Cost and Decision Making

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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


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