Key Terms-Chapter 5

Question 1

Break-Even Point

Answer 1

The level of sales at which profit is zero.

Question 2

Contribution Margin ration (CM Ratio)

Answer 2

A ratio computed by dividing contribution margin by dollar sales.

Question 3

Cost-Volume-Profit (CVP) Graph

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.

Question 11

Contribution Margin

Answer 11

The amount remaining from sales revenue after variable expenses have been deducted. Thus, it is the amount available to cover fixed expenses and then to provide profits for the period.