Chapter 16

Question 1

Break-even point

Answer 1

the point where total sales revenue equals total costs (i.e., the point of zero profits).

Question 2

Common fixed expenses

Answer 2

fixed costs that are not traceable to the segments and that would remain even if one of the segments were eliminated.

Question 3

Contribution margin

Answer 3

the difference between revenue and all variable expenses.

Question 4

Contribution margin ratio

Answer 4

contribution margin divided by sales revenue. It is the proportion of each sales dollar available to cover fixed costs and provide for profit.

Question 5

Cost-volume-profit graph

Answer 5

a graph that depicts the relationships among costs, volume, and profits. It consists of a total revenue line and a total cost line.

Question 6

Degree of operating leverage

Answer 6

a measure of the sensitivity of profit changes to changes in sales volume. It measures the percentage change in profits resulting from a percentage change in sales.

Question 7

Direct fixed expenses

Answer 7

fixed costs that can be traced to each segment and would be avoided if the segment did not exist.

Question 8

Margin of safety

Answer 8

the units sold or expected to be sold or sales revenue earned or expected to be earned above the break-even volume.

Question 9

Net income

Answer 9

operating income less taxes, interest expense, and research and development expense.

Question 10

Operating leverage

Answer 10

the use of fixed costs to extract higher percentage changes in profits as sales activity changes. Leverage is achieved by increasing fixed costs while lowering variable costs.

Question 11

Profit-volume graph

Answer 11

a graphical portrayal of the relationship between profits and sales activity.

Question 12

Sales mix

Answer 12

the relative combination of products (or services) being sold by an organization.

Question 13

Sales-revenue approach

Answer 13

an approach to CVP analysis that uses sales revenue to measure sales activity. Variable costs and contribution margin are expressed as percentages of sales revenue.

Question 14

Sensitivity analysis

Answer 14

a “what-if” technique that examines altering certain key variables to assess the effect on the original outcome.

Question 15

Variable cost ratio

Answer 15

variable costs divided by sales revenue. It is the proportion of each sales dollar needed to cover variable costs.