Chapter 6: Cost-Volume-Profit Relationships

What is the formula for margin of safety percentage?

Margin of safety in dollars /(divided by) total budgeted or actual sales in dollars

CVP focuses on how products are affected by:

Selling price Sales Volume Unit Variable Costs Total Fixed Costs Mix of products sold

Variable expense divided by sale per unit = ?

Variable Expense Ratio

What is the break-even point?

the quantity at which total revenue and total cost are equal, resulting in 0 profits

When constructing a CVP graph, the vertical axis represents what?

Dollars

List in order items found on a Contribution Margin Format Income Statement:

1. Sales 2. Variable Exp. 3. Contribution Margin 4. Fixed Exp. 5. Net Operating Income

How is net operating income determined?

1. Sales - Var. Exp. = CM 2. CM - Fix. Exp. = Net Op. Income

What is the formula for margin of safety?

Formula: Budgeted or actual sales - break-even sales

The vertical distance between the total revenue line and the total expense like on a CVP graph represents what?

Profit or loss

How do you determine the Contribution Margin?

Sale per Unit - Variable Price per Unit = Contribution Margin

What is the margin of safety?

The amount sales can drop before losses are incurred

When preparing a CVP graph, the horizontal axis represents what?

Unit volume

What is incremental analysis?

When only cost and revenue are considered when checking if there's a change in profits.

What is sales mix?

relative proportions in which a company's products are sold goal: achieve mix that yields greatest profits