Cost-Volume-Profit Analysis

break-even point

The break-even point is the point where total revenue equals total cost (i.e., the point of zero profit).
The break-even point is the level of sales at which contribution margin just covers fixed costs and consequently operating income is equal to zero

common fixed expense

are the fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated.

contribution margin

is 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.

contribution margin income statement

Sale
(Total variable cost)(variable selling and administrative cost, prime cost, overhead)
=Total contribution margin
(Fixed cost)
=Operating income

contribution margin ratio

contribution margin per unit/price

CVP analysis

method that estimates how changes in the following three factors affect a company's profit:Costs (both variable and fixed),Sales volume, Price

Cost structure

a company's mix of fixed cost in relative to variable cost

CVP graph

The cost-volume-profit graph depicts the relationships among cost, volume, and profits (operating income).

Degree of operating leverage

can be measured for a given level of sales by taking the ratio of contribution margin to operating income or:
Contribution margin � Operating income

Direct fixed expense

are those fixed costs that can be traced to each segment and would be avoided if the segment did not exist.

Indifference point

the quantity at which the two system: automated and manual produce the same operating income

Margin of safety

The margin of safety is the units sold or the revenue earned above the break-even volume.

Operating leverage

is use of fixed costs to extract higher percentage changes in profits as sales activity changes.

Profit- volume graph

A profit-volume graph visually portrays the relationship between profits (operating income) and units sold.
Function: income= (price-variable expense)*units-fixed expense

Sales Mix

is the relative combination of products being sold by a firm.
Break-even packages= total fixed cost/packages contribution margin ratio

Sensitivity analysis

a what-if technique company uses to analyze impact of changes in underlying assumption on an answer

Variable cost ratio

variable cost/price

CVP Analysis Assumption

1.linear revenue and cost functions remain constant over the relevant range
2.selling prices and costs are known with certainty
3. All units produced are sold, no inventories
4. Sales mix are known for certainty for multiple product break-even setting