CVP Vocab
What type of cost changes in total but remains constant per unit?
Variable cost.
A company sells a product for $50 per unit. Variable cost per unit is $35.
What is the contribution margin ratio?
CM = 50 – 35 = 15; CM ratio = 15 ÷ 50 = 30%.
What is a relevant cost?
A cost that differs between decision alternatives.
A company has excess capacity. It receives a special order for 1,000 units at $22 each. Variable cost = $18 per unit; no extra fixed costs.
Should the company accept the order? What’s the effect on income?
Yes; incremental revenue = $22,000; incremental cost = $18,000; profit increase = $4,000.
At break-even, total contribution margin equals what?
Total fixed costs.
What type of cost stays the same in total within the relevant range?
Fixed cost.
Selling price = $25, variable cost = $15, fixed costs = $60,000.
What are the break-even sales in dollars?
CM ratio = (25 – 15)/25 = 0.4 → 60,000 ÷ 0.4 = $150,000.
What is a sunk cost?
A cost that has already been incurred and cannot be changed.
Why is depreciation ignored in decision-making?
It’s a sunk cost.
What is the difference between total sales and total variable costs?
Contribution margin.
A company sells two products:
Product A: sells for $40, variable cost $20, sales mix 60%
Product B: sells for $30, variable cost $10, sales mix 40%
Fixed costs = $200,000
What is the weighted-average contribution margin?
A’s CM = $20 × 0.60 = $12; B’s CM = $20 × 0.40 = $8; total bundle = $12 + $8 = $20 weighted-average CM.
Define opportunity cost.
The benefit lost by choosing one alternative over another.
Product A can be sold now for $25 per unit or processed further with an extra cost of $7 to sell for $34.
Should the company process further or sell now?
Incremental revenue = $9; incremental cost = $7 → process further for a $2 gain per unit.
Why might management reject a profitable special order?
Qualitative/Social factor example.
What is the range of activity where cost behavior assumptions are valid?
The relevant range.
A company has fixed costs of $90,000. It sells a single product for $45 with variable costs of $30.
How many units must it sell to achieve a target net income of $30,000?
(90,000 + 30,000) ÷ (45 – 30) = 120,000 ÷ 15 = 8,000 units.
Other than financial information, what other factors (2) should management consider when making decisions?
Qualitative and social factors.
If a company drops a product line, what might happen to common fixed costs?
They remain and must be absorbed by other segments.
Name 3/5 key assumptions made in CVP analysis.
Activity changes cost; costs are linear; sales mix is constant; all units produced are sold; costs are variable or fixed.
The following monthly data are available for a company’s maintenance costs and machine hours:
Month: Machine Hours: Maintenance Costs:
Jan 2,000 $9,000
Feb 4,000 $13,000
Mar 3,000 $11,000
Apr 6,000 $17,000
Use the high–low method to find our cost equation. (Y=mx+b)
Variable cost = (17,000 – 9,000) ÷ (6,000 – 2,000) = $2/hr; Fixed = 9,000 – (2 × 2,000) = $5,000.
Y = 2x + 5,000
Name one qualitative factor that could affect a make-or-buy decision.
Supplier reliability, product quality, employee morale, or long-term control of production.
A company makes two products using a single constrained resource:
Product X: Contribution margin $24/unit, uses 3 machine hours
Product Y: Contribution margin $18/unit, uses 2 machine hours
Which product should be prioritized if machine hours are limited?
CM per hour → X = 24 ÷ 3 = 8; Y = 18 ÷ 2 = 9 → prioritize Product Y.
What’s one limitation of CVP analysis in real-world use?
Assumes linear relationships and constant sales mix; doesn’t handle uncertainty well.