Term
| Cost-Volume-Profit (CVP) Analysis |
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Definition
| Assists managers in understanding the behavior of a product's total cost, total revenues, and operating income as changes occur in that products output level, selling price, variable cost, fixed cost |
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Term
| Simplifying Assumptions of CVP Analysis |
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Definition
-Costs are either fixed or variable
-units produced=units sold
-relationship between revenues and costs are linear |
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Term
| CVP Simplified Income Model |
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Definition
| Revenues - Costs = Income |
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Term
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Definition
| Remains constant per unit and varies in total |
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Term
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Definition
| Remains constant in total but varies per unit |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| Break Even Units (BEu) = FC/Contribution Margin (CM) |
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Term
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Definition
| CM= Sales Price per unit (SP)- VC (per unit) |
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Term
| Contribution Margin Income Statement |
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Definition
Sales- XX
Less: VC- (XX)
Contribution Margin XX
Less: Fixed Cost (XX)
Income Before Taxes- XX
Income Tax Expense (XX)
Net Income XX |
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Term
| Alternative Break Even Calculation |
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Definition
| BEu = FC/CM% where CM%- CM/SP |
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Term
| Income to Earn Desired Profit (DP) |
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Definition
DPu = (FC+DP)/CM ignores tax
To accommodate tax DP/(1-TR)=DP before income tax |
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Term
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Definition
| When you have multiple products, weight their contribution margin by their production percentage to get contribution from each product line. |
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Term
Calculation for WACM
Product A: sp 25 vc 20 mix .6
Product B: sp 40 vc 30 mix .4 |
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Definition
Product A CM=25-20=5 x Mix=.6 WCMa=3
Product B VC=40-30=10 x Mix=.4 WCMb=4
WACM=7 so CM= 7 for each product hereon out due to weighting, separate out. |
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Term
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Definition
| The trade-off of FC and VC. If you increase FC to decrease VC, you can increase profit if you sell a lot of product, however, if you don't sell much, you have much higher costs to pay, despite not producing much. Risk vs. Reward |
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