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9 Cards in this Set
- Front
- Back
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Cost Volume Profit (CVP) Analysis |
This is the examining of the shifts in cost and volume and their resulting effects on profits. This analysis is a key factor in many business decisions, including choice of product lines, pricing of products and services, marketing strategy and utilization of productive facilities. |
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Relevant Range |
This is the number of units or hours of production where a firm would normally operate and where fixed costs remain fixed and variable costs vary at a constant rate. |
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Break-even Analysis |
Break-evan analysis is the study of the relationship best been sales, costs and profits. It examines the effects of changes in costs an revenue and therefore, profits as a result of changes in output. |
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Break-even Point |
The break-even point is the sales volume where total revenue equals total costs. It is reached when enough units have been sold to generate a total contribution margin equal to Total fixed cost. The break-even point is defined as the volume of activity at which the contribution margin is equal to total fixed cost |
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Operating Income |
Operating income = total revenue from operations - (cost of goods sold + operating costs) Net income = operating income - income taxes |
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Contribution Margin |
The contribution margin is the excess of Revenue over variable cost that is available first to cover fixed costs and then leaves a surplus of profit. When contribution is just enough to cover fixed costs the firm is said to be breaking even. |
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Uses of Break-even Analysis |
It is an excellent way for the cost accountant to present financial information to managers who may not be trained in in accounting as a graph is worth a thousand words. It is a decision making tool. It can highlight the relationship between cost, volume and profit and allows the presenter to show the effect on profit if certain courses of action such as increasing selling price or decreasing fixed costs, are taken. |
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Break-even Analysis as a Planning Tool |
Break-even analysis can be used by management to answer the following questions: a) How many profits can return at a given level of sales? b) How many units must we sell to achieve a target profit? c) What is the effect on Break-even point if selling price is changed? d) What is the effect on break even point if variable cost per unit is changed? e) what is the effect on Break-even pont if there is a change in fixed cost? |
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CONTRIBUTION MARGIN TECHNIQUE |
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