-VOLUME GRAPH?
visually portrays the relationship between profits (operating income) and units sold. The profit-volume graph is the graph of the operating income equation:
Operating Income=(price x units)- (Unit Variable Cost x Units) - Total Fixed Costs
What is the COST-VOLUME-PROFIT GRAPH?
depicts the relationships among cost, volume, and profits (operating income) by plotting the total revenue line and the total cost line on a graph. To obtain the more detailed relationships, it is necessary to graph two lines- the total revenue line and t
What is SALES MIX?
the relative combination of products being sold by a firm.
What is MARGIN OF SAFETY?
the units sold or the revenue earned above the break-even volume. It is calculated as follows. Margin of Safety=Sales-Breakeven Sales
What is OPERATING LEVERAGE?
the use of fixed costs to extract higher percentage changes in profits as sales activity changes.
Explain DEGREE OF OPERATING LEVERAGE.
can be measured for a given level of sales by taking the ratio of contribution margin to operating income, as follows: Degree of operating leverage= Total Contribution Margin/Operating Income.
Formulas
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Break-Even Units
Total Fixed Cost/Price-Variable Cost per Unit
Variable Cost Ratio 1
Total Variable Cost/Sales
Variable Cost Ratio 2
Unit Variable Cost/Price
Contribution Margin Ratio 1
Total Contribution Margin/Sales
Contribution Margin Ratio 2
Total Contribution Margin/Price
Break-Even Sales
Total Fixed Expenses/Contribution Margin Ratio
Percentage Change in Profits
Degree of Operating Leverage x Percent Change in Sales