Finance Exercise
1
Finance Exercise Week Four
University of Phoenix
FIN/324 Financial Analysis For Managers I
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Finance Exercise
2
Finance Exercise Week Four
9. What is the basic CVP equation? What is a more detailed
version of this equation?
The basic equation for the CVP is sales revenuevariable costsfixed cost=profit
A precise version of the equation is (sales price x units) – (variable costs x units) – fixed costs =
profit
10. What is the contribution margin, and why is it important for managers to know the
contribution margins of their products?
The contribution margin is the revenue available to cover the fixed costs of the product
and provide a profit to the business.
The contribution margin provides the manager with the profitability of products assisting
managers in planning
11. How much will profits increase for every unit sold over the breakeven point?
Profits increase by 100% once the breakeven point has been reached
12. What is the major advantage of using CVP graphs?
The graphs provide a visual understanding of the results of CVP calculations and are
considered the most efficient method of explaining and understanding the data.
13. When other factors are constant, what is the effect on profits of an increase in fixed costs? Of
a decrease in variable costs?
Profits will decrease when the fixed costs increase and all other factors are constant. The
company will need to sell more units of a product or service to remain at the target income and
remain at the same profit margin. A decrease in variable costs will result in an increase of profit.
14. What are the limiting assumptions of CVP analysis?
CVP is limited by the time fixed and variable cost change and requires periodic adjustments.
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 Spring '10
 LITTLE
 Finance, Contribution Margin, Finance exercise, Kerry Yost

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