Cost Management

Business

Quiz 9 :

Short-Term Profit Planning: Cost-Volume-Profit Cvp Analysis

Quiz 9 :

Short-Term Profit Planning: Cost-Volume-Profit Cvp Analysis

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Felton Paper produces paper for textbooks. Felton plans to produce 500,000 cases of paper next quarter to sell at a price of $100 per case. Each case costs the company $80 to produce. What is the total contribution margin for next quarter
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The contribution margin is the difference between the entire revenue and total variable cost. The contribution margin per unit is the difference between the selling price per unit and variable cost per unit. It is a pointer that shows the changes in operating financial gain with alteration in the number of units. The contribution margin per unit is calculated as follows
img The total contribution margin is calculated by multiplying contribution margin per unit by the total number of units. The total contribution margin is calculated as follows:
img Where
p = Selling price per unit
v = Variable cost per unit
Q = number of units sold
F company selling price is $100 per case and the variable cost per unit is $80. The total number of cases produced is 50000 cases. The total contribution margin is calculated as follows:
img The total contribution margin for F company is
img

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What are the basic assumptions of CVP analysis
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Cost volume and profit analysis is a technique that scrutinizes the variation in cost and volume levels and its effect on profit. This technique examines the effect of operating decisions on short-term profit. It defines the relationship between selling price, fixed cost, the variable value, price at which per unit can be sold and the output level.
CVP analysis relies on a few assumptions. They are as follows:
1. For a given range of output, the revenue activity and the overall cost(fixed cost and variable cost) are probable to be linear. The assumption is based on a given CVP model on a given vary of activity and these are not valid outside of the appropriate range.
2. There are two components of total cost: fixed cost and variable cost. Fixed costs stay constant with a rise and reduce within the units of goods and services produced or sold. A fixed cost remains unchanged in total in a given period despite wide variation in the total activity and volume. Variable costs modify in proportion with a rise and reduce in the units of goods and services produced or sold. A variable cost changes in total in a given period with vary in the total activity and volume.

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What is the underlying relationship in CVP analysis
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Break-Even point:
It is a point at which gains equal losses; it means there are no gains and losses by doing that particular task.
At this break-even point cost or expenses are equal to revenue. This break-even point will be calculated by the following formulas.
img img • Cost-volume-profit (CVP) analysis extends the use of information provided by breakeven analysis.
• The main important part of CVP analysis is the point, where total revenues equal total costs. That is both fixed and variable.
• At this breakeven point (BEP), an enterprise will experience no income or loss.
• This BEP is an initial examination, which is done previous to the more detailed CVP analyses.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis.
The assumptions underlying CVP analysis are:
1. CVP analysis studies the behavior of both costs and revenues simultaneous throughout the relevant range of activity. (This assumption resembles the concept of volume discounts on either purchased materials or sales.)
2. CVP is useful for classifying accurately, as either fixed or variable.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold (there is no ending finished goods inventory).
5. When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
• Finding the breakeven point is the initial step in CVP, since it is most important to know whether sales at a given level will at least cover the relevant costs.
The breakeven point can be determined with a mathematical equation, using contribution margin, or from a CVP graph.
img img

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May Clothing is a retail men's clothing store. May's variable cost is $20 per shirt and the sales price is $40 per shirt. May plans to sell 400,000 shirts for the year and at this level would generate a before tax profit of $2,500,000. What is the degree of operating leverage (DOL) at this volume level
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Scott Power produces batteries. Scott has determined its contribution margin to be $8 per battery and its contribution margin ratio to be 0.4. What is the effect on profits of the sale of one additional battery Of one additional dollar of sales
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ABC Audio sells headphones and would like to earn after-tax profits of $400 every week. Each set of headphones incurs variable costs of $5 and sells for $10. Rent and other fixed costs are $200 per week; the income tax rate is 20%. How many headphones must ABC sell per week to meet its profit goal
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What is operating leverage, and for what is it used
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The Cobb Clinic treats walk-in patients for various illnesses. The accounting manager has estimated that the clinic has $5,000 in monthly fixed costs in addition to a $20 cost per patient visit. If the charge is $30 per visit, how many visits per month does the clinic need to break even
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Franklin Cards sells greeting cards for $2 each and plans to sell 100,000 cards every quarter. The accounting manager has determined the company must sell 80,000 cards every quarter to break even. What is the margin of safety in units and sales dollars
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Define degree of operating leverage (DOL). How is DOL measured
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Why do management accountants use sensitivity analysis
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How is CVP analysis used to calculate the breakeven point for multiple products
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Doughton Bearings produces ball bearings for industrial equipment. In evaluating the financial data from the previous year, the accounting manager has determined that the company's unit sales price is $25 per bearing and the unit variable cost is $18 per bearing. What is the unit contribution margin
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Why does the issue of taxes not affect the calculation of the breakeven point
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What is the contribution margin ratio and how is it used
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Ford Tops manufactures hats for baseball teams. Ford has fixed costs of $175,000 per quarter and sells each hat for $20. If the variable cost per hat is $10, how many hats must Ford sell each quarter to break even
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Oxicon Inc. manufactures several different types of candy for various retail stores. The accounting manager has requested that you determine the sales dollars required to break even for next quarter based on past financial data. Your research tells you that the total variable cost will be $500,000, total sales will be $750,000, and fixed costs will be $75,000. What is the breakeven point in sales dollars
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Williams Williams Co. produces plastic spray bottles and wants to earn a before-tax profit of $100,000 next quarter. Variable costs are $0.50 per bottle, fixed costs are $500,000, and the selling price is $1 per bottle. How many bottles must the company sell to meet this goal
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What is the margin of safety, and for what is it used
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What type of risk does sensitivity analysis address
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