Week 2 Chapter 3 - Short-Term Profit Planning - Cost-Volume-Profit (CVP) Analysis
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What is Cost-Volume-Profit (CVP) Analysis or Model?
A representation of the short-term profit structure of an organization.
What is the Contribution Margin?
- The difference between total revenue and total variable cost.
- CM = TR - VC
What is the Contribution Margin Ratio?
- The ratio of Contribution Margin per unit to selling price per unit.
What is the CVP equation for a single product company?
How can you manipulate the CVP equation to get the units needed to be sold to produce a target profit?
Units needed to be sold = (target profit + fixed cost) / contribution margin per unit
What is the CVP equation if target profit is defined as 20% of revenues?
What is the equation for Incremental Profit?
Incremental profit = Incremental contribution margin - Incremental cost
What is the main characteristic of a Contribution Income Statement?
Costs are expressed by how they behave.
What is the Breakeven Point equation?
- B/E point = Fixed cost / Contribution margin per unit
- B/E = FC / (p - v)
What are the main assumptions to be made with CVP analysis?
- Price per unit and the Variable cost per unit (and there for the Contribution Margin per unit) remain the same over all levels of production.
- All costs can be classified or decomposed into fixed or variable costs.
- Fixed costs remain the same over all contemplated levels of production.
- Sales = production
What is the equation to calculate the Required Unit Sales when the Target Profit is a % of Revenues?
X = Required unit sales
FC = Fixed costs
cm = Contribution margin per unit
p = Price per unit
X = FC / (cm - [target % * p])
Given the Tax Rate (t) and the Targeted After-Tax Profit, what is the Target Pre-Tax Amount?
t = 45%
A = $100,000
Given the linear cost functions that are assumed in a conventional CVP model, a given percentage increase in Fixed Costs leads to what?
An equivalent percentage increase in the Break-Even Point, all other things constant.
Revenues and Costs change only in response to what?
Volume of sales
Dollar Per Unit is what kind of Profitability Measure?
Absolute measure of profitability
Percentage is what kind of Profitability Measure?
Relative measure of profitability.
What is the Breakeven Point?
When you have just enough Contribution Margin to cover your Fixed Costs.
What is the Indifference Point?
The difference in Fixed Costs versus the difference in Variable Costs.
What is similar about Break-even Point and Fixed Costs?
- They are both expressed by a period.
- i.e., per year, month, etc.
What is the equation for Contribution Margin Per Unit?
What are the required units to sell to achieve a targeted pre-tax profit of 15% of sales?
p = 60
v = 48
FC = 600,000
What is the required units to sell to achieve a targeted after-tax profit of $100,000, given an income-tax rate (t) of 45%?
p = 60
v = 30
FC = 3,000,000
t = 0.45
Assuming an income-tax rate (t) of 40%, how many units would need to be sold to generate an after-tax profit of 5% of sales?
p = 60
v = 48
FC = 600,000
t = 0.4
Contribution Margin Ratio represents what?
The proportion of each sales dollar that is available for recovery of fixed costs, and then profit.
What is the Degree of Operating Leverage?
How cost structures are characterized by their level of fixed costs.
What is the Degree of Operating Leverage equation?
- Contribution Margin ÷ Operating Income
- CM ÷ OI
- Operating income = Sales volume
The greater the proportion of Fixed Costs in the organization's cost structure, then what?
- The higher the degree of operating leverage. (DOL)
- The riskier the cost structure.
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