Ch 5

Question 0

Break even point, equation?

Answer 0

Level of sales at which profit is 0

Unit sales to break even = fixed expenses/unit CM

Unit CM = selling price per unit - variable expenses per unit

Question 1

Contribution Margin

Answer 1

Amount remaining from sales revenue after

Variable expenses have been deducted

Question 2

Cost-Volume-Profit equation

Answer 2

Profit = (sales - variable expenses) - (fixed expenses)

Sales = selling price X quantity sold
Variable expenses = variable expenses per unit X quantity sold

Question 3

Unit contribution margin = unit CM

Answer 3

Unit CM = selling price per unit - variable expense per unit

Question 4

Cost-volume-profit (CVP) graph

Answer 4

Illustrates relationships among revenue, cost, profit

and volume over wide ranges of activity

Question 5

Contribution margin ration (CM Ratio)

Answer 5

Contribution margin as a percentage of sales

CM margin/sales

Question 6

Variable expense ratio

Answer 6

Ratio of variable expenses to sales

Variable expense ratio = variable expenses/sales

Question 7

Incremental analysis

Answer 7

Analytical approach that focuses only on the costs

And revenues that change as a result of a decision

Question 8

Target profit analysis

Answer 8

Estimate of what sales volume is needed to

Achieve specific target profit

Question 9

Margin of safety, equation? Margin of safety percentage?

Answer 9

Excess of budgeted or actual sales dollars
Over break even volume of sales dollars

Margin of safety =
total budgeted (or actual) sales - break even sales

Margin of safety % = margin of safety/total budgeted sales

Question 10

Operating leverage

Answer 10

Measure of how sensitive net operating income is
To given percentage change in dollar sales

Acts as multiplier, if operating leverage is high a small
% increase in sales leads to larger percentage increase
In net operating income

Question 11

Degree of operating leverage, equation?, example

Answer 11

Measure at a given level of sales, of how a % change
In sales volume will affect profits

Degree of operating leverage =
contribution margin/net operating income

Example if degree of operating leverage = 400/100= 4
Than the company’s net operating income grows
4 times faster than its sales

Question 12

Sales mix, objective?

Answer 12

Relative proportions in which company’s products
Are sold

Ideal to achieve mix that yields greatest profits