Flashcards Answers
Ch 5: CVP
Format of a CVP Income statement:
CM: Rev – VC
CM per Unit: Unit selling price – VC per Unit
CM Ratio: CM per Unit/Unit Selling Price
BEP in # = TFC/CM per Unit
BEP in $ = TFC/CM Ratio
MOS in $ = Actual (expected) sales – break-even sales.
MOS ratio = MOS in $ / actual (expected) sales.
TOI: Required sales in $ = (TFC + Target OI)/CM ratio
TOI: Required Sales in # = (FC + Target OI)/CM per Unit.
CH: 6 Incremental
Incremental Analysis (IA) format:
To calculate whether or not to accept special orders: Simply use the IA format with the columns reject
and accept and rows revenues and costs. If the cost is more than the revenue, do not accept; if revenue
is more than cost, accept.
To calculate whether to make or buy: Similarly, use the IA format with the columns make or buy and
rows that have your variable and fixed costs, along with a total annual costs row. Choose the cheaper
option.
To decide whether to sell, or process futher, the IA format is also used. Use columns, sell, process
further, and net income increase (decrease). Use rows sales per unit and then use the rest of the rows to
calculate the given costs (such as DL, DM etc) with a total income per unit row. Choose the more
profitable option.
The IA is also used for deciding whether to retain or replace equipment. Use columns retain, replace and
net income increase (decrease) and have your rows calculate the total cost saving and new machine
costs. Ignore the book value of the machine. Have a net incremental savings row and choose the option
with the higher savings.
To decide whether or not to eliminate a segment, use the IA format. Use coluns, eliminate, continue,
and net income increase (decrease). Rows are sales, varaiable costs, CM margin and FC with a total Net
income row. Choose the more profitable option.
Deicing how to allocate limited resources. Find the CM margin per unit of each resource, and multiply it
by the amount of limited resource that is used in the production of each unit to to get the total
contirbution margin. Use the highest CM.