Accounting 4B

If sales increase 5% and the degree of operating leverage is 4, then net operating income should increase by:

20%; 5%*4

The target profit at the break-even point is:

zero

An ______ cost is a cost that can be eliminated by choosing one alternative over another

avoidable

Contribution margin Ratio

CM ratio=Contribution Margin/Sales

Degree of Operating Leverage

Degree of Operating Leverage=CM/Net Operating Income

Break even point in sales

Fixed Expense/CM ratio

Dollar Sales to Break even

Fixed Expense/CM ratio

Unit Sales to break even

Fixed Expense/Unit CM

Which determine whether a cost structure with higher variable costs is better than one higher fixed costs.

Long-run trends in sales The attitude of owners towards risks Year-to-year fluctuations in the level of sales

Margin of Safety in Units

MS Units=Margin of Safety in Dollars/price of units

Margin of Safety Percentage

Margin of Safety %=Margin of Safety in Dollars/Sales

What should not be included in the analysis when making a decision?

Non-differential future costs and sunk costs

Unit sales to attaint target profit

Target Profit+Fixed Expenses/Unit CM

Margin of Safety in Dollars

Total Sales-Break Even Sales

To estimate the effect on profits for a planned increase in sales, multiply the increase in units sold by the unit ______________.

contribution margin

To calculate the degree of operating leverage, divide _______ by net income.

degree operating leverage=contribution margin/net income

Dollar sales to attain target profit

dollar sales to attain target profit=Target profit+Fixed Expense/CM ratio

A business segment should only be dropped if a company can save more in _____ costs than it loses in contribution margin

fixed

A ______ decision is a decision to carry out one of the activities in the value chain internally than to buy externally from a supplier

make or buy

Deciding in what to do with a joint product at the split off point is a

sell or process further decision