Key Terms VII

Question 1

Break-even point

Answer 1

The level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equals total fixed expenses

Question 2

Contribution margin method

Answer 2

A method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit

Question 3

Contribution margin ratio (CM ratio)

Answer 3

The contribution margin as a percentage of total sales

Question 4

Cost-volume-profit (CVP) graph

Answer 4

The relations between revenues, costs and level of activity in an organisation presented in graphic form

Question 5

Degree of operating leverage

Answer 5

A measure of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by profit

Question 6

Equation method

Answer 6

A method of computing the break-even point that relies on the equation: Sales = Variable expenses + Fixed expenses + Profits

Question 7

Incremental analysis

Answer 7

An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision

Question 8

Margin of safety

Answer 8

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

Question 9

Operating leverage

Answer 9

Profit before interest and profit taxes have been deducted

Question 10

Sales mix

Answer 10

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