Ch 7

Break Even Point in Sales Dollars

Total Fixed Costs/Contribution Margin %

Break Even Point in Units

Total Fixed Costs/Unit Contribution Margin

Margin of Safety

Total Sales - Break Even Sales

% Increase in Net Income

% Increase in Sales x Degree of Operating Leverage

Limiting Assumptions in CVP Analysis

1. behavior of revenues and costs is linear in the relevant range 2. costs can be divided into variable/fixed elements 3. sales mix is constant 4. nothing changes, all relationships stay the same

TRUE

A company that desires to raise its Break-even point should strive to decrease the sales price per unit.

Degree of Operating Leverage

Contribution Margin/Net Income

Product Costs- VC

DM, DL, VMOH

Product Costs- AC

DM, DL, VMOH, FMOH

Period Costs- VC

FMOH, Selling and Admin Expense

Net Income, per unit price

If you sell one more unit, ____ ________ will go up by the ___ _____ ________.

Margin of Safety %

MS in dollars/Total Sales

New Net Income

Old Net Income x (1 + % increase in Net Income)

FALSE

Operating leverage is a measure of the extent to which variable costs are being used in an organization.

Period Costs- AC

Selling and Admin Expense

FALSE

The Break-even point is that level of activity where the total contribution margin equals total fixed cost plus total variable cost.

TRUE

The margin of safety is the excess of budgeted (or actual) sales over the Break-even volume of sales.

FALSE

The term Contribution Margin appears on a full absorption costing income statement.

Margin of Safety

excess of budgeted (or actual) sales over the break even volume of sales

Degree of Operating Leverage

measure at a given level of sales of how a % change in sales volume will affect profits

Operating Leverage

measure of the extent to which FC are being used, greatest in companies that have high FC compared to VC