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chapter 18
Cost-Volume-Profit
and Business Scalability
goals discussion
goals
achievement
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in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Define cost-volume-profit analysis.
Differentiate between a variable cost, fixed cost, and mixed cost.
Describe the nature of variable costs, in the aggregate and per unit.
Describe the nature of fixed costs, in the aggregate and per unit.
Describe the concept of economies of scale.
What is meant by the term "relevant range?"
Discuss the nature of specific types of fixed costs: committed fixed costs and discretionary fixed costs.
Identify the nature of a step cost, and cite the appropriate business strategy for dealing with step costs.
Carefully describe the nature of a mixed (semivariable cost).
Describe how a scattergraph, the method of least squares, and the high-low method can be used to sort out the fixed and variable components of a mixed cost.
Be able to apply the mechanics of the high-low method.
Be able to prepare a "break-even graph."
Define the contribution margin; distinguishing between aggregate, per unit, and ratio amounts.
Understand the break-even point and target income.
Be able to perform break-even and target income computations.
Understand the impact of operating changes on break-even and other CVP computations.
Be able to apply CVP analysis to firms with multiple products.
What are some of the applications for CVP analysis?
Cite the assumptions of CVP modeling.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| break-even point | The level of activity where revenues equal total expenses, producing a zero net income; also the point where the contribution margin is said to cover fixed costs |
| committed fixed cost | Costs that arise from an organization's commitment to engage in operations; unavoidable elements like depreciation, rent, insurance, property taxes |
| contribution margin | Revenues minus all variable expenses, whether related to production or selling and administration (do not to be confuse with gross profit) |
| cost-volume-profit analysis | (CVP) Analysis focusing on the interplay of pricing, volume, variable and fixed costs, and product mix |
| discretionary fixed cost | Fixed cost resulting from yearly spending decisions; proper planning can result in avoidance of these costs as necessary (e.g., advertising and training) |
| economies of scale | Efficiencies associated with increases in volume |
| fixed cost | A total cost that is the same regardless of volume; total cost is constant and per unit cost decreases with volume increases |
| high-low method | A simple means for separating costs into fixed and variable components, based upon the difference between costs at the highest and lowest observed levels of activity |
| method of least squares | A complex means for separating costs into fixed and variable components, based upon minimizing the variances between all observations and the resulting assumed cost function |
| mixed costs | A cost that has both fixed and variable components |
| relevant range | The level of activity for which assumptions underlying CVP are expected to hold true |
| scattergraph | A simplistic mapping of observed data points, where a line is "visually" drawn to represent the estimated cost function |
| step cost | A cost function that is fixed over a range, and then increases by a measured step to a new level at the next higher increment of activity |
| target income | A level of income that is to be obtained; CVP projects activity levels necessary to achieve this benchmark |
| variable cost | A per unit cost that is the same regardless of volume; total variable cost increases with volume increases |