chapter 5
Discipline: Accounting
Type of Paper: Question-Answer
Academic Level: Undergrad. (yrs 3-4)
Paper Format: APA
Pages: 1
Words: 275
Question
1. Selling prices
2. Sales volume
3. Unit variable costs
4. Total fixed costs
5. Mix of products sold
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
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
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