Chapter 6: Cost-Volume-Profit Relationships
What is the formula for margin of safety percentage?
Margin of safety in dollars /(divided by) total budgeted or actual sales in dollars
CVP focuses on how products are affected by:
Selling price Sales Volume Unit Variable Costs Total Fixed Costs Mix of products sold
Variable expense divided by sale per unit = ?
Variable Expense Ratio
What is the break-even point?
the quantity at which total revenue and total cost are equal, resulting in 0 profits
When constructing a CVP graph, the vertical axis represents what?
Dollars
List in order items found on a Contribution Margin Format Income Statement:
1. Sales 2. Variable Exp. 3. Contribution Margin 4. Fixed Exp. 5. Net Operating Income
How is net operating income determined?
1. Sales - Var. Exp. = CM 2. CM - Fix. Exp. = Net Op. Income
What is the formula for margin of safety?
Formula: Budgeted or actual sales - break-even sales
The vertical distance between the total revenue line and the total expense like on a CVP graph represents what?
Profit or loss
How do you determine the Contribution Margin?
Sale per Unit - Variable Price per Unit = Contribution Margin
What is the margin of safety?
The amount sales can drop before losses are incurred
When preparing a CVP graph, the horizontal axis represents what?
Unit volume
What is incremental analysis?
When only cost and revenue are considered when checking if there's a change in profits.
What is sales mix?
relative proportions in which a company's products are sold goal: achieve mix that yields greatest profits