Ch. 6 - Cost-volume-profit relationships Flashcards

1
Q

Break-even point

A

The level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equals total fixed expenses.

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2
Q

Contribution margin method

A

A method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit.

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3
Q

Contribution margin ratio (CM ratio)

A

The contribution margin as a percentage of total sales.

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4
Q

Cost–volume–profit (CVP) graph

A

The relations between revenues, costs and level of activity in an organization presented in graphic form.

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5
Q

Degree of operating leverage

A

A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by profit.

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6
Q

Equation method

A

A method of computing the break-even point that relies on the equation Sales = Variable expenses + Fixed expenses + Profits

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7
Q

Incremental analysis

A

An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision.

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8
Q

Margin of safety

A

The excess of budgeted (or actual) sales over the break-even volume of sales.

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9
Q

Operating leverage

A

A measure of how sensitive profit is to a given percentage change in sales. It is computed by dividing the contribution margin by profit.

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10
Q

Sales mix

A

The relative proportions in which a company’s products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

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