Cost-Volume-Profit Analysis Flashcards

Vocabulary flashcards covering core Cost-Volume-Profit (CVP) analysis terms, formulas, and concepts.

Cost-Volume-Profit (CVP) Analysis

A method that analyzes the relationship among cost, volume, and profit to help managers plan for change, budget, and make decisions.

Contribution Margin

The amount remaining from sales revenue after variable expenses have been deducted; used to cover fixed costs and provide profit.

Contribution Margin Ratio (CM%)

Contribution margin expressed as a percentage of sales, computed as total contribution margin divided by total sales or revenue: $\text{CM\%} = (\text{Sales} - \text{Variable cost}) \div \text{Sales}$

Contribution Margin per Unit

The unit selling price minus the variable cost per unit.

Break-even Point

The level of sales, in pesos or in units, at which total revenue equals total costs and profit is exactly zero.

Graph Method

One of the three ways to find the break-even point, which relies on plotting cost and revenue lines to see where they intersect.

Equation Method

One of the three ways to find the break-even point that starts from the basic formula $\text{Sales} = \text{Variable costs} + \text{Fixed costs} + \text{Profit}$

Formula Method (CM Approach)

One of the three ways to find the break-even point that uses contribution margin per unit or contribution margin ratio directly in a formula.

Margin of Safety

The difference between expected (or actual) sales and the break-even point, showing how far sales can drop before the company starts operating at a loss.

Degree of Operating Leverage (DOL)

A measure of how a percentage change in sales volume affects net operating income, calculated as $\text{DOL} = \text{Contribution margin} \div \text{Operating profit}$

Sales Mix

The relative combination or proportion in which a company's different products or services are sold.

Weighted Contribution Margin per Unit

In multi-product CVP analysis, a figure that combines each product's contribution margin per unit with its share of the sales mix (in units) into one blended amount.

Weighted Contribution Margin Ratio

In multi-product CVP analysis, a figure that combines each product's contribution margin ratio with its share of the sales mix (in peso sales) into one blended ratio.

Target (Desired) Profit

The profit level management wants to achieve for the coming period, used to compute the required sales volume or sales pesos.

Fixed Costs

Costs that remain constant in total within the relevant range, regardless of the activity or volume level.

Variable Costs

Costs that change in total in direct proportion to changes in activity or volume level.

Operating Profit

The bottom line of the contribution margin income statement, calculated as $\text{Sales} - \text{Variable costs} - \text{Fixed costs}$

Five Factors of CVP Analysis

The factors explicitly considered in CVP analysis: selling price per unit, sales volume, variable cost per unit, total fixed costs, and sales mix.

Break-even Point in Units

Computed by dividing total fixed costs by contribution margin per unit: $\text{Break-even units} = \text{Fixed costs} \div \text{CM per unit}$

Break-even Point in Peso Sales

Computed by dividing total fixed costs by contribution margin ratio: $\text{Break-even pesos} = \text{Fixed costs} \div \text{CM ratio}$

Before-Tax Desired Profit

The equivalent before-tax profit calculated when target profit is stated after-tax, using the formula $\text{Before-tax desired profit} = \text{After-tax profit} \div (1 - \text{tax rate})$