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What is operating leverage why is knowledge of a rms

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Unformatted text preview: 2_ch01_001-072.inddfinancial statements? 1 3-1. 3-2. 3-3. lan27114_ch03_080-109.indd lan27114_ch03_080-109.indd 95 10/5/09 11:09:29 PM 10/22/09 10:34:02 PM REVISED PAGES Part II 96 3-4. 3-5. 3-6. 3-7. 3-8. 3-9. 3-10. 3-11. Cost Analysis and Estimation 1 Compare cost-volume-profit (CVP) analysis with profit-volume analysis. How do they PART differ? Fixed costs are often defined as “fixed over the short run.” Does this mean that they are not fixed over the long run? Why or why not? What is operating leverage? Why is knowledge of a firm’s operating leverage important to its managers? What is the margin of safety? Why is this important for managers to know? Write out the equation for the target volume (in units) profit equation when the income tax rate is t. How do income taxes affect the break-even equation? Why? Why is it common to assume a fixed sales mix before finding the break-even volume with multiple products? What are some important assumptions commonly made in CVP analysis. Do these assumptions impose serious limitations on the analysis? Why or why not? Orientation Preparing and Organizing Yourself for Success in College Critical Analysis and Discussion Questions 3-12. 3-13. 3-14. 3-15. 3-16. 3-17. 3-18. Exercises Why might the operating profit calculated by CVP analysis differ from the net income reported in financial statements for external reporting? Why does the accountant use a linear representation of cost and revenue behavior in CVP analysis? How is this justified? The typical cost-volume-profit graph assumes that profits increase continually as volume increases. What are some of the factors that might prevent the increasing profits that are indicated when linear CVP analysis is employed? “The assumptions of CVP analysis are so simplisticC that noTfiErm S I N make R T O N E HAP R would P A a decision based on CVP alone. Therefore, there is no reason to learn CVP analysis.” Comment. “I am going to work for a hospital, which is a not-for-profit organization. Because there are no profits, I will not be able to apply 1 CVP analysis in my work.” Do you agree with this any Making Yourself Successful in College statement? Why or why not? Consider a class in a business school where volume is measured by the number of students 2 leverage is high or low? Why? in the class. Would you say the operating Approaching College Reading and Developing College-Level Vocabulary On January 1, 2009, a news report on msn.com includedathe following sentence: “A report put out by brokerage house CLSA about Jet Airways said that the fall in ATF [fuel] prices has brought down the load factors (flight occupancy) required for the airline to break even 3 Approaching College limitations should be from 78 percent to 63 percent.” What important assumptions andAssignments: Reading (The load factor Following Directions considered when using this piece of information? Textbooks and is the percentage of available seats on a flight that are occupied.) accounting 3-19. Profit Equation Components Id...
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