ACCT Ch. 11

contribution margin technique for target net income

(fixed cost + target net income)/unit contribution margin

Assumptions underlying CVP analysis

1. Selling price is constant throughout the entire relevant range 2. Costs are linear over the relevant range 3. In multi-product companies, the sales mix is constant 4. In manufacturing firms, inventories do not change (units produced = units sold)

Margin of Safety in Dollars

Actual (Expected) Sales - Break-Even Sales

mixed costs

Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level; uses the high-low method

Margin of Safety Ratio

Margin of Safety in Dollars / contribution margin ratio

contribution margin

Sales - Variable Costs

Activity Index

The activity that causes changes in the behavior of costs.

Target net income

The income objective set by management.

sales volume

The number of items or products or services sold by a business over a period of time.

Cost-Volume-Profit Analysis

The study of the effects of changes in costs and volume on a company's profits.

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

CVP income statement

classifies costs as variable or fixed and computes a contribution margin

net income

contribution margin - fixed costs OR required sales - variable costs - fixed costs

fixed costs

costs that remain the same in total regardless of changes in the activity level. (Ex. depreciation, property taxes, insurance, rent, salaries)

variable cost

costs that vary directly in total with changes in the activity level. (Ex. direct materials, direct labor)

margin of safety

difference between your actual or expected profitability and the break even point

break-even point in dollars

fixed costs / contribution margin ratio OR BEP in units x unit selling price

break-even point (BEP)

the quantity at which total revenue and total cost are equal

Contribution Margin Ratio

unit contribution margin/sales price per unit

Unit Contribution Margin (UCM)

unit selling price - unit variable cost