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