Cost Volume Profit Analysis

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Cost volume profit analysis

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tool for understanding the interaction of revenues with fixed an variable costs.

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Breakeven point

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the level of output at which total revenues equal total expenses. Operating income is zero.

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Margin of safety

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Measure of risk. excess of budgeted revenues over breakeven revenues.

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mixed costs (semivariable costs)

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costs with both fixed and variable elements

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revenue (sales) mix

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the composition of total revenues in terms of various products. FLightcrew = 50% hoodies 20% shirts 10% hats 20% Crewnecks.

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Sensitivity Analysis

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examines the effect on the outcome ofnot achieving the orignal forecast or changing an assumption.

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Accounting concept of marginal analysis

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includes only explicit costs

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economic concept

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both explicit and implicit costs

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explicit costs

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costs that represent actual outlays in cash

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implicit cost

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opportunity cost. The contribution to income that is forgone by not using a limited resource in its best alternative use.

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normal profit

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Crucial implicit costs
profit foregone using your skill in another venture.

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Economic costs

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Explicit costs+Implicit costs
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Accounting profits

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when the book income of an organization exceeds the book expenses

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Economic profits

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not earned until the organizations income exceeds not only costs as recorded in the accounting records, but the firms implicit costs as well.

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avoidable cost

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cost that may be saved by not adopting a particular option.

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unavoidable cost

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cost that cannot be avoided if particular action is taken.

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Marginal revenue

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additional revenue produced by generating one additional unit of output.

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Short run maximization

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when marginal revenue equals marginal cost.

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make-or-buy

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the manager considers only the costs relevant to the investment decision. If the total relevant costs of production are less than the costs to buy the item, it should be in sourced.

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Disinvestment

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opposite of capital budgeting decisions. If the marginal cost of a decision exceeds the marginal revenue, the firm should dis invest.

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The law of demand

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if all other factors are held constant, the price of a product and the quantity demanded are inversely related.

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Income effect

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as the price of a good falls, consumers have more buying power. they can buy more of the good with less money.

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Substitution effect

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as the price of one good falls, it becomes cheaper relative to other goods. Consumers will thus have a tendency to spend money on the cheaper good.

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Price elasticity of demand

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measures the sensitivity of the quantity demanded of a product to change in its price.

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When demand elasticity coefficient is

Greater than one

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relatively elastic range. A small change in price results in a large change in quantity demanded.

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When demand elasticity coefficient is

Equal to one

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unitary elastic. A single unit change in price brings a single unit change in quantity demanded.

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When demand elasticity coefficient is

Less than one.

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demand is relatively inelastic. A large change in price will lead to a small change in demand.

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~When demand elasticity coefficient is

Infinite

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Perfectly elastic. Horizontal line. Perfect competition.

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When demand elasticity coefficient is

equal to zero

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demand is perfectly inelastic. Drug addicts.

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Target margin maximization

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percentage ratio of profits to sales.

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Volume-oriented objectives

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set prices to meet target sales volumes or market shares.

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image-oriented objectives

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set prices to enhance the consumers perception of the firms's merchandise mix.

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Stabilization objectives

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set prices to maintain a stable relationship between the firms prices and the industry leader's prices.

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Price setting factors

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Supply and demand
Internal factors

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Internal factors of price setting

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Marketing objectives
marketing mix strategy
relevant costs in the value chain
organizational focus
capacity.

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External factors of price setting

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Type of market
customer perceptions of price and value
Price demand relationship
Competitors

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cartel

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when a group of firms joins together for price-fixing purposes.

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collusive oligopoly

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similar to a monopoly. each firm is willing to restrict output, charge a higher price and earn max profit.

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Market based pricing

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basing prices on the products perceived value and competitors actions rather than costs.

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competition based pricing

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going rate pricing bases price largely on competitors prices.

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Price skimming

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is the practice of setting an introductory price relatively high to attract buyers who are not concerned about price and to recover research and development costs

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Penetration pricing

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setting an introductory price relatively low to gain deep market penetration quickly

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Zone pricing

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sets differential freight charges for customers on the basis of location.

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Basing-point pricing

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charges each customer the freight costs incurred from a specified city to the destination regardless of the actual point of origin of the shipment.

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freight absorption pricing

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absorbs all or part of the actual freight charges. Customers are not charged actual delivery costs.

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Price adjustments

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frieght
Discounts and allowances.

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Discriminatory pricing

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different prices for different customers

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Psychological pricing

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based on consumer psychology

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Promotional pricing

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temporarily reduces prices below list or even cost to stimulate sales.

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Value pricing

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entails redesigning products to improve quality without raising prices or offering the same quality at lower prices.

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Product line pricing

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sets price steps among the products in the line based on costs, consumer perceptions and competitors prices.

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optional product pricing

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requires the firm to choose which products to offer as accessories and which as standard features of a main product.

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Captive product pricing

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Products that must be used with a main product. Often the main product is cheap but the captive products are not (ink cartridges)

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By product priding

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sets prices at any amount in excess of storing and delivering byproducts. such prices allow the seller to reduce the costs and therefore the prices of the main products.

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Product bundle pricing

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entails selling combinations of products at a price lower than the combined prices of the individual items. this strategy promotes sales of items consumers might not otherwise buy if the price is low enough. SEASON TICKETS.

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Target price

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expected market price for a product or service, given the company knowledge of the consumers perceptions of value and competitors responses.

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Kaizen

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continuous improvement

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Value engineering

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a means of reaching targeted cost levels