AGEC 340 - Chapter 12: Decision Making and Volume-Cost Analysis

A set of vocabulary flashcards covering decision-making steps, cost classifications, and volume-cost analysis formulas based on the AGEC 340 Chapter 12 lecture.

Decision Making

The process of choosing between different alternatives for the purpose of achieving desired goals, involving process, choosing, and goals.

Problem identification

The first step in the six-step decision-making process.

Summary of facts

The second step in the decision-making process involving the collection of factual information.

Identifying alternatives

The third step in the decision-making process where different possible solutions are outlined.

Analysis

The fourth step in the decision-making process involving the study of the identified alternatives.

Action

The fifth step in the decision-making process where the chosen alternative is implemented.

Evaluation

The sixth and final step in the decision-making process to assess the results of the action taken.

Volume-cost analysis

Also known as breakeven analysis, it is a tool for examining the relationship between costs and the volume of business generated by a firm.

Fixed costs

Costs in which the total amount does not fluctuate with the volume of business.

Variable costs

Costs in which the total amount changes directly with the volume of sales.

Semi-variable costs

Costs that are partly fixed and partly variable.

Incremental costs

A cost classification where the additional cost for each unit becomes increasingly smaller or greater as sales increase, such as supplier discounts.

Lumpiness

Costs that are fixed within certain sales volume ranges, but once a certain point is reached, a whole new set of fixed costs are incurred.

Allocating costs

The process of determining which division or part of an agribusiness is responsible for covering specific costs.

Length of time period

A factor in cost classification where, in the very long run, all costs become variable with sales volume.

Gross Profit (Margin)

The amount calculated by subtracting the Total Cost of Goods Sold from Net Sales.

Net Operating Income

The result of subtracting Total Operating Expenses from Gross Profit.

Contribution to overhead (CTO)

The portion of each unit of sales that remains after variable costs are covered and that can be applied towards paying or covering fixed or overhead costs.

CTO Formula

$$\text{Revenue (Sales)} - \text{Variable Cost} = \text{Contribution to Overhead}$$

Breakeven point

The number of units (dollars) of sales that are needed to completely cover all costs.

Breakeven Point Formula

$$\text{Breakeven Point} = \frac{\text{Total Fixed Costs}}{1.0 - \frac{\text{Variable Costs}}{\text{Sales}}}$$

Assumption 1 (Volume-Cost Analysis)

Fixed costs are constant.

Assumption 2 (Volume-Cost Analysis)

Efficiency is unchanged.

Assumption 3 (Volume-Cost Analysis)

Input prices are fixed.

Assumption 4 (Volume-Cost Analysis)

Product mix is constant.

Assumption 5 (Volume-Cost Analysis)

Selling price is unchanged.

Profit planning

A use of volume-cost analysis to determine the sales necessary to reach a specific financial target.

Additional Sales to Reach Profit Goal Formula

$$\text{Additional Sales to Reach Profit Goal} = \frac{\text{Profit Goal}}{\text{CTP}}$$

Additional Sales to Cover New Fixed Costs Formula

$$\text{Additional Sales to Cover New Fixed Costs} = \frac{\text{Additional Fixed Costs}}{\text{CT0}}$$

Impact of changes in price

Because CTO is selling price per unit less variable cost per unit, any change in selling price directly impacts the CTO and the breakeven point.