chapter 5

Contribution Income Statement

Sales-variable costs= contribution margin-fixed costs=net income

Committed or Discretionary: Depreciation on buildings

committed

What effect does an increase in volume have on: A: UNIT FIXED COSTS, B: UNIT VARIABLE COSTS, C: Total Fixed Costs, D: Total Variable Costs

decrease, increase, no change, increase

Committed or Discretionary: Advertising

discretionary

Committed or Discretionary: Research

discretionary

Committed or Discretionary: management development and training

discretionary

Define Relevant Range

range of activity within which assumptions about variable and fixed costs behavior are reasonably valid

What is the Contribution Margin

sales revenue - variable expenses

Define Variable Cost

a cost that varies, in total, in direct proportion to changes in the level of activity. it is constant per unit

Committed or Discretionary: Long-term equipment leases

committed

Committed or Discretionary: pension payments to the company's retirees

committed

Define Mixed Costs

cost that contains both variable and fixed elements

Define Cost Behavior

how a cost changes as the level of activity changes

what is the major disadvantage to the high low method

if you have an outlier, your information will be screwed towards that outlier

Define Fixed Cost

remains constant, in total, regardless of the level of activity within the relevant range. in units, it varies inversely