ACC 252 Terms

Profit=

(CM*units)-Fixed Costs

Contribution margin becomes profit after fixed expenses are covered.

True

A company has a contribution margin of 35%. For each dollar of sales, CM will increase by...

$0.35

Two keys to building segmented income statements:

1. A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. 2. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures:

1. An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with lower proportion of fixed costs. 2. A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with lower proportion of fixed costs. 3. Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:

1. Selling price is constant. The price of a product or service will not change as volume changes. 2. Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range. 3. In multiproduct companies, the mix of products sold remains constant.

Common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" for two reasons:

1. This practice may make a profitable business segment appear to be unprofitable. 2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control.

Cost Volume Profit 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.

For a given level of sales, a low contribution margin ratio will produce more net operating income than a high contribution margin ratio.

False

If sales volume increases, and all other factors remain unchanged, the contribution margin ratio will increase.

False

The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

False

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.

A change in sales mix from low margin to high margin items may cause total profits to increase despite a decrease in total sales.

True

CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income (profit).

True

Common fixed costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated.

True

Contribution Margin (CM) is the amount remaining from sales revenue after variable expenses have been deducted.

True

When making a decision using incremental analysis, consider the

change in cost from the decision, and change in sales dollars resulting from the decision

A change in sales mix from high margin to low margin items may cause total profits to

decrease despite an increase in total sales

The amount sales can drop before losses are incurred is the

margin of safety

Variable expense ratio is variable expense to

sales

Break even point can be affected by

sales, total fixed costs, and contribution margin per unit

CVP analysis allows companies to easily identify the change in profit due to changes in

selling price, costs, and volume

CVP analysis focuses on how profits are affected by

selling price, total fixed costs, mix of products sold, sales volume, and unit variable cost.

CVP graph has lines representing

total revenue, total expense, and total fixed expense

At break even,

total revenue=total cost and NOI is zero

Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure.

True

Costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain

True

For every unit above break even, profit increases by contribution margin per unit.

True

In target profit analysis, we estimate what sales volume is needed to achieve a specific target profit.

True

Sales mix must be taken into account when calculating the break even point for more than one product due to different selling prices, costs, and contribution margins among products.

True

The break-even point in units can be obtained by dividing total fixed expenses by the unit contribution margin.

True

The higher the margin of safety, the lower the risk of not breaking even and incurring a loss.

True

The margin of safety is the amount by which sales can decrease before losses are incurred by the company.

True

The segment margin is the best gauge of the long-run profitability of a segment.

True

The traceable fixed costs of one segment may be a common fixed cost of another segment.

True

Traceable fixed costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared.

True

A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

True.