Chapter 5

Question 1

break-even point

Answer 1

the level of sales at which profit is zero

Question 2

contribution margin ratio

Answer 2

a ratio computed by dividing contribution margin by dollar sales

Question 3

cost-volume-profit (CVP)

Answer 3

a graphical representation of the relationships between an organization’s revenues, costs, and profits on the one hand and its sales volume on the other hand

Question 4

degree of operating leverage

Answer 4

a measure, at a given level of sales, of how a percentage change in sales will affect profits. the degree of operating leverage is computed by dividing contribution margin by net operating income

Question 5

incremental analysis

Answer 5

an analytical approach that focuses only on those costs and revenues that change as a result of a decision

Question 6

margin of safety

Answer 6

the excess of budgeted (or actual) dollar sales over the break-even dollar sales

Question 7

operating leverage

Answer 7

a measure of how sensitive net operating income is to a given percentage change in dollar sales

Question 8

sales mix

Answer 8

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

Question 9

target profit analysis

Answer 9

estimating what sales volume is needed to achieve a specific target profit

Question 10

variable expense ratio

Answer 10

a ratio computed by dividing variable expenses by dollar sales