Accounting 202 ch 3

contribution margin

amount remaining from sales after variable expenses are deducted

incremental analysis

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

CVP analysis

analysis focuses on how profits are affected by selling prices, sales volume, unit variable cost, total fixed costs, and the mix of products sold

Change in contribution margin

CM ratio* change in sales

break even sales in dollars

fixed expenses/ CM ratio

unit sales to break even

fixed expenses/ unit CM

Profit

(sales-variable expenses)- fixed expenses

unit sales to attain target profit

(target profit + fixed expenses) / (unit CM)

dollar sales to attain target profit

(target profit + fixed expenses)/ (CM ratio)

Margin of safety percentage

Margin of safety in dollars/ total budgeted or actual sales in dollars

Equation method

Profit= (unit CM*Q)-fixed expenses

Cost-volume-profit graph

a graphical representation of the relationship between an organization's revenue, costs, and profits on the one hand and its sales volume on the other hand.

degree of operating leverage

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

Contribution margin ratio

a ratio computed by dividing contribution margin by dollar sales. 1-variable expense ratio

Variable expense ratio

a ratio computed by dividing variable expenses by dollar sales

Operating leverage is high

a small percentage increase in sales can produce a much larger percentage increase in net operating income.

Operating leverage is low

a small percentage increase in sales produces a much smaller percentage increase in net operating income

Percentage change in net operating income

degree of operating leverage* percentage change in sales

Target profit analysis

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

Margin of safety

excess of budgeted or actual sales dollars over the break even volume of sales dollars. The amount sales can drop before losses are incurred.

Operating leverage

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

operating leverage

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

sales mix

relative proportion 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.

margin of safety

the excess of budgeted or actual dollar sales over the break even dollar sales.

Break-even point

the level of sales at which profit is zero

Margin of safety in dollars

total budgeted or actual sales- break even sales