Chapter 18

Question 1

break-even point

Answer 1

The level of activity where revenues equal total expenses, producing a zero net income; also the point where the contribution margin is said to cover fixed costs.

Question 2

committed fixed cost

Answer 2

Costs that arise from an organization’s commitment to engage in operations; unaviodable elements like depreciation, rent, insurance, property taxes.

Question 3

contribution margin

Answer 3

Revenues minus all variable expenses, whether related to production or selling and administration (not to be confused with gross profit).

Question 4

cost-volume-profit analysis

Answer 4

(CVP_Analysis focusing on the interplay of pricing, volume, variable and fixed costs, and product mix.

Question 5

discretionary fixed cost

Answer 5

Fixed cost resulting from yearly spending decisions; proper planning can result in avoidance of these costs as necessary (e.g., advertising and training).

Question 6

economies of scale

Answer 6

Efficiencies associated with increases in volume.

Question 7

fixed cost

Answer 7

A total cost that is the same regardless of volume; total cost is constant and per unit cost decreases with volume increases

Question 8

high-low method

Answer 8

A simple means for separating costs into fixed and variable components, based upon the difference between costs at the highes and lowest observed levels of activity

Question 9

method of least squares

Answer 9

A complex means for separating costs into fixed and variable components, based upon minimizing the variances between all observations and the resulting assumed cost function.

Question 10

mixed costs

Answer 10

A cost that has both fixed and variable components.

Question 11

relevant range

Answer 11

The level of activity for which assumptions underlying CVP are expected to hold true.

Question 12

scattergraph

Answer 12

A simplistic mapping of observed data points, where a line is “visuall” drawn to represent the estimated cost function.

Question 13

step cost

Answer 13

A cost function that is fixed over a range, and then increases by a measured step to a new level at the next higher increment of activity

Question 14

target income

Answer 14

A level of income that is to be obtained; CVP projects activity levels necessary to achieve this benchmark.

Question 15

variable cost

Answer 15

A per unit cost that is the same regardless of volume; total variable cost increases with volume increases.