Contribution margin:
Is revenue remaining after deducting variable costs. May be expressed as contribution margin per unit.
Cost Behavior Analysis
Variable costs, Fixed costs, Relevant range, Mixed costs, Identifying variable and fixed costs
Cost-Volume-Profit Analysis
Basic components, CVP income statement, Break-even analysis, Target net income, Margin of safety
The activity index:
Identifies the activity that causes changes in the behavior of costs. Allows costs to be classified according to their response to changes in activity as either:Variable Costs, Fixed Costs, Mixed Costs.
Variable costs
are costs that vary in total directly and proportionately with changes in the activity level. Remain the same per unit at every activity level. Example: Direct Materials. Direct Labor. Cost of Goods Sold. Sales Commissions.
Fixed costs
are costs that remain the same in total regardless of changes in the activity level.
The relevant range is:
The range over which the company expects to operate during a year.
Mixed Costs
Costs that have both a variable cost element and a fixed cost element. Sometimes called semi variable cost.
high-low method
For purposes of Cost-Volume-Profit (CVP) analysis, mixed costs must be classified into their fixed and variable elements. One approach to separate the costs is called the ______________.
Cost-Volume-Profit Analysis
CVP Analysis -the study of the effects of changes in costs and volume on a company's profits. Important in profit planning. A critical factor in setting:selling prices, determining product mix, and maximizing use of production facilities.
Fixed costs per unit
One of the following is NOT involved in CVP analysis. That factor is: Sales mix, Unit selling prices, Fixed costs per unit, Volume or level of activity.
CVP Income Statement
Classifies costs and expenses as fixed or variable.
Reports contribution margin in the body of the statement.
Amount of revenue remaining
after deducting all variable costs
break-even point
A key relationship in CVP analysis is the level of activity at which total revenue equals total costs (both fixed and variable).
This level of activity is called the _______________.
Gossen Company is planning to sell 200,000 pliers for $4 per unit. The contribution margin ratio is 25 percent. If Gossen will break even at this level of sales, what are the fixed costs?
a. $100,000.
b. $160,000.
c. $200,000.
d. $300,000.
$200,000
target net income
Rather than just breaking even, management usually sets an income objective called "____________."
Indicates sales or units necessary to achieve this specified level of income.
The mathematical equation for computing required sales to obtain target net income is: Required sales = ?
a. Variable costs + Target net income.
b. Variable costs + Fixed costs + Target net income.
c. Fixed costs + Target net income.
d. No correct answer
Variable costs + Fixed costs + Target net income.
Margin of Safety Ratio
Computed by dividing the margin of safety in dollars by the actual or expected sales.
Marshall Company had actual sales of $600,000 when break-even sales were $420,000. What is the margin of safety ratio?
a. 25%.
b. 30%.
c. 33 1/3%.
d. 45%.
30%.