Chapter 5 Flashcards
Cost-volume-profit (CVP) graph
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.
Incremental analysis
An analytical approach that focuses only on those costs and revenues that change as a result of a decision.
Target profit analysis
Estimating what sales volume is needed to achieve a specific target profit.
Margin of Safety
The excess of budgeted or actual dollar sales over the break-even dollar sales.
Operating leverage
A measure of how sensitive net operating income is to a given percentage change in dollar sales.
Degree of operating leverage
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.
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.
Break Even Point
The level of sales at which profit is zero.
Incremental analysis
An analytical approach that focuses only on those costs and revenues that change as a result of a decision.
Target profit analysis
Estimating what sales volume is needed to achieve a specific target profit.
Contribution Income Statement
- Sales (Per Unit) ) 2.Variable Expenses (PU) [new line] 3. Contribution Margin (The difference between Sales and VE) 4. Fixed Expenses 5. Net Operating Income (The difference of CM and FE)
What is per unit basis on a contribution income statement?
Sales, Variable Expenses, and Contribution Margin
Steps for a CPV graph
Volume is X and Money is Y…. Step 1) draw a line parallel to the volume axis to represent total fixed expense. Step 2) choose some volume of unit sales and plot the point representing total expense (fixed and variable) at the sales volume you have selected….Step 3) Again choose some sales volume and plot the point representing total sales dollars at the activity level you have selected.
How do you interpret a CPV graph
Profit Area is between the Total Revenue and Total Expense line and above Break Even Point….Loss Area is between Total Revenue and Total Expense below Break Even Point….
What does contribution margin ration mean?
It means that for each dollar increase in sales, total contribution margin will increase by (CM Ratio) in cents….40% CM ratio means for ever $1 increase in sales we get $0.40 !!NET OPERATING INCOME ALSO INCREASES BY THAT AMOUNT!!!
