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CHAPTER 4
COSTVOLUMEPROFIT ANALYSIS:
A MANAGERIAL PLANNING TOOL
DISCUSSION QUESTIONS
1.
CVP analysis allows managers to focus on
selling prices, volume, costs, profits, and
sales mix. Many different “whatif” questions
can be asked to assess the effect on profits
of changes in key variables.
2.
The units sold approach defines sales
volume in terms of units of product and
gives answers in these same terms. The unit
contribution margin is needed to solve for
the breakeven units. The sales revenue ap
proach defines sales volume in terms of rev
enues and provides answers in these same
terms. The overall contribution margin ratio
can be used to solve for the breakeven
sales dollars.
3.
Breakeven point
is the level of sales activity
where total revenues equal total costs, or
where zero profits are earned.
4.
At the breakeven point, all fixed costs are
covered. Above the breakeven point, only
variable costs need to be covered. Thus,
contribution margin per unit is profit per unit,
provided that the unit selling price is greater
than the unit variable cost (which it must be
for breakeven to be achieved).
5.
Variable cost ratio = Variable costs/Sales
Contribution margin ratio
= Contribution margin/Sales
Contribution margin ratio
= 1 – Variable cost ratio
6.
No. The increase in contribution is $9,000
(0.3
×
$30,000), and the increase in advert
ising is $10,000. If the contribution margin ra
tio is 0.40, then the increased contribution
margin is $12,000 (0.4
×
$30,000). This is
$2,000 above the increased advertising ex
pense, so the increased advertising would be
a good decision.
7.
Sales mix
is the relative proportion sold of
each product. For example, a sales mix of
3:2 means that three units of one product
are sold for every two of the second product.
8.
Packages of products, based on the expec
ted sales mix, are defined as a single
product. Selling price and cost information
for this package can then be used to carry
out CVP analysis.
9.
This statement is wrong; breakeven analys
is can be easily adjusted to focus on tar
geted profit.
10.
The basic breakeven equation is adjusted
for targeted profit by adding the desired tar
geted profit to the total fixed costs in the nu
merator. The denominator remains the con
tribution margin per unit.
11.
A change in sales mix will change the contri
bution margin of the package (defined by the
sales mix) and, thus, will change the units
needed to break even.
12.
Margin of safety
is the sales activity in excess
of that needed to break even. The higher the
margin of safety, the lower the risk.
13.
Operating leverage
is the use of fixed costs
to extract higher percentage changes in
profits as sales activity changes. It is
achieved by increasing fixed costs while
lowering variable costs. Therefore, increased
leverage implies increased risk, and vice
versa.
14.
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This note was uploaded on 02/24/2009 for the course ACCY 202 taught by Professor Mccaffrey during the Spring '08 term at University of Mississippi School of Law.
 Spring '08
 McCaffrey

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