Chapter 4: Cost-volume relationship, contribution margin, CMR, break-even point

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16 Terms

1
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What are the 5 elements of the cost-volume profit relationship?

  1. Prices of products

  2. Volume/activity level

  3. Per unit variable costs

  4. Total fixed costs

  5. Mix of products sold

2
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What are the basic components of an income statement?

Sales

- variable expenses

= contribution margin

- fixed expenses

= operating income

<p>Sales</p><p>- variable expenses</p><p>= contribution margin</p><p>- fixed expenses</p><p>= operating income</p><p></p>
3
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How do you find the per-unit prices of sales, variable expenses, and contribution margin?

Divide the sales & variable expenses by the units produced

  • subtract the variable expenses from sales to find the contribution margin per unit

<p>Divide the sales &amp; variable expenses by the units produced</p><ul><li><p>subtract the variable expenses from sales to find the contribution margin per unit</p></li></ul><p></p>
4
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How do you find the percentage contributions of sales, variable expenses, and contribution margin?

Sales = 100%

Variable expenses = unit variable cost / unit sales

Contribution margin = unit CM / unit sales

  • this means, 40% contributes to covering fixed costs

If the activity level changes, these ratios are still the same!

<p>Sales = 100%</p><p>Variable expenses = unit variable cost / unit sales</p><p>Contribution margin = unit CM / unit sales</p><ul><li><p>this means, 40% contributes to covering fixed costs</p></li></ul><p>If the activity level changes, these ratios are still the same!</p>
5
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What is the cost-volume profit graph?

If you sell above the break even quantity (intersection), you make a profit

If you sell below, you make a loss

<p>If you sell above the break even quantity (intersection), you make a profit</p><p>If you sell below, you make a loss</p>
6
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What is the contribution margin ratio formula?

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7
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How do you find the contribution margin ratio using units?

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8
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How can you use the contribution margin ratio to find the change in contribution margin dollars?

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9
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What is the variable expense ratio?

The ratio of variable expenses to sales

<p>The ratio of variable expenses to sales</p>
10
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What is the break even point in units?

Fixed expenses / unit CM

<p>Fixed expenses / unit CM</p>
11
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What is the break even point in sales dollars?

Fixed expenses / CM ratio

CM ratio = CM / Sales

  • can also get it by multiplying the unit break even point by the selling price 

<p>Fixed expenses / CM ratio</p><p>CM ratio = CM / Sales</p><ul><li><p>can also get it by multiplying the unit break even point by the selling price&nbsp;</p></li></ul><p></p>
12
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How do you find the units needed to attain the target profit?

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13
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How do you find the sales needed to attain target profit?

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14
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How do you find the profit after tax & the profit before tax?

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15
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What is the margin of safety?

The excess of sales over the break-even volume of sales

<p>The excess of sales over the break-even volume of sales</p>
16
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What is operating leverage?

Measures how sensitive net operating income is to percentage change in sales

<p>Measures how sensitive net operating income is to percentage change in sales</p>