Chapter 3

Event

A possible relevant occurrence in a decision model.

Revenue Driver

A variable, such as volume, that causally affects revenues.

Sensitivity Analysis

A what-if technique that managers use to calculate how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes.

Margin of Safety

Amount by which budgeted (or actual) revenues exceed breakeven revenues.

Degree of Operating Leverage

Contribution margin divided by operating income at any given level of sales.

Contribution Margin Percentage

Contribution margin per unit divided by selling price. Also called contribution margin ratio.

Probability Distribution

Describes the likelihood (or the probability) that each of the mutually exclusive and collectively exhaustive set of events will occur.

Operating Leverage

Effects that fixed costs have on changes in operating income as changes occur in units sold and hence in contribution margin.

Cost-Volume-Profit (CVP) Analysis

Examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed costs of a product.

Gross Margin Percentage

Gross margin divided by revenues.

Contribution Income Statement

Income statement that groups costs into variable costs and fixed costs to highlight the contribution margin.

Probability

Likelihood or chance that an event will occur.

Choice Criterion

Objective that can be quantified in a decision model.

Net Income

Operating income plus non operating revenues (such as interest revenue) minus nonoperating costs (such as interest cost) minus income taxes.

Outcomes

Predicted economic results of the various possible combinations of actions and events in a decision model.

Sales Mix

Quantities of various products or services that constitute total unit sales.

Breakeven Point (BEP)

Quantity of output sold at which total revenues equal total costs, that is where the operating income is zero.

Contribution Margin Ratio

See contribution margin percentage.

Expected Monetary Value

See expected value.

Contribution Margin Per Unit

Selling price minus the variable cost per unit.

PV Graph

Shows how changes in the quantity of units sold affect operating income.

Decision Table

Summary of the alternative actions, events, outcomes, and probabilities of events in a decision model.

Uncertainty

The possibility that an actual amount will deviate from an expected amount.

Contribution Margin

Total revenues minus total variable costs.

Expected Value

Weighted average of the outcomes of a decision with the probability of each outcome serving as the weights. Also called expected monetary value.