Chapter 5: Cost-Volume-Profit Relationships

Cost Behavior

1. Be able to explain and recognize examples of Variable costs, Fixed costs, and Mixed costs.

2. Explain what happens to the following when activity level increases or decreases:

a. Total Variable Cost

b. Variable Cost per Unit

c. Total Fixed Cost

d. Fixed Cost per Unit

3. Be able to calculate total contribution margin, contribution margin per unit, & contribution margin ratio, and be able to use these equations to solve for different unknowns.

4. When activity/volume/units sold, sales price, variable costs, or fixed costs change, explain what happens to:

a. Contribution margin (CM) per unit, CM in total, the CM ratio, and Net operating income (or BE).

Cost-Volume-Profit (CVP) Analysis

1. Briefly describe the assumptions of CVP.

2. Understand a CVP graph. For example, how are break-even, profit, and loss shown on a CVP graph?

3. Be able to calculate the required unit sales or revenue (sales dollars) to breakeven or to earn a target profit.

4. Be able to calculate the new profit, or new BE point, or new required sales, afterconsidering a proposed change in fixed cost, variable cost, sales price, volume (units sold), or some combination of these.

a. Be able to manipulate the profit Equation approach.

5. Understand the margin of safety (MoS) conceptually and be able to calculate it.

6. Understand the degree of operating leverage (DOL) conceptually and be able to calculate and use it.