Chapter 5: Cost-Volume-Profit Flashcards

Study Notes

Cost-Volume-Profit (CVP) Relationships

The CM Ratio Formula is calculated as Contribution Margin divided by Sales, providing insight into profit generation relative to sales.
To determine the Unit Sales to Break Even, use the formula Fixed Expenses divided by Unit Contribution Margin (CM).
Dollar Sales to Break Even can be calculated using Fixed Expenses divided by the Contribution Margin Ratio, indicating how much revenue is needed to cover costs.
For achieving a target profit, the formula is (Target Profit + Fixed Expenses) divided by Contribution Margin Per Unit (CMPU).
The formula for Dollar Sales to Attain Target Profit is (Target Profit + Fixed Expenses) divided by CM Ratio, helping specify sales goals.
Margin of Safety in Dollars represents the cushion of budgeted or actual sales over break-even sales. A higher margin indicates lower risk of losses.
The formula for calculating Margin of Safety in Dollars is Total Sales minus Break Even Sales, essential for risk management analysis.
An advantage of a high cost structure is increased income during profitable years compared to companies with lower fixed costs.
Conversely, a disadvantage of a high cost structure results in decreased income during poor years, making it riskier than lower fixed cost structures.
Operating leverage measures how sensitive net operating income is to changes in sales, reflecting the impact of fixed costs on profit.
The Degree of Operating Leverage Formula is Contribution Margin divided by Net Operating Income, indicating the level of operating risk.
Sales mix refers to the proportionate relationship of different products sold by a company, affecting overall profitability.
CVP Relationships in Equation Form is represented as Profit = (Sales - Variable Expenses) - Fixed Expenses, summarizing profit drivers in a straightforward equation.

Description

Test your knowledge of cost-volume-profit relationships with these flashcards. Focus on key formulas such as the CM Ratio, break-even sales, and target profit calculations. Perfect for students looking to solidify their understanding of financial concepts.