Cost and Decision Making
Price-takers
Companies that have no control over prices
Price-setters
Companies that have the ability to set prices
Contribution margin ratio
Contribution margin divided by sales revenue
Total cost of producing
Cost of producing a specific quantity of a product
Variable cost
Cost that fluctuates with production and sales
Sunk cost
Cost that has already been incurred and cannot be recovered
Fixed cost
Cost that remains constant regardless of production and sales
Variable costs per unit
Cost that varies with production and sales on a per unit basis
Margin of safety
Amount by which sales exceed the breakeven point
Discontinuing a product
Decision to stop producing and selling a product
Weighted average contribution margin
Average contribution margin of different products
Slope of a mixed cost line
Coefficient of the x variable 1 in a regression analysis
Cost equation
Equation that relates costs to production and sales
Linear cost equation
Equation that represents the relationship between costs and volume
Monthly cost equation
Equation that represents the relationship between monthly costs and the cost driver
Fixed cost per unit of activity
Fixed cost divided by the level of activity
Avoidable fixed costs
Fixed costs that can be eliminated if a product is discontinued
Breakeven point
Level of sales at which revenue equals total costs
Net benefit to operating income
The change in operating income resulting from a decision
Absorption costing
Method required for external financial reports and income tax reports
High-low method
Method that fits a line through the highest and lowest volume points
Cost-plus pricing
Pricing strategy that adds a markup to the cost of production
Operating income
Profit or loss generated from operations
Operating income
Revenue minus total costs
Contribution margin
Sales revenue minus variable costs
Sales revenue at breakeven
Sales revenue needed to cover all costs at the breakeven point
Opportunity cost
The cost of forgoing the next best alternative
High competition
Situation where there are many competitors in the market
Total fixed costs
Sum of all fixed costs for a specific period
Total costs
Sum of fixed and variable costs
