ACG 3361 - Chapter 3

Target # of Units (Formula)

(Fixed Costs + Target Operating Income) / Contribution Margin Per Unit

CVP Relationship - Contribution Margin Method

(Contribution Margin Per Unit x Quantity of Units Sold) - Fixed Costs = Operating Income

Sensitivity Analysis

A "what if" technique that managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes.

Revenue Driver

A variable, such as volume, that causally affects revenues

Margin of Safety

Answers the "what-if" question: If budgeted revenues are above breakeven and drop, how far can they fall below budget before the breakeven point is reached?

Margin of Safety (Formula)

Budgeted (or actual) Revenues - Breakeven Revenues = ?

Degree of Operating Leverage (Formula)

Contribution Margin / Operating Income = ?

Contribution Margin Percentage or Contribution Margin Ratio (Formula)

Contribution Margin Per Unit / Selling Price = ?

Contribution Margin (Formula 1)

Contribution Margin Per Unit x Number of Units Sold = ?

Contribution Margin (Formula 2)

Contribution Margin Percentage x Revenues (in dollars) = ?

Breakeven Point (Formula)

Fixed Cost / Contribution Margin Per Unit = ?

Breakeven Point in Revenues (Formula)

Fixed Costs / Contribution Margin % = ?

Breakeven Point in Bundles (Formula)

Fixed Costs / Contribution Margin Per Bundle

Operating Leverage (High Fixed Cost)

High Operating Leverage

Operating Leverage (Low Fixed Cost)

Low Operating Leverage

Margin of Safety Percentage (Formula)

Margin of Safety in Dollars / Budgeted (or actual) Revenues = ?

Net Income (Formula)

Operating Income - Income Taxes = ?

Contribution Margin Per Unit (Formula)

Selling Price - Variable Cost Per Unit = ?

Breakeven Point

That quantity of output sold at which total revenues equal total costs - that is, the quantity of output sold that results in $0 of operating income.

Contribution Margin (Definition)

The difference between total revenues and total variable costs

Operating Leverage

The effects that fixed costs have on changes in operating income as changes occur in units sold and contribution margin.

Sales Mix

The quantities (or proportion) of various products (or services) that constitute total unit sales of a company.

CVP - Cost-Volume-Profit Analysis

The study of behavior and relationship among total revenues, total costs, and income as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed costs of a product.

CVP Relationship - Equation Method

[(Selling Price x Quantity of Units Sold) - (Variable Cost Per Unit x Quantity of Units Sold)] - Fixed Costs = Operating Income