Intro to Cost-Volume-Profit Analysis Flashcards

Intro to Cost-Volume-Profit Analysis Flashcards
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Incremental Analysis
Businesses use this decision-making tool to narrow their attention onto only the important factors that influence a decision, ignoring other issues, such as sunk costs.
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Contribution Margin
This reflects the difference between a company's total variable cost and its sales. To be successful, this number should stay positive.
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Pull Production System
Businesses that use this production system create custom products. Due to this, they often utilize pricing strategies that deal with lower fixed costs and high variable costs.
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Cost-Volume-Profit (CVP) Income Statement
This income statement is designed to be used internally by a company's management. It records information about net income and company expenses.
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Sales Mix
The range of services or products offered for sale by a given company.
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Theory of Constraints
Businesses can use this process when they want to identify, manage and assess issues that may hold back the production of their goods.
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Contribution Margin Per Unit: Formula
Sales price per unit - variable cost per unit
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Contribution Margin Per Unit
The earnings of a business that can be applied to profit or fixed costs.
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Break-Even Point
The point at which you sell enough products to cover the money you spent making them. Every product you sell past this point will generate profit.
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Break-Even Analysis: Formula
Fixed Cost / (Sales Price - Variable Cost) = Number of items sold to break even
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Break-Even Analysis
This form of analysis allows you to determine how many products you need to sell to exactly cover the cost of production.
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22 cards in set

Flashcard Content Overview

Checking out this set of flashcards gives you the opportunity to review the purpose of cost-volume-profit (CVP) analysis and the CVP income statement. You'll be able to focus on high and low operating leverage along with the margin of safety. Incremental analysis and the role of a contribution margin in business are also covered by these cards. Additionally, you can go over break-even analysis and a business's break-even point.

Front
Back
Break-Even Analysis
This form of analysis allows you to determine how many products you need to sell to exactly cover the cost of production.
Break-Even Analysis: Formula
Fixed Cost / (Sales Price - Variable Cost) = Number of items sold to break even
Break-Even Point
The point at which you sell enough products to cover the money you spent making them. Every product you sell past this point will generate profit.
Contribution Margin Per Unit
The earnings of a business that can be applied to profit or fixed costs.
Contribution Margin Per Unit: Formula
Sales price per unit - variable cost per unit
Theory of Constraints
Businesses can use this process when they want to identify, manage and assess issues that may hold back the production of their goods.
Sales Mix
The range of services or products offered for sale by a given company.
Cost-Volume-Profit (CVP) Income Statement
This income statement is designed to be used internally by a company's management. It records information about net income and company expenses.
Pull Production System
Businesses that use this production system create custom products. Due to this, they often utilize pricing strategies that deal with lower fixed costs and high variable costs.
Contribution Margin
This reflects the difference between a company's total variable cost and its sales. To be successful, this number should stay positive.
Incremental Analysis
Businesses use this decision-making tool to narrow their attention onto only the important factors that influence a decision, ignoring other issues, such as sunk costs.
Margin of Safety
The amount of room (money, units, or percentage of sales) a business has to change prices or what they buy before they drop below their break-even point.
Margin of Safety: Investments
In this type of business, the margin of safety is considered to be the amount between a product's intrinsic value and the price it is purchased at.
Margin of Safety: Sales Formula (in monetary terms)
Projected level of sales - break-even point
Operating Leverage
This amount represents a percentage of a company's fixed costs. This percentage is found in the operating structure of the company.
Low Operating Leverage
Companies have this type of operating leverage if their fixed costs are low. This type of operating leverage comes with a low degree of risk.
High Operating Leverage
We see this type of operating leverage in businesses with high fixed costs. These businesses face higher amounts of risk and have to sell a lot of products.
Cost-Volume-Profit (CVP) Analysis
Businesses use this kind of analysis to examine the connections among their profit, costs and production volume. It assumes the sales mix stays the same.
Cost-Volume-Profit (CVP) Analysis: Relevant Range
This is the level of activity that a company can reasonably assume it will operate at over a set amount of time.
Your company sells cakes for $10 with a variable cost of $5. Your fixed costs are $1,000. Use break-even analysis to determine how many cakes you need to sell to break even.

$1,000 / ($10 - $5)

1,000 / 5 = 200 cakes

You want to determine your contribution margin for cakes. Each cake sells for $10 and has a variable cost of $2. Use the contribution margin per unit formula to complete the calculation.
10 - 2 = 8
What is the margin of safety for a company with a break-even point of $10,000 and a projected sales level of $12,000?
$12,000 - $10,000 = $2,000

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