Ch. 6 - Cost-volume-profit relationships Flashcards
Break-even point
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.
Contribution margin method
A method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit.
Contribution margin ratio (CM ratio)
The contribution margin as a percentage of total sales.
Cost–volume–profit (CVP) graph
The relations between revenues, costs and level of activity in an organization presented in graphic form.
Degree of operating leverage
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.
Equation method
A method of computing the break-even point that relies on the equation Sales = Variable expenses + Fixed expenses + Profits
Incremental analysis
An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision.
Margin of safety
The excess of budgeted (or actual) sales over the break-even volume of sales.
Operating leverage
A measure of how sensitive profit is to a given percentage change in sales. It is computed by dividing the contribution margin by profit.
Sales mix
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.